Tag Archives: China

China’s Soybean Importers Threaten More Defaults

CHINA’S SOYBEAN IMPORTERS are hardening their line on defaulting on contracted shipments in an attempt to force down prices in face of burgeoning stockpiles and slowing demand. China is the world’s biggest buyer of soybeans, accounting for three-ffiths of global imports. The main use for the beans is to be crushed into meal to make poultry feed. Demand for feed has fallen by an estimated 15% following last year’s outbreaks of bird ‘flu.

Since late February Chinese importers have cancelled 1 million metric tons of orders from the U.S. and South America, particularly from Brazil, though to put that in context, China imports 70 million metric tons a year. In the Chicago commodities futures markets, soybean prices have risen by more than 14% this year.

Trading firms mostly clustered in Shandong province have refused to make payments for about 20 shipments, Shao Guorui, general manager of Shandong Sunrise Group, reportedly says. Chinese buyers face losses of as much as $7 million dollars on each shipment, he adds. The crushing companies they sell onto are suffering, too, with around half the industry’s capacity idle because of over-expansion. 

Sunrise accounts for one-eighth of China’s soybean imports. It is part of Shandong Chenxi Group Co., run by Shao’s multi-millionaire brother Zhongyi.

The issue could flare up into a trade dispute with Japan.  Shandong buyers have 80 to 100 cargoes booked for delivery from the Japanese trading giant, Marubeni, through July. Marubeni accounts for a quarter of China’s soybean imports. “Marubeni is deluded in thinking that payments will come once the cargoes have sailed,” an unidentified industry executive based in Shandong was quoted as saying.

 

Leave a comment

Filed under Agriculture

China’s Economy Continues Its Intended Slowdown

THE SLOWING OF China’s economy alarms financial markets more than it does China’s policymakers. First-quarter GDP growth, at 7.4%, represented the second slowest three months of growth since the global financial crisis. But the economy is on a long-term deceleration as authorities seek to rebalance it from investment and export-led growth to domestic consumption. Growth, remember, hasn’t topped 8% since the first quarter of 2012.

Although the official growth target for the year is 7.5%, China’s leaders are lowering public expectations about the need for that to be hit exactly. Prime Minister Li Keqiang’s comments at the Boao Forum last week about “about 7.5%” growth being the target were just the latest in a series softening the number.

How much softer is permissible will depend on unemployment staying sufficiently low. That is an indicator being carefully monitored as it has political as well as economic ramifications. Policymakers are also watching closely for signs of worsening trouble in the banking and property sectors.

In the first quarter, fixed-asset investment was up 17.6% year-on-year, a tad down on the 17.9% growth in the first two months of the year. Retail sales grew 12.2% year on year in March, exceeding January-February’s 11.8%, though the first two months of the year, which contained New Year, will have been hit by the curbs on lavish displays of official consumption as part of the anti corruption drive. The statistics bureau is suggesting growth in overall consumption was likely down in the first quarter.

The leadership looks committed to slowing the economy to a long-term sustainable growth rate, and, if to a lesser extent, to the reforms necessary to get it there. It can always fall back on accelerating infrastructure investment later this year if growth softens too much too fast.

Leave a comment

Filed under Economy

China’s Mini-Stimulus Is As Much Political As Economic

WHAT IS SIGNIFICANT to this Bystander’s eye about the mini-stimulus package that China has just announced is that it is to be financed by central government bonds. That has two implications. The first is that the spending will be targeted to specific projects. When Beijing announced its 2008 stimulus it in effect set an overall goal and left it to provincial and municipal governments to fill in the details. That scattershot approach had several unintended consequences. One was a raft of what have turned out to be uneconomic investments in infrastructure and a credit boom that has left a large and ticking local-government debt bomb. Another was a further round of mutually enriching deals between local government officials and developers involving unpopular land requisition. This time more reliance will be put on the discipline of the debt markets to keep both borrowing and corruption in check.

Second, as well as  keeping the loan books of the banks swelling further at a time when their bad debt write-offs are rising, it will also provide a boost to the development of the onshore bond market. China will issue at least 150 billion yuan ($24 billion) of bonds this year to finance railway construction in the less developed central and western provinces of the country, part of a $300 billion yuan railway investment fund that will be open to outside investors. It also plans to issue 1 trillion yuan-worth of bonds over an unspecified period through the state-owned China Development Bank to build affordable housing.

Both initiatives will bring forward already planned work in order to ensure the economy stays within touching distance of its official target of 7.5% growth this year — ever more frequently described by officials as “about 7.5%” growth. They will also help generate the 10 million new jobs top policymakers deem necessary to ensure social stability. Those jobs will mostly be in poorer parts of the country and are intended to help reverse growing income inequality. This is stimulus that has political goals as much as economic ones.

Leave a comment

Filed under Economy

China’s Banks Accelerate Bad-Loan Write-Offs

THE BOND DEFAULTS and bank runs seen in recent weeks are small beer when it comes to signs of stress faults in China’s financial system. Far more concerning is the rapidly rising volumes of loans turned sour that the country’s big banks have been writing off.

China’s five biggest banks — which account for more than half of all loans written — wrote off 59 billion yuan ($9.5 billion) of bad debt, according to their 2013 results, the Financial Times reports. That was up 127% from the previous year’s write-offs and the most since the big-state-owed banks had to be cleaned up and recapitalized a decade or so back. A slowing economy and authorities efforts to reign in shadow banking are making it more arduous for borrowers to repay debt.

The big banks have been required by authorities to build up a plump cushion of reserves to absorb bad loans such as these, and to absorb those that offer any hint of defaults that pose the remotest systemic risk. One of the benefits of the measured pace of financial reform is that the big bank’s profits, though growing more slowly than previously, remain healthy despite having to hold higher capital reserves.

The banks’ reported ratio of bad loans to total loans remains a comfortable looking 1% for last year, up from 0.95% in 2012. That prompts two questions: first, to what extent are write-offs being used to massage that number; and second, how accurate are the banks’ reported non-performing loans numbers? Some suggest the true number could be five times as large.

As the credit rating agency, Standard & Poor’s, recently noted, loan quality will likely decline further in 2014. Banks remain at risk from debt-laden local government financing vehicles, a weakening real estate market, and earnings-challenged manufacturers for whom a slowing economy is only exacerbates the ill-effects of the excess capacity they borrowed to build. And if the leadership holds to accepting slower growth as one of the cost of economic reform to rebalance the economy, these strains on the financial system are likely to continue well into 2015, too.

2 Comments

Filed under Banking, Economy

Bank Runs Show China’s Need For Bank Deposit Insurance

THE THREE DAY run on Jiangsu Sheyang Commercial Bank and then on Rural Commercial Bank of Huanghai earlier this week highlights the need for explicit bank deposit insurance in China to replace the implicit guarantees that the government will stand behind depositors. Jiangsu Sheyang is a small rural lender whose 12 billion yuan ($1.9 billion) in assets is barely a rounding error in the total assets of China’s banking system. Yet the panicky withdrawal of funds from four of its branches on nothing more than a rumor that a customer had been denied a withdrawal of their funds needed a full-court press by authorities, including a very public demonstration of large stacks of cash bearing the central bank’s seal being made available, to restore depositors’ confidence and bring the run to a halt.

Setting up a bank deposit insurance scheme would also provide a point of differentiation between the formal and shadow banking systems, making the former more attractive to depositors who are starting to see a number of failures of shadow banking products, albeit small-scale ones, along with, pertinently in Jiangsu Sheyang’s case, the failures of some rural credit co-operatives in the province in January, whose bosses fled in the face of investment losses.

It would also provide a firebreak of sorts between the two banking systems. That might help calm the nerves of policymakers, already frazzled by China’s first corporate bond default and mounting anxiety about the real estate market. They worry that a shadow banking collapse could reverberate into a bigger systemic buckling of the financial system. In the interim, China has resorted to a bit of old-fashioned regulation. The suspected original rumormonger has been arrested.

1 Comment

Filed under Banking, Economy

China’s Regulators Show Their Nervousness About Real Estate Defaults

ALLOWING TWO REAL estate development firms to raise capital through private share placements hints at stress the property sector is putting on China’s shadow banking system. Tianjin Tianbao Infrastructure and Join.In Holding will be the first such firms that regulators are allowing to raise funds this way since authorities started to let the air out of the property bubble in early 2010.

Nor are the pair likely to be the last. Fears are growing of further property defaults among cash-strapped developers following the near-collapse of a small, privately owned developer, Zhejiang Xingrun Real Estate, earlier this week. Officials stepped in after the company was unable to meet payments on 3.5 billon yuan of debt, two thirds of it owed to banks. Earlier this month, China saw its first domestic bond default since the the corporate bond market was opened up in 1997.

The Shanghai Securities News reports that since the middle of last year more than 30 listed property firms have sought permission to raise a total of 90 billion yuan ($14.5 billion) of new captial. Many developers facing tight credit conditions, a slowing economy, and overbuilding in smaller cities have reportedly turned to the shadow banking system, but the high rates they are paying to borrow there only double down on the risk of defaults.

Earlier this week, the central bank and China Construction Bank were reportedly discussing the bailout of a developer owing 3.5 billion yuan — believed to be Zhejiang Xingrun — that had borrowed informally at rates of 18-36%. Zhejiang Xingrun is based in Ningbo, one of the cities where government data released earlier this week showed home prices falling. Another is Wenzhou, a shadow banking centre. Two of Zhejiang Xingrun’s owners have been detained by police for what is being described as illegal fundraising.

Separately, the central government’s 2014-20 urbanisation plan released earlier this week calls for a national property database to be set up. This would be a precursor to a new property tax to fund the urbanization plan and to allow local government finance to be reformed. However, it will likely face local footdragging from the many officials who have squirreled away ill-gotten wealth in the form of real estate — even if some of that real estate is starting to look less valuable.

4 Comments

Filed under Uncategorized

China Doubles Yuan’s Daily Trading Band

CHINA’S DOUBLING OF the daily trading band within which its currency can move is another cautious step towards letting market forces play a larger role in the economy. The People’s Bank of China says the exchange rate will be allowed to move 2% above or below the midpoint range it sets each day against the U.S. dollar.

The last time the band was widened, in April 2012, it was doubled from half a percent to one percent. This latest move will be seen within China as being more ambitious than it will be seen outside of it. On what there will be agreement is that it is another step towards the yuan becoming fully convertible — though it has a long way to go even to challenge the dollar let alone eclipse it.

It is also a sign that policymakers have confidence that the economy, though experiencing slowing growth, remains strong enough to enable the continuing drive towards financial reform. Greater exchange rate fluctuations may also deter hot money inflows, allowing the central bank to tighten monetary policy to throttle rapid credit expansion. They will also increase the demand for the introduction of financial products that can be used for currency hedging.

Leave a comment

Filed under Economy

Details Emerge Of China’s New Privately-Owned Banks

DETAILS ARE SEEPING out about the pilot programme announced in January to establish a handful of new private banks this year. These are intended as a first step towards providing competition to China’s giant state-owned banks and an alternative to the shadow banking system for small businesses in need of mainstream banking services.

Earlier this week, Caixin quoted a China Banking Regulatory Commission official outlining arrangements that paired some deep-pocketed investors, including internet company Alibaba, which operates China’s largest e-payment service, Alipay, with autoparts maker Wanxiang Group, and Tianjin Shanghui Investment with copper producer Huabei Group. Each of the five pairs, it seems, will focus on a specific customer segment and test a different banking business model. Initially, at least, the new banks being kept from going in direct competition with the big state banks’ existing businesses.

The Alibaba-Wanxiang partnership is intended to serve small and family businesses, which are likely to already by Alibaba customers, whereas the Shanghui-Huabei pairing would take only corporate clients. The Alibaba-Wanxiang bank will have caps on the size of the loans it can make and deposits it can take. Another pairing, social networking and online gaming company Tencent and Shenzhen-based Baiyeyuan Investment, will also have a cap on its loan size but will have a deposit minimum, not maximum.

What is not clear is the niche being carved out for the other two pairings, Shanghai investment companies JuneYao Group and Fosun Group, and Zhejiang’s electrical equipment maker Chint Group and industrial chemicals producer Huafon Group. Something in wealth management or personal finance seems likely for JuneYao-Fosun.

The five new private banks will be set up in Shanghai, Tianjin, Zhejiang and Guangdong. The banking regulator says they will start operating once they meet required standards, including forming a “living will” that will outline how the bank will shut down in an orderly manner in the event of a failure.

Leave a comment

Filed under Economy

China’s February Export Slump: New Year Distortion Or Full-Year Herald?

LUNAR NEW YEAR always makes forecasting China’s February export numbers something of a lottery. Yet few if any foresaw the 18.1% decline just announced.

Throw in slowing credit growth, the National People’s Congress meeting going as expected — i.e. offering no new answers of how both a 7.5% growth target for the year and reforms to rebalance the economy will be achieved — political tension over Ukraine and the mystery disappearance of the Beijing bound Malaysia Airlines’ passenger jet and it is scant surprise investors, already jittery about growth prospects, have taken umbrage. Shares hit a five year low in Shanghai and the yuan weakened against the dollar, with the ripples being felt in Hong Kong and in U.S markets beyond.

Most forecasters had expected an increase in exports for February, if a modest one. The most recent official purchasing managers index had pointed to weakness in new export orders, thought to be a consequence of the untypically harsh winter in the U.S., China’s second largest export market after the E.U. In addition, exporters tend to front-load their deliveries ahead of the New Year’s holiday when factories are closed for a week or so.

Nonetheless, across January and February taken together exports were down 1.6% while imports rose 10%. That has taken a chunk out of China’s trade surplus. February’s was the largest monthly trade deficit in two years. Across the two months, the surplus was $8.9 billion, down 79.1% on the same period a year earlier.

The question, of course, is whether this is all just a holiday induced blip in long-term deceleration of the growth rate or harbinger of a harder than previously expected braking of the economy. The March trade figures will be looked at closely for clues to the answer.  However, exporters will have to go at it if they are to make good the forecast of the State Information Center, a government think tank affiliated to the top economic planning agency, the National Development and Reform Commission. It is forecasting an 8.1% growth in exports in the first quarter, and about 7.5% GDP growth. Investors would be delighted, and surprised.

Leave a comment

Filed under Economy, Trade

The Rise And Fall Of Alain Perrin

CHINA’S NATIONAL FOOTBALL team squeaked into next year’s Asian Cup finals this week by the narrowest of margins. It was a sobering welcome for new coach Alain Perrin (above), appointed by the China Football Association late last month after a lengthy search for a successor to Jose Antonio Camacho. The former Real Madrid manager was ousted last June in the face of the team’s continuing dismal performance.

Perrin is little known outside of football circles in his native France. He won cups and a league titles there but his greatest reputation is as a stop gap. None of his eleven appointments — he most recently managed Qatar’s Olympic team — have lasted longer than eight months.

That may have been the strongest selling point of his resume. Our man among the muddied oafs says that the CFA wants to appoint to the job Marcello Lippi, the Italian who manages Guangzhou Evergrande. Lippi coached Italy in the 2006 FIFA World Cup, which it won. Last November his Guangzhou Evergrande won the AFC Champions League – the first time that a club from China had lifted the trophy.

Lippi’s contract with the club is up at the end of this year. This Bystander is not surprised to read that Perrin’s payoff will be slight if he is dismissed, nothing like the 51.5 million yuan ($8.4 million) Camacho and his coaching staff reportedly walked away with once they were shown the door.

China lies 88th in FIFA’s global country rankings and barely scrapes into Asia’s top 10. Lippi would have a huge challenge ahead of him in getting the national team to qualify in 2018 for what would be only its second World Cup finals. The country’s football is only slowly overcoming the corruption, bribery and match-fixing scandals that plagued it in years not too recently past.

Lippi may have some technological assistance not available to his predecessors. China is putting some of its best researchers to work on video analysis of the national team’s games. Teams (of academics) at the Chinese Academy of Sciences, the National Natural Science Foundation, Xian Jiaotong University, and Tsinghua University have been tasked with devising a computer system that can identify the team’s strength’s and weaknesses — though identifying the weaknesses hasn’t been the problem, particularly for China’s opponents on the field.

2 Comments

Filed under Sport