China the monster.

[triage]

In Reply To: early birds's post @ Nov 14 2012, 03:00 PM

Hi eb

I read somewhere a few days ago - not sure where (?) - that it appears that Jiang Zemin may have won out over Hu Jintao in the selection of the seven members fo the Politburo Standing Committee. Whilst Hu's choices for top dog and premier, Xi Jinping and Li Keqiang respectively, have made it through okay the other five to be appointed are all beholden to the conservative forces around Mr Jiang and not Mr Hu.

If that is broadly right then expect the new broom to apply the old fixes of more emphasis on promoting infrastructure and state owned enterprises and less on the drastic changes that both Mr Hu and Wen Jiabao have been saying need to be implemented. It also seems that the tussle between Mr Jiang and Mr Hu is spilling over into control of the military (and remember the PLA was established to protect the Communist Party not the State).

http://ntdtv.org/en/news/china/2012-11-13/...ary-reign-.html

Again, from what I've read it appears that the forces around Mr Jiang are pushing for a more agressive approach regarding the border disagreements (probably a good deal of the discussion the yanks and Bob Carr and Stephen Smith have been having would be to think through the ramifications of such a scenario coming reality).

That this congress is being held in November and not October and that it is still not clear who exactly has been appointed - I think we can ignore the pretence that the members of the Standing Committee would be "elected" rather than "selected" - suggest that in the context of how the Chinese Communist Party works this actually has not been a particularly smooth transition.

But in any case going on most recent reports it seems that China is already pulling out of the mild downturn it has been experiencing this year so whoever gets effective control will likely have the luxury of being able to delay making any major strategic changes for a year or two. In other words it seems it will be business as usual for the comrades.

[early birds]

China Congress Gives First Clues to New Leadership
http://www.cnbc.com/id/49814103
===========

no nasty surprise there, seems like a smooth transition!!

[triage]

Here is a link to a recent chat by some newish China hands about current political developments there. As Patrick Chovanec points out on his blogsite the discussion took place before the New York Times did an expose about the serious wealth of Premier Wen's family so that matter was not addressed by the panel.

http://popupchinese.com/lessons/sinica/par...ongress-preview

The main take-away I got from it was the suggestion that the leadership apparently still thinks they have two or three years to get serious about rebalancing the economy away from investment/infrastructure/export and more towards consumption/services/domestic.

Also the comments about the profound effects that social media is having in China: I think the yanks make too much of the so-called revolution that is Apple and Twitter and Facebook, I see how teenagers use that stuff and it is really just using novel ways of doing what they were already doing, but maybe the real impact of social media is to be seen in places like China and MENA where the social media is providing something for the first time and not just different.

(A bit of an eye-opener too that some in the leadership may be recommending that others read a book analysing the causes and effects of the French Revolution [the one in the 18th century, not the one in the 60's].)

[triage]

It seems that the green shoots are appearing in the Chinese manufacturing sector before they become visible in their construction sector. The HSBC flash PMI index for China for October is out and it suggests that manufacturing may indeed be steadying.

Commenting on the Flash China Manufacturing PMI survey, Hongbin Qu, Chief Economist, China & CoHead of Asian Economic Research at HSBC said:

“October’s flash PMI reading continues to recover for the second month, thanks in part to a gradual improvement in the new orders index which picked up to a six-month high (albeit marginally below 50). This is helped by the filtering-through of the earlier easing measures. However, external challenges are still abound and the pressures on job market are lingering. This calls for a continuation of policy easing in the coming months to secure a firmer growth recovery.”

http://pragcap.com/china-flash-pmi-hits-a-3-month-high

My understanding is that the HSBC index not only comes out a few days quicker than the official PMI release but it tends to be biased towards smaller privately owned manufacturers which are more likely to be more prone to any weaknesses in export markets than the official index which has a heavier weight of the big state owned heavy manufacturers.

However with regards to Australian resource companies I think I would still be paying more attention to what the likes of Cummins and Caterpillar are saying about the timing of any turnaround in China.

[triage]

The heavy engine maker Cummings came out last week (?) indicating that things had tightened up for them in China. Now the dominant heavy vehicle maker, Caterpillar, gives confirmation of market conditions there. Interestingly they seem to think that the bounce that many expect to kick in by the end of this calendar year may not benefit them until into next year.

Are you seeing any signs of improvement in your China sales for construction? What are your expectations for the fourth quarter and into 2013?

Sales in China remained weak in the third quarter and below the third quarter of 2011. While our sales and dealer deliveries remained
at low levels, finished inventory in our Product Distribution Center (PDC) in China and dealer inventories declined during the third quarter. While we have reduced production in China substantially, we have not seen an improvement in sales yet, and, as a result, the inventory reduction in China is slower than we had expected.

On a positive note, although sales of excavators remain weak, we have done better than the overall excavator industry in China,
particularly with mid-size and large excavators.

We remain very positive on long-term industry growth in China and our strategy to grow our business there. Our plans for the remainder of 2012 reflect a continued orderly ramp down of production that considers our entire supply chain in China. Given the
current low rate of sales and the production ramp down, it will likely take the rest of 2012 and continuing into 2013 to reduce inventory to levels more in line with sales.

While the industry is down and will likely remain down for the balance of 2012, we are encouraged by recent actions that the Chinese
government has taken to improve growth. They have lowered bank reserve requirements, increased infrastructure investment and have cut interest rates. We expect they will continue to ease policy to help improve growth in their economy. Those actions will likely lead to better growth in the construction industry in 2013.

http://www.businessinsider.com/caterpillar-on-china-2012-10

I point out that Caterpillar is not predicting the collapse of China and remain positive about its prospects there and indicate confidence in the measures being taken by Beijing. Neither however are they attempting to pretend that China has not been going through a rough patch of late.

[flower]

In Reply To: mullokintyre's post @ Sep 29 2012, 06:58 PM

Not completely certain whether the above will have any material effect on what happens here,
but it is a fundamental economic change that may have other unintended consequences

The USD/YUAN exchange rate volatility must be causing real problems in international trading.

Attached File(s)

 USD_Yuan.gif ( 12.28K ) Number of downloads: 3

 

[nipper]

"A bad debt isn't bad unless you insist on being repaid" - Patrick Chovanec - Tsinghua University

Last week, Bank of China posted the slowest quarterly profit growth in three years, with net income up 5% to 34.8bn yuan ($5.5bn). Non-performing loans fell to 0.94% at the end of June, from 0.97% at the end of March, although overdue loans grew by 17% in the first six months of year, suggesting that more loans may turn bad in the near future.

Mr Chovanec says many of the problem loans Chinese banks face stem from a state-directed lending spree in the wake of the global financial crisis in 2008. The government leant on banks to lend more, particularly to local governments, which have used the cash for infrastructure projects intended to spur growth.

Last year, Beijing said that local governments had piled up 10.7tn yuan ($1.6tn) in debt, or the equivalent of 25% of China's annual economic output.

"Some were good investments and some were bad investments, but fundamentally they should have been paid with by tax revenue and they were not credible commercial loans," said Mr Chovanec.

Companies too are suffering as a sluggish global economy hurts demand for the products China makes. Small and medium companies, light manufacturers and wholesale retailers are driving bad loan figures, according to Sheng Nan, director for China bank research at CCB International, the research arm of China Construction Bank.

The problem is also geographical. Mr Sheng said that the steepest rise in non-performing loans has been in eastern China, particularly in Zhejiang. The province saw a credit crunch last year as sources of informal lending dried up and sent scores of companies into bankruptcy.

However, he says it's unlikely that rising levels of bad loans will lead to a crisis in China's banking system given high levels of liquidity.

Unlike their counterparts in Europe and the US, Chinese lenders rarely need to tap wholesale funding from other banks. They can rely on the vast flow of deposits from savers and companies, which usually have little option other than to park their cash with the country's banks.

"I am not denying that some of these loans are bad and I think the actual NPL number is probably higher than the reported numbers," he says. "But the liquidity in the banking system is so abundant and as long as the liquidity and funding is there you can keep dragging the problem out.

"By doing this, you hopefully allow growth to absorb some of the problems - some of the projects that are not cash producing right now may eventually be profitable and you allow inflation to dilute some of the real value of the debt." He also notes, so far, local and provincial governments have not had problems paying back loans that are coming due.

Mr Chovanec is more downbeat about the banking system's prospects - although he doesn't expect a major Chinese bank to implode Lehman Brothers-style given the state's far-reaching role in the economy.

"A bad debt isn't bad unless you insist on being repaid," he says. "The (Communist) Party can call up the head of one the big four banks and say 'look just don't collect on these loans' but that still has economic consequences," he says. "The core banking system can sit on top of bad assets for a long time but that drags down economic growth."

Mr Chovanec says it is plausible that up to 20% or even 30% of banks' loan portfolios will turn bad. This means the money Chinese banks are required to set aside - 2.5% of the loans they have extended - would not be enough to cover loan losses.

He also says that many smaller Chinese banks may not have enough liquidity to allow them to keep rolling over loans until the economy improves and customers can pay back what they owe.

"Banks were reporting huge profits because they were lending a great deal and one of the reasons why they are reporting lower profits now is because they are lending less," he says. "But all of this disregards the credit quality and whether they are going to get paid back on those loans."

[mullokintyre]

From Ord Weekly report:

China news. News came this week that the Chinese central
bank injected nearly $58bn into money markets. This was the
largest injection ever. China’s recent monetary operations are
in sharp contrast to much of the last decade when strong
foreign capital inflows kept the central bank busy draining
liquidity from the system. With speculative flows reversing, the
People’s Bank of China (PBOC) must supply cash to the
market. It is not quite clear that this is good news. The large
injection reflects a reversal of foreign capital flows. Foreign
direct investment, which has been a growth engine for China,
fell for the third consecutive month in August with reading down
1.4% over the last 12 months. The PBOC’s action begs the
question whether the outflows have accelerated in September.
Equally, with loan and deposit interest rates set by the PBOC,
the transmission mechanism in China is not via the interbank
rate (which is affected by these operations).

Not completely certain whether the above will have any material effect on what happens here,
but it is a fundamental economic change that may have other unintended consequences.
Worth keeping an eye on.

Mick

[triage]

Finally it looks like the power struggle at the top of the communist party has been decided, and in favour of the Guangdong model rightist meritocracy backers over the Chongqing model leftist neomaoist clique.

Top Chinese politician Bo Xilai has been expelled from the Communist Party and will face justice, state media say.

Mr Bo, the ex-Communist Party leader in the city of Chongqing, is accused of abuse of power and corruption.

Mr Bo was held up as being the leader of the leftists and had been expected to move into the very top echelon of management of the communist party (and the Chinese state) but he has now been banished (I have even seen reports that he may be facing the death penalty) which suggests that the leftists have lost out big-time. My guess is that the current leadership sufficiently proved their mettle to the powerbrokers in how they confronted Japan about the disputed islands as to allow their natural successors to be given another 5 years in control of things.

Anyway matters have been sufficiently resolved to allow them to go ahead with the change-over process at the top of the party, to begin on 8 November (it was originally thought that it would happen in October but apparently it took longer than expected for the matter to be decided).

http://www.bbc.co.uk/news/world-asia-19755035

So why does this matter to a mum and dad investor in Australia like me? Well I reckon the new management team, now that they have held off the threat from the left, will be more determined and better able to start addressing some of the developing malaise in the Chinese economy, and in a way that will more likely rely on the Guangdong model which tends to favour the private sector driving the changes over initiatives controlled by government departments and state owned enterprises. If that is at all close to being the case, then expect the new team to be more focused on rebalancing the economy towards consumption than on continued reliance on (over)investment in infrastructure, in which case we could see a period of relatively lower but broader growth in China for a while.

(and the way it is looking in the US, on 6 November Obama may well get another 4 years at the helm, and hopefully he will use this second chance as an opportunity to decisively address some of the imbalances he allowed to fester in his first term).

[balance]

Nomura bullish on China