Month: March 2014

 

The week started with Panasonic, a huge Japanese global corporate, making not just a “cost of living adjustment” to salaries for its expats working in China, but actually a “cost of not living” adjustment to expat pay. What was most shocking in their announcement this week is that such a pay adjustment is not applicable to Chinese employees. I guess in their view, the life of a foreign expat is worth more than the life of a Chinese employee. Very scary indeed!

The saga of the non-bank lending continues, as apparently shadow lending in China ($7.62 trillion Q3 2013) has slowed significantly this month, due to active government intervention. Trust company shadow lending ticked up when local government investment companies and property developers were borrowing quite substantially, but were regarded as too risky by bank lenders due to the overall caps on bank lending imposed by the government, i.e. available funds went to the most credit worthy.

Mizuho Securities suggests that the efforts of the central bank to control the shadow banking sector are having results, which are reflected in the increase in on balance sheet bank loans that accounted for approximately 64% of new loans in China this year.

However, the big news this week for international markets was the warning by China’s premier, Li Keqiang, of potential bond or loan defaults by corporate borrowers. Historically most debt was quasi government guaranteed, as the government typically would bail out those who were over leveraged.

Needless to say, the world in on pins and needles waiting to see if new government deregulation allows defaults to occur, and potentially incite a “Lehman moment”. Although in the same breath, China’s premier was quick to say that China is projected to meet its 2014 GDP growth forecast of 7.5%.

Iron ore, the main commodity used to manufacture steel, prices tanked (Steel Index price reporting agency) this week as it was revealed that China steel mills have significant overcapacity and less than half of them are currently profitable. The fact that Haixin Steel, a privately owned steel mill, is technically in default of a bond repayment, certainly did not help support global iron ore prices or market values of the world’s biggest mining companies.  China consumes around two-thirds of the world iron ore consumption.

Finally, the most exciting news this week is that the Yu’e Bao an online money market fund, managed by Alibaba Group, topped Rmb500 billion ($81.4 billion) in total deposits with its 6 per cent on demand interest rate. No wonder, it’s a slam dunk in comparison to the government imposed, on demand bank savings account rate of 0.35 per cent.  Even the one-year bank deposit rate is only 3.3 per cent. The difference is truly “left over treasure” or Yu’e Bao.

 

The question of how government economic reform will play out will certainly be an ongoing debate. There are the naysayers that say that the hugely debt perpetuated economic growth will eventually unravel and end in a severe economic downturn.

However, the Chinese communist government is still very powerful and very much in control. Unlike, other “free” economies, they still have the ability to counter balance destabilizing movements. Whoever said that transformation from an emerging economy to an economic leader would be smooth sailing.

The first ever, corporate bond default in China is nearly upon us. A solar cell maker, Shanghai Chaori Solar Energy, has announced that it will not be able to make an annual interest payment of Rmb89.8 million ($14.6 million) on bonds that it issued two years ago. Although this announcement should not be terribly unexpected, as the bond issue carries a CCC junk bond rating and trading was suspended last July.

Given the significant level of debt issuance from 2008 to 2013, which Standard and Poor’s estimates is around $12 trillion at year end 2013, defaults on riskier credits would be expected.

As us European high yield bond veterans recall back in the late 1990s, unsophisticated investors, such as the Italians of the day, just picked the names with the highest yields. Needless to say, it all went very badly for them when those risky, start up telecom issuers started to falter. An analyst at Moody’s claims the same is happening in the Chinese corporate bond market today. However, the difference here is that investors expect the Chinese government or other third parties to bail out the issuers in the end. Perhaps that will continue…

Buried somewhere in all the noise about the “slowing” Chinese economy, albeit the growth target for 2014 is still at 7.5 per cent, is the detail that the government must create enough jobs for 7.3 million university students graduating this year. Of course this number does not even include those students who are studying abroad and looking to return home after graduation. If only our government had an inclination to create new jobs for our college graduates.