Could a banking crisis erupt in China? The commonly accepted answer among western analysts is no, for the simple reason that China has huge State owned banks that dominate the country’s banking industry. But dig a little deeper and a different picture emerges.
It turns out that within China’s smaller cities, the market share of the big banks fades away. Instead, local banks take over. With few national branches, these local banks will have a much more difficult time spreading risk geographically, and are thus more prone to failure.
While there is very little information on local finances, we examined the IPO prospectuses for several banks about to list in Hong Kong and unearthed a treasure trove of information on the geographical breakdown of China’s banking system. Read more
Auto manufacturers, their suppliers and investors need to prepare themselves for a triple shock from China’s slowing economy.
The first shock is already under way. As the chart below shows, China’s slowdown has caused passenger car volumes to decline in the Bric economies – which accounted for one in three global sales last year. Volumes in Brazil and Russia have collapsed as their commodity exports have tumbled: Brazil’s sales are down 23 per cent and Russia’s down 33 per cent (January – September 2015 versus 2014). China’s market has also clearly plateaued. New car sales have fallen in three of the past four months and inventories are close to record levels. India’s sales are the only bright spot, up 7 per cent this year, but India’s market is just a tenth of total Bric volume. Read more
By Ronald Cheng, Bingna Guo, Sean Wu, O’Melveny & Myers
Chinese companies are by no means immune from the cyber attacks plaguing firms all over the world. More and more are suffering data breaches, which can result in the leakage of customer information, the denial of service, and the prospect of litigation. In July 2015, the national cyber-security emergency response unit received reports of some 11,800 “cyber incidents”. Xi Jinping, the president, has made cyber security an issue of national security.
Partly in response to such mounting cyber security issues, the Chinese government adopted the National Security Law on July 1, 2015. The law for the first time addressed the concept of cyber security and advocated the prevention and punishment of online crime, but did not specify particular measures or punishments. In addition, the law mandated the “national security review and oversight” of all “internet information technology products and services,” naming a pretty broad swath of industries that could be facing more government scrutiny. Read more
Emerging market stocks, as measured by the MSCI EM Index, have seen more than a quarter of their value wiped out in the past four months, led by the travails of the Chinese stock market. We are not saying that now, or next week, or next month will represent the ideal buying point. We believe there is further disruption ahead, with suggestions that the devaluation by the Chinese central bank in August did not go far enough, and with others calling for a more profound market-clearing event to cleanse the final remnants of the price inflation seen earlier this year.
Many have been trying to call the bottom of the market; what we would say is that we are beginning to see tentative indications of discrete, selective buying of the babies that have been thrown out with the bathwater. We don’t think there is ever a bad time for rigorous, bottom-up analysis of companies exhibiting strong fundamentals. We do think that now looks like a particularly good moment to put old-fashioned research skills to work, and particularly in China. Read more
In all likelihood, the IMF will announce next month that the renminbi is set to become one of the currencies – along with the dollar, euro, yen and sterling – used by the Fund to underpin the Special Drawing Right, or SDR, its own reserve asset. As a result, the RMB will be informally crowned with the status of a ‘reserve currency’. But what exactly is in it for China?
In the near term, the biggest pay-off for China is that reserve status for the RMB could act as a catalyst for capital inflows from the world’s central banks, who might be tempted to increase the share of their reserves that are invested in China. Read more
China’s economic growth surprised on the upside in the third quarter. Yet markets will probably remain fixated on the economy’s slow-down and on the devaluation of the renminbi in August. We are in a world where volatilities rule, economic opinions differ and geopolitical conspiracy theories abound.
The mainstream view on the Chinese economy is that it will slow considerably, and only return to healthy growth if it can be “rebalanced” away from investment and exports to a household consumption-driven model. This view is incomplete at least, and misguided in some aspects.
The Chinese economy, over the next two decades before China becomes a high-income country, will be driven by four engines. Read more
Multinational corporations (MNCs) have been an essential part of China’s fast economic growth over the last three decades. They introduced new technologies, nurtured local managerial capabilities, created jobs and upgraded China’s export competitiveness. In return, MNCs found a new source of revenue by extending the life cycle of their mature technologies and products.
MNCs, however, got into a new playing field from the mid 2000s, with the preferential market access and tax benefits they previously enjoyed substantially reduced. The challenge from local competitors has become increasingly fierce. MNCs have had to adjust their strategies and market positioning to maintain a competitive advantage. Unfortunately their adjustment to the reality in China has not been working well. Read more
China’s ruling State Council last month released a much-anticipated plan meant to kick the country’s huge state-owned enterprise (SOE) sector into shape. No small amount of kicking is required. Not all but many of China’s 155,000 SOEs are inefficient and often loss-making. Where SOEs do make money, it’s usually because of markets and lending rules rigged by the government in their favor.
Finding a truly good SOE, one that can take on and outcompete private sector rivals in a fair fight is hard. Gong He Chun is one. Customers throng daily to buy its high-quality products, often forming long queues. The employees, unlike at so many SOEs in China, are helpful and enthusiastic and take evident pride in what they are doing. Though local private sector competitors number in their hundreds, Gong He Chun has them all beat. Read more
Emerging economies have little to be cheerful about these days, and while it wouldn’t do to put all the blame on China, what’s going on there makes for some grim economic weather.
China has embarked on an irreversible transition from rapid, investment-led growth to slower, more balanced growth; a transition that is utterly necessary in order for China to avoid a financial crisis of its own.
But the result is that China now just needs less of the stuff – commodities and intermediate manufacturing inputs – that it had previously been happy to buy from other developing countries. China’s sunshine has given way to cloud. Read more
By Edward Tse, Gao Feng Advisory Company
China’s recent stock market turbulence and currency devaluation has attracted enormous attention from around the world—with a disproportionate amount focused on whether we are seeing the end ofChina’s growth story.
True, many people lost a lot of money (though doubtless some also made a lot) and the reputation of the country’s economic managers has been badly damaged. The aftermath resulting from the meltdown will likely continue to be felt for at least several months, particularly by those private sector companies which have had to shelve plans to raise funds via initial public offerings. Read more
While the word has focused on China’s disastrous stock market bailout and the devaluation of the currency, a far larger crisis is brewing in China’s hinterland.
China’s property bubble has sagged in the big cities like Beijing and Shanghai – but it is on the verge of popping completely in the country’s heartland. After spending a week in Sichuan Province, it is clear that land sales, prices and transactions are all declining in double digits.
Sichuan province is one of China’s largest, in the heart of the country. We spent some time at a residential project called Universal City Centre, about 20km from Chongqing. The 1.08m sqm property has seen prices fall one-third from 4,000 to 5,800 psm one-third to 3,000 to 4,000 psm. Read more
By Herald van der Linde, HSBC
On the face of it, it makes no sense that the international flower industry should be headquartered in the Netherlands. The feeble sunshine and predisposition for a large number of rainy days would not make the Netherlands the first choice for anyone starting a flower-growing business today – if not for the fact that the business, and its integral supply chains, are already there. This is a huge competitive advantage for a new entrant, who can benefit from such things as the sophisticated Dutch flower auctions, the flower-growers’ associations and advanced research centres.
Academic Michael Porter uses this very example to illustrate his cluster theory of trade development, whereby whole supply chains “cluster” together. Another well-known cluster is the auto manufacturing industry in Michigan in the US. Over 50 per cent of North American auto companies are based in Michigan, and 46 of the top 50 global auto suppliers have operations in the state. Further south in the US, around Dalton in Georgia, over 90 per cent of all functional carpets are produced. It is why Dalton is called the “carpet capital of the world”. Read more
By Hayden Briscoe, AllianceBernstein
The visit to the US later this month by China’s President Xi Jinping comes at a politically sensitive time, with volatility in China’s markets — widely attributed to the effect of policy decisions — rippling globally. In our view, however, China deserves more credit than blame for its recent actions.
As China attempts to make the transition to a more open economy, two things are virtually inevitable: market volatility and difficult policy decisions, many of which need to be taken in the heat of the moment.
A case in point is the government intervention that followed the initial correction in the A shares market in July. This was widely interpreted outside China as a panicky reaction. But China’s share market is largely retail driven, and the need to maintain social harmony is of paramount importance to a single-party state. In light of this, the government’s response makes sense. Read more
The global commodity super-bubble is coming to an end. It is exactly a year since we forecast that a Great Unwinding of stimulus policies was underway, due to a major slowdown in China. As we warned on beyondbrics:
Oil and commodity prices are falling sharply as supply/demand once again becomes the key driver for prices; the US dollar is strengthening and liquidity is tightening across the world; equity markets risk sharp falls, as investors realise they have overpaid for future growth and rush for the exits; China’s economy is slowing fast as the new leadership implements the World Bank’s ‘China 2030’ plan; interest rates are becoming volatile as some investors seek a ‘safe haven’, while others worry that stimulus policy debt may never be repaid.
Today, it is clear that risks are rising in all these areas. And fewer people now believe that the problems can be magically wished away by a further round of stimulus – even if this was economically and politically possible. Read more
By Derek Scissors, American Enterprise Institute
Stock market volatility and a small currency devaluation have in the past few months caused the financial community to take note of Chinese economic weakness. A natural question is what effect this weakness will have on the rest of the world. The answer is very little, with most important reason being that China has not truly contributed to the global economy for at least four years.
The idea that Chinese weakness threatens the world economy melds a number of misconceptions. The first is that the weakness is a new phenomenon. It was actually the initial stock market climb and a rising renminbi that were somewhat surprising; the ensuring partial corrections were late in coming, if anything. Read more
By John Davies, Standard Chartered
China is the second-largest investor in US government bonds (or US Treasuries), trailing only the US Federal Reserve, but as the renminbi becomes more international, Chinese demand could drop, with significant implications for US yields.
The International Monetary Fund (IMF) is scheduled to decide later this year whether to include the RMB in its Special Drawing Rights (SDR) currency basket. In our view, China’s currency now meets the technical requirements for SDR inclusion, and we see a better than even chance that the IMF will add the renminbi.
Beijing appears to have taken up the challenge of the SDR review this year by accelerating the liberalisation of China’s capital account. However, this liberalisation cannot be achieved with a fixed RMB, so China, as this month’s move by its central bank has demonstrated, is likely to be heading towards a floating currency regime. Read more
Red is a lucky colour in China, which is why share price displays go red when prices are rising. A green display means prices are falling, the opposite to stock markets elsewhere. There is a similar discontinuity between the short-term impact of China’s recent 30 per cent stock market collapse and the concern of some western analysts that the government may see this as a reason for reversing President Xi’s New Normal programme of economic reform.
We do not expect this to happen. Rather, we see the aftermath of the collapse as a further playing out of the on-going factional struggle between the Princelings represented by President Xi and the Populists represented by Premier Li. If anything, it will strengthen Xi’s hand over the medium term, as the stimulus policy of the Populists is further discredited. Read more
By David Daokui Li, Tsinghua University
For most economies in the world, a 30 per cent drop in the stock index within a span of three weeks would certainly be considered a crisis. Certainly, the Chinese stock free fall (32 per cent at its peak) is a significant concern in China.
In fact, I was told the occupants of China’s Zongnanhai (the equivalent of the U.S. White House) endured the ensuing weekend with no rest, relentlessly laboring over rescue measures. In the final analysis, however, this was not a real “crisis” but a scary and revealing fire drill. Most likely, the stock market will be stabilized before long. Read more
Major structural change is under way in China’s passenger car market. New car sales grew just 1.2 per cent in May, as the country develops a used car market for the first time in its history. Buyers in the world’s largest auto market now have much more choice when it comes to buying a car, and are no longer forced to buy a new car.