By Philippe Le Corre and Joel Backaler
This year has all signs of becoming another bumper year for Chinese overseas mergers and acquisition activity. In the first three months alone, the total value of cross-border deals nearly reached 2015 annual totals ($101bn and $109bn, respectively).
High-profile deals from the last three months include: Dalian Wanda’s $3.5bn acquisition of Legendary Pictures, a US media company, Haier’s $5.4bn takeover of GE’s appliances unit and most notably ChemChina’s record-setting $43bn bid for Syngenta, a Swiss-based agri-business group.
However, all of this overseas business activity is occurring against a backdrop of a Chinese domestic economy that is facing myriad challenges with a slower GDP growth forecast of 6.5 per cent, reduced domestic demand and decreasing industrial profits not to mention industrial overcapacity. Read more
By Mark Schwartz, Goldman Sachs
In the 1990s, trade was the defining issue of the US-China economic relationship. Today, as much as any other issue, the environment binds the two giants of the global economy together.
This week, leaders from the international financial community are gathering in Shanghai for preparatory meetings in advance of the G20 summit in Hangzhou this September. Among the most prominent items on the agenda is green finance– public and private investment in environmental protection and climate change mitigation. Read more
By Michel Lowy, SC Lowy
Traditionally, investing in Asian high-yield bonds has not been for the faint-hearted. Yet in recent years a new normal emerged; just about any bond delivered strong returns. Such has been one of the results of the extremely accommodative policies of major central banks that have flooded the markets with liquidity, thereby dulling the perception of risk.
However, all this changed last year when steep falls in oil and commodities prices,
together with US high-yield fund redemptions, led to a liquidity shakeout
in the high-yield bond market. The new reality rewarded a discriminating investment strategy – with the Chinese property sector’s high yield bonds returning gains of 20 per cent, even as other market segments such as Indian issuers and Chinese industrials experienced single-digit losses. Read more
The aim of an equity market circuit breaker is to provide safeguards to address market volatility and inspire investor confidence. It’s hard to argue with the rationale, but this week’s new measure in China has had unintended consequences for the world’s second largest economy. And it’s not the first time that the China Securities Regulatory Commission (CSRC) has made such an error of judgement.
Under previous rules, trading in individual mainland Chinese stocks had to remain within a 10 per cent price limit based on the prior day’s close. Monday’s innovation extended restrictions to the entire CSI 300 index, however; this time at even tighter boundaries of 5 per cent and 7 per cent. In essence, if an upward or downward move exceeds 5 per cent, the index goes into auction mode (when trades may be submitted but not executed). A subsequent move to the 7 per cent boundary means all stocks are suspended. Read more
By Victor Shih, University of California at San Diego
An important milestone has been reached in global finance. For the first time, the currency of a developing country has joined the special drawing right (SDR) basket of the International Monetary Fund (IMF). The Chinese Renminbi has received this global recognition for the currency’s importance both in global trade and in cross-border financial transactions.
This may herald the beginning of a fundamental shift in global finance that spells the end of hegemony by a small handful of advanced countries. Yet, it is in no one’s interest if the restructuring of the global financial architecture lowers the standards of the global financial system. Read more
By Andrew Collier, Orient Capital Research
Chinese investors have discovered a new way to spirit money out of the country behind the backs of the country’s regulators.
In recent years, savvy investors have used false invoicing as a way to disguise their capital flight. A Chinese company pays $1m to a foreign company for a machine tool that is actually worth $500,000; the rest is invested in property or stocks in London or Sydney or New York. Read more
By Rafael Halpin, China Confidential
At the start of his premiership, Li Keqiang drew on an ancient Chinese proverb to explain the task ahead. A Chinese warrior, having been bitten by a snake, cuts off his hand in order to save his body. China’s reform process will be “very painful and even feel like cutting one’s wrist”, Li warned.
Pain has certainly been part of 2014 for the Chinese economy. To a large extent, it has been self-inflicted. Measures to deleverage the shadow financing system, for example, led to a sharp slowdown in credit, which in turn contributed to a drop in home sales. This has resulted in slower growth in industrial output, as well as weaker consumer purchases of cars and white goods. Meanwhile, anti-corruption campaigns have hit spending on luxury goods and services and led to delays in the approval of new projects by local officials. Read more
By Hayden Briscoe, Shamaila Khan and Jenny Zeng, AllianceBernstein
Based on insights from our team’s recent trip to China, we noted that the country is likely headed for a long economic landing. What does that mean for its infrastructure and commodity sectors? Read more
By Hayden Briscoe, Shamaila Khan and Jenny Zeng, AllianceBernstein
China’s economy isn’t headed for a hard or soft landing — instead, it’s more likely to be a long landing. That’s our perspective, based on our team’s recent visit to China to get an up-close look at the economic landscape.
The country’s economy clearly faces another few years of uncertainty and negative headlines, but we think the risks will be contained as long as the government sticks to its reform agenda. On our China trip, we assessed conditions in important cyclical sectors such as banking, basic industries and property. Read more
By Eswar Prasad, Karim Foda, and Abhinav Rangarajan
China is making steady progress on its path to making the renminbi an international currency, as the FT writes in a Special Report, The Future of the Renminbi, published today.
See here for an Interactive graphic that traces the renminbi’s progress since 2000.
China continues to gradually open up its capital account, make offshore renminbi liquidity more easily available, and sign up more renminbi trading centers (London and Frankfurt most recently). To become a reserve currency, China also needs to let the renminbi’s value be market-determined rather than being tightly managed relative to the US dollar.
On March 16th of this year, China took another step towards freeing up its currency. The daily trading band around the renminbi’s central value relative to the U.S. dollar was widened from 1 percent to 2 per cent in either direction. The reasonable expectation had been that this would lead to faster appreciation of the currency and more volatility. Instead, the opposite happened. Was the shift to a wider trading band just a head fake? Read more
If proxy indicators are to be trusted, investors will welcome a key further opening of China’s Shanghai stock market to foreigners next month with a bang. More important, though, are the ways in which the partial integration of the Shanghai and Hong Kong exchanges promise to recast the global investor landscape.
Several portents of a rousing reception await the launch of the “Shanghai-Hong Kong Stock Connect”, which is set to offer Hong Kong and foreign investors with offshore renminbi (CNH) the most unfettered access yet to the Shanghai market. Read more
By Andrew Collier, Orient Capital Research
The threat of a collapse in the shadow banking market looms over China like a hawk swooping down on its prey. Shadow loans are made outside the formal banking system and are only lightly regulated, making them a significant source of financial stress if the Chinese economy slows significantly. One of the biggest source of shadow loans, Trusts, is showing signs of weakness that could turn into a big problem for China’s economy.
There now is a staggering Rmb 11.7tn in outstanding Trust loans, approximately one-quarter of the entire shadow banking market. Using a list of 31 failed Trusts supplied by the Central University of Finance and Economics in Beijing, we examined them to see what they tell us about the fate the entire Trust industry – and by extension shadow banking in China.
What we found is a disturbing harbinger of things to come for China’s economy. Read more
Two of China’s stodgiest state-controlled entities locked horns this week as state broadcaster CCTV accused a major state bank of money laundering and violations of the country’s foreign exchange rules.
In a report aired on Wednesday, China Central Television claimed that Bank of China (BOC), the country’s fourth largest lender, was helping clients circumvent foreign exchange controls using a service called “Youhuitong,” a play on words that translates as “Preferential Transfer Channel.”
The incident highlights the many regulatory grey areas that have emerged as China has launched a slew of financial reform pilot programmes. Many such programmes take the form of broad guidelines, while detailed regulations appear much later, if at all. Read more
The end of a year-long freeze on stock market listings in China might sound look good news for investors but for several reasons Chinese stocks fell on Monday, the first day of trading since the weekend announcement, with the ChiNext Composite index – representing China’s answer to the Nasdaq exchange – plunging 8.26 per cent, its biggest single day decline in its four-year history. Read more
By Jingdong Hua of the IFC
China’s economic growth has been extraordinary, averaging about 10 per cent a year for the past three decades. Despite the recent economic slowdown the country added 7.25m jobs in the first half of this year. The capital markets have been a driver of China’s economy, and their continued development is essential for sustained growth. Read more
Chinese government bond futures are back, ending an 18-year halt after an investment scandal shuttered the market. The move is part of efforts to encourage development of the government bond market and offers a hedge against market volatility.
The China Securities Regulatory Commission (CSRC) said on Friday that a proposal to issue government bond futures had been approved by the State Council and that the futures would be publicly traded on the China Financial Futures Exchange (CFFEX) in two months’ time. Read more
When Xiao Gang, the new boss of the China Securities Regulatory Commission, used ‘China dream’ as the theme of his first public speech following his appointment back in March, he was making an obvious echo of president Xi Jinping’s evoctaion of a ‘China dream’. Xiao’s speech was published on CSRC’s website to just before China’s May 4th Youth Day.
However, whether Xiao really is a reformist remains to be seen. He certainly seems willing to continue the reforms started by his predecessor, Guo Shuqing. But progress will require something more practical than dreams. Read more
What should we make of the appointment of China’s new top securities regulator? The expectations are: stability, predictability, and no great drive for further market reform. But we might all be surprised.
Xiao Gang (pictured), until this week the chairman of the Bank of China, is being interpreted as a cautious new head of the China Securities Regulatory Commission. Read more
In the pantheon of financial news, China’s decision to open its interbank bond market to foreign investors may seem a small item. But the announcement, made on Wednesday, is a big one for two reasons.
First, it gives foreign institutions access to a major asset class. Second, its timing signifies that China’s financial reform train is still very much in motion just a few days after the dust finally settled on the country’s leadership reshuffle. Read more