China credit

By Kevin Martin, HSBC

China’s consumers are by no means the wealthiest in the world. But they are years ahead of their counterparts in many developed economies in terms of how they shop and pay for what they buy. In this, they are revolutionising the way consumer finance is conducted in the world’s second-biggest economy.

Like so many of the changes sweeping China, the uptake of internet and digital technologies has happened with head-spinning speed.

As recently as 2000, a mere 1.7 per cent of mainland Chinese were online. Now, the country has more than 700m internet users – a penetration rate of more than 50 per cent.  Read more

By Gordon French, HSBC

China’s “Belt and Road” infrastructure investment drive will help boost the flow of physical goods across large swathes of Eurasia, southern Asia and even parts of Africa and the Middle East. Less obvious is the impact that the vast amount of spending linked to the initiative will have in the financial arena – in the currency and bond markets in Asia and beyond.

First announced in 2013, the “Belt and Road” initiative is an essential part of China’s domestic economic rebalancing, and of its outbound ambitions. The initiative entails ploughing billions of dollars into the hardware – railways, highways and ports – that links mainland China and the dozens of countries to its west and south. The goal is to encourage more cross-border trade while putting excess capacities to work. Read more

By Gilliam Collinsworth Hamilton, NSBO

From Uber ratings to credit scores, the world has increasingly grown comfortable with the idea of assigning grades to human character. Behavioral quantification has become ever more fine-tuned, with online services using big data to predict recommendations and personalise the upsell.

Last year, China’s State Council (cabinet) released a planning outline for the “Construction of a Social Credit System,” the main objective of which is to establish “the fundamental laws, regulations and standard systems for social credit” by 2020, a vague term that is meant to encompass an individual’s personal, professional and financial history.

The point of the credit score is to judge your character, as well as your potential for contribution to society as a whole. Read more

China is in the early stages of a domestic M&A boom unlike any other elsewhere in the world. Deal pricing, timing, terms, financing and structure are all markedly different than in other major economies, with likely consequences, good and bad, for global corporations and buyout firms eyeing M&A transactions in China.

For these two, as well as companies wishing to find a buyer in China, the game now is to learn the new rules of China M&A and then learn to use them to one’s advantage.

Chinese companies mainly pursue M&A for the same reasons others do – to improve margins, gain efficiencies and please investors. The main difference, and it’s a striking one, is that in most cases domestic Chinese corporate buyers, especially the publicly-quoted ones who are most active now trying to do deals, have no money to buy another business. Read more

By Robert Moffatt, Neuberger Berman

Throughout much of the world, auto market prospects appear sluggish. In the US, auto sales are moving back to normalised replacement demand levels, implying slowing growth. In Europe, sales are being held back by a choppy economic recovery. China, in our view, presents a different story. Despite near-term concerns about the country’s slowing GDP growth and slipping consumer confidence, we are bullish on the long-term growth prospects of Chinese autos.

The Chinese auto market went through a rapid growth spurt from 2005-2010, growing nearly six-fold in six years, from 2.5m units in 2004 to 13.75m units in 2010. This unprecedented 35 per cent compounded annual growth rate has since slowed to roughly 9 per cent, but with nearly 18m cars sold in 2013, China has displaced both the U.S. and Western Europe as the world’s largest auto market (see chart below). Read more

A surge in fake invoicing is once again inflating China’s export figures, according to a survey, raising questions over a mysterious recent ballooning in Beijing’s trade surplus and suggesting that inflows of hot money may be rising.

A survey of executives at 200 export companies, trading firms and shipping agents in China in September revealed a spike in the number of respondents who think over-invoicing of exports is resurgent (see chart). The levels are reminiscent of late 2013, when hot money inflows prompted a managed depreciation of the renminbi. Read more

By Paul Hodges of International eChem

Strange things are happening in China’s polyethylene (PE) market. Despite a slowdown in the economy, demand is surging.

Our research suggests that PE, like copper and iron before it, is the latest instrument of China’s ‘collateral trade’, in which spurious imports are helping to drive one of the world’s great credit bubbles.

It can only end badly. Read more

Much of the reaction on Monday to the announcement of China’s financing numbers for January has focused on the sharp month-on-month increase in bank credit. However, a more telling picture can be had from looking at Total Social Financing (TSF) – the widest official measure of financing in the economy – on a year-on-year basis.

By TSF, Chinese financing in January was virtually flat at Rmb2.58tn, up from Rmb2.54tn in January 2013. This 1.6 per cent increase was well below the 9.5 per cent year-on-year increase in TSF last year and the 22.6 per cent expansion in 2012. Read more

Just when world markets need them least, new signs of underlying economic weakness are emerging from China.

Data from China Confidential, an FT research service on China, show that the real estate market – one of the key 2013 engines of Chinese growth – is starting to sputter. Read more

China recently announced political reforms, but what’s worrying markets is rising credit. George Magnus, senior economic adviser to UBS, discusses with John Authers the easing of the one-child policy and encouraging credit even as it needs to be kept in check.

Some more fuel to the China-credit-is-out-of-control fire. Fitch Ratings (which, don’t forget, downgraded China’s debt rating last year) has published a report which argues that “talk of deleveraging, or contracting credit, is misplaced” and warns that “no financial system can sustain rising leverage indefinitely”.

And Fitch has a few scary numbers and charts to show the extent of the problem. Read more

The market for renminbi-denominated credit raised outside China has gone four weeks without a single deal – it’s longest ever barren spell. Tee Chong-hong, head of CNH Capital Markets Products at Standard Chartered tells the FT’s Josh Noble that the market has been hit by speculation about the end of QE in the US and interbank liquidity in China.

From the numbers alone, it’s not immediately clear what’s good or bad about China’s inflation data out on Tuesday.

The year on year June figures show consumer prices are up 2.7 per cent, a rise from 2.1 per cent annual inflation in May. That doesn’t sound too bad, does it? After all, China’s aim is for inflation to be 3.5 per cent 2013. But what is pushing inflation up? Food – particularly pork prices – and property. This isn’t the type of demand that China wants. Read more

China’s markets stabilised on Wednesday, with interest rates easing in the crucial interbank market and stocks slipping slightly in uneventful trading.

But along with the stability, there is gloom. Equity investors are increasingly worried that slower growth and tighter credit is bad news for stocks: they’ve now fallen to their lowest since January 2009 and the depths of the global financial crisis. Read more

The People’s Bank of China on Monday finally went public over the country’s liquidity squeeze.

Its first statement on the cash crunch helped ease the pressures in the money markets and bring down short-term borrowing costs. But it did nothing to reassure investors in the stock market, where the Shanghai Composite plunged 5.3 per cent, taking its losses over the last two weeks to more than 12 per cent.

That seems logical – the authorities don’t want a banking crisis. But they appear to be serious about putting the brakes on credit growth, even at the cost of slowing the economy. Read more

In China, it’s often the case that the numbers themselves are a source of confusion, if not outright disbelief. But sometimes the numbers also speak for themselves. And one in particular is telling: credit intensity.

This measures the amount of credit needed to generate growth, and it has risen rapidly in the past six months to near its highest level. In other words, when it comes to GDP, China is getting less bang from it’s credit buck. Read more

China’s economy has started 2013 with an unexpected slowdown in manufacturing growth and a surprise surge in inflation, according to data published over the weekend.

But the real news in the numbers is the persistent strength of credit-fuelled investment. Despite all the effort put into rebalancing the economy in favour of domestic consumption, it’s still the investment engine that’s driving the economy. Read more

With concerns about the US Federal Reserve possibly cutting its stimulus programme hitting American markets, it was little surprise to see Asian risk assets getting a battering on Thursday.

But the impact was compounded by unexpected moves from the Chinese authorities to curb the property market and reduce to reduce liquidity. As a result the MSCI Asia ex-Japan index slumped by 1.8 per cent, with China leading the way and Shanghai closing down 3 per cent. Read more

China’s banks are about to start installing CCTV cameras in steel traders’ warehouses to make sure those traders are using their bank loans to actually trade steel – such is the erosion of trust in that sector.

Banks realised at the end of last summer that things were not going so well for their exposures to the traders, perhaps because, as it turned out, many smaller and mid-sized operations had been using some of their bank loans for purposes other than buying and stocking steel products. Read more

Will emerging markets ride to the rescue of the developed world? A new report from Ernst & Young suggests they will.

The report, Rapid-Growth Markets Forecast, Summer 2012, says a re-balancing of emerging economies towards domestic consumption, led by China, should reduce their dependence on western export markets while providing a new engine of growth for the world economy – even to the extent of “stabilizing financial markets and economic systems across the world”. Read more