Author Archives: Andrew Collier

China’s Belt and Road: Debt trap – for China?

China’s Belt and Road: Debt trap – for China?

Andrew Collier | Oct 15, 2018

I spent three days at the end of September in the city of Astana in Kazakhstan, at a conference that was part of a larger effort by Nazarbayev University to create a China Centre. Kazakhstan is feeling pressure due to its location between China and Russia and is seeking greater depth of knowledge on China from western experts, who are considered neutral players between Russia and China.

One large focus during the meeting was the impact of China’s Belt and Road policy on central Asia. Is China going to be helpful or controlling in the relationship? Is China going to contribute to the growth of Central Asia or simply use it as a dumping ground for excess domestic production capacity and as a means to extend its regional security capacity?

I left Central Asia with a few thoughts:

  1. Kazakhstan is the largest country in Central Asia. Due to its size and natural resources (mainly oil and gas), it is in a better position to meet China as a quasi-equal than many of its neighbors and even some countries on the belt and road route in Southeast Asia.
  2. Most locals view China’s BRI as a security policy. But, as sophisticated sinologists, they are aware that the BRI title has been thrown over a loose array of policies and investments and may be less concrete than the rhetoric would imply.

Does Xi Jinping Control the Economy?

Xi Jinping is widely viewed as China’s strongest leaders since Deng Xiao Ping thirty years ago. He has consolidated control over the Party, rammed home an anti-corruption campaign, and pledged backing for the expansion of the state sector through programs like “One Belt One Road” and “Made in China 2025.”

But behind the flagship programs and bold statements lies a much more troubling picture. Due to a combination of fiscal constraints, the overwhelming rise of shadow banking, and the sheer size of the Chinese economy, Xi Jinping is more like a rider riding a bull during a rodeo than a President with his finger on the pulse of government. In fact, Xi and his top economic advisors have tacitly acknowledged their inability to directly control the economy by devising policy workarounds to keep the economy moving. These policies have both a political and an economic component.

Unable to provide the credit the local governments need, President Xi’s response has been to acknowledge the deficit and place responsibility for growth squarely on the shoulders of local governments.

As economist Barry Naughton of the University of California at San Diego noted:

“…the Chinese economy is simply too big to try to place under some kind of unified policy guidance….China is evolving towards some kind of new untested system in which a highly centralized and disciplined authoritarian political system is combined with a more decentralized economy.”

Thus, Xi is handing over more power to Provincial party bosses, who increasingly have greater control over the towns and counties below them. These local governments will be responsible for generating growth – with little help from Beijing.

For full report, contact Orient Capital Research

Xi Jinping’s Boao Speech – Modest Concessions

Xi Jinping’s Measured Boao Speech

Xi Jinping made a surprisingly concessionary speech at the Boao Forum April 10 in response to the escalating trade war instigated by the Trump Administration. I had expected him to avoid making any overt signs of concessions to Trump’s trade threats. Perhaps I underestimated how little these overseas speeches are disseminated to domestic audiences, allowing him to speak freely to a foreign audience. However, there were few firm commitments and several very typically broad Chinese statements of intent.

He affirmed China will:

  • Increase the foreign ownership restrictions for the insurance and financial sector.
  • Lower the auto import tariffs this year.
  • Proactively expand imports.
  • Allow more foreign stakes in auto manufacturing.

Foreign automakers already hold significant stakes in the domestic market and are unlikely to increase exports apart from high-end autos and specialty vehicles such as ambulances. Tesla, however, may benefit.

Commercial banking is the lifeblood of state firms and Beijing is intent on controlling the country’s savings deposits so I doubt there will be significant concessions there. By the end of 2016, 39 foreign banks had established subsidiaries on the mainland. Most of their business has been restricted to yuan services, accounting for 70 percent of their assets, loans and deposits. Early joint ventures in banking by CBA of Australia and ANZ of New Zealand, for example, have been dismal failures with few cross-synergies.


The insurance and brokerage sectors are the one area likely to have a significant impact. Insurance has been going through tough times and could use the capital. The industry expanded rapidly over the past few years through the sale of financial products and the investment in highly risky property and local government infrastructure loans. In the past year, their activities have been curtailed and their ability to raise capital in the “shadow” (i.e., private) markets has been restricted.

Same with securities firms. The brokerage business is a huge mess with competing groups all across the country that have engaged in risky fund raising activities in the shadow market. Allowing the sale of smaller institutions — below controlling interest and with fresh injections of capital — would probably be welcomed. However, I doubt we will see the larger, more systemically important firms like Citic Securities and Haitong welcoming foreign investment, however.

Other comments pertaining to areas such as IP Protection are unlikely to yield significant gains.

In the end, the U.S. and China are likely to engage in an escalating war in much larger markets such as semiconductors that will reflect a sheer battle for market share. Although President Trump may try to turn these engagements into accusations of unfair trade, the underlying reality of China’s economical significance will be hard to ignore.



Bloomberg Radio: Xi Jinping on Trade

Andrew Collier, Managing Director, Orient Capital Research joined Bryan Curtis and Juliette Saly to discuss his expectations for President Xi Jinping’s keynote speech at BOAO in China. He doesn’t expect anything big on the trade spat with the U.S., saying he will instead position China as a country that adheres to trade rules globally.

Running time 06:45

China’s Leaders Fret Over Debt

See my comments below….

Published onDecember 29, 2017

Engen Tham, Matthew Miller and David Lague, Reuters

SHANGHAI/BEIJING/HONG KONG, Dec 28 (Reuters) – In March 2013, retired chemical company employee Anne Xing, her older sister and their husbands visited a China Everbright Bank branch on the outskirts of Shanghai. A private wealth manager at the bank had a special deal to offer them.

“He said there is a high-quality product,” Xing recalls. “Only elite customers can buy it. We asked him if there was any risk. He said there was no risk.”

The two couples sank about 5 million yuan (about $762,000) into the investment product, which offered 9.5 percent annual interest over two years – substantially higher than the 3.75 percent they could earn on a fixed, two-year deposit at the same bank. Xing’s sister said she sold a property for 3 million yuan to fund her investment. The two families say they didn’t know exactly where the money was going at the time. When the contracts arrived weeks later, it turned out they had entered China’s $9.8 trillion shadow banking industry.

By December 2015, the interest payment for the second year was already well overdue and the couples were worried. “Then the sky came crashing down,” Xing said. “The money was gone, a couple of million.”

Everbright had actually sold the two couples a stake in Chang’an Trust Coal Industry Resource Investment Fund Three A Collective Investment Fund Plan. Their money had been lent to a coal miner that soon went bust. The Chang’an Trust product was one of countless so-called wealth management products sold to investors to help raise money for a massive wave of lending in China that began in the aftermath of the 2008 global financial crisis.

The widely publicized default burned Anne Xing and other investors who now are suing Chang’an. “I’ve become like the mentally ill, really,” says Xing. Amid the acrimony over the loss, Xing says, her sister divorced her husband.

Everbright did not respond to several requests from Reuters for comment. In a written response, Chang’an said: “This case is currently being processed by the courts. Please wait for the judgment.”

Conducted outside the normal banking system, lending like this is at the heart of China’s massive shadow banking industry. For China’s rulers, the fear is that there may be more bad loans in the shadows of the financial system. The danger is that a big default or series of loan losses could cascade through the world’s second-biggest economy, leading to a sudden halt in bank lending.

Top leaders in Beijing have acknowledged that the colossal volume of complex and potentially risky lending obscured in shadow banking compounds the threat posed by the economy’s tremendous accumulation of debt since the global financial crisis. So far there have been relatively few defaults like the Chang’an product. Some regional banks have been restructured after a spike in shadow loan failures.

Financial risk also poses a formidable challenge for the Communist Party. At a top level conference in July, party leader Xi Jinping declared that financial security was vital to national security.

Economic pain from shadow banking could also test the political climate for an authoritarian regime that justifies its one-party rule as the price the country must pay for stability and prosperity. Middle-income and high-income earners, the core of support for the Communist Party, have invested heavily in wealth management products, according to surveys of investors.


Inside and outside China, alarms are now sounding about mounting debt. Zhou Xiaochuan, the head of China’s central bank, the People’s Bank of China, has openly warned that authorities need to curb financial risks that might lead to a “Minsky Moment” – a sudden collapse of asset prices, sparked by debt or currency pressures, after a long period of growth. Zhou said corporate debt levels were relatively high and household debt was rising fast, in remarks in October on the sidelines of the Communist Party’s 19th congress in Beijing. “We should focus on preventing a dramatic adjustment,” he said.

Earlier this year, Moody’s Investors Service and Standard & Poor’s downgraded China’s sovereign rating, citing concerns over the nation’s rising debt.

Countries with close trading ties to China are monitoring efforts to restrain shadow banking and the accumulation of debt. The Reserve Bank of Australia (RBA) warned in its October Financial Stability Review that “financial stability risks in China remain high.” The RBA acknowledged that Chinese authorities were taking steps to curb risk. “But the more that leverage and risky lending grow, the more likely that China’s economic transition will include a significant disruption of some form,” the bank said.

A blizzard of regulations, high-profile arrests and official warnings over the last 18 months have sent a clear signal that authorities are attempting to reign in excesses. A veteran of the country’s financial reforms, Guo Shuqing, was appointed in February to head the China Banking Regulatory Commission. Guo almost immediately issued a flurry of directives aimed at forcing banks to improve risk management and curb the sale of complex, high-yielding wealth management products to investors.

In November, Beijing set up the Financial Stability and Development Committee, a top-level panel of regulators tasked with policing tougher rules and closing loopholes that allow risky lending. Days later, the People’s Bank of China and financial regulators jointly issued new draft rules to govern the wealth management industry.

There are signs it is working. The growth of shadow banking, particularly the sale of wealth management products, slowed over the first half of 2017, according to reports from Moody’s and Fitch Ratings.

But this too presents a political challenge: An overzealous crackdown could lead to financial and economic disruption, economists say. Shadow lending plays a major role in maintaining the 6.5 percent annual growth target that Xi Jinping has set for China’s economy. Slower growth may also expose less profitable borrowers to a higher danger of default, potentially creating the conditions for an upheaval. And smaller banks, which have benefitted from the explosion of shadow banking, are resisting the new wealth management rules.

China’s banking regulator and the central bank did not respond to questions from Reuters about the risks of shadow banking.

In the case of the product sold to Xing and her relatives, the money raised through the Chang’an Trust fund had been lent via a complicated series of transactions to Shanxi Loujun Mining, a subsidiary of coal miner Liansheng Energy. Liansheng went bust in late 2013, before the loan matured. The Liansheng failure was one of the first defaults that exposed the risks in shadow banking. It was widely covered in China’s state-controlled media.

At first, Anne Xing says, they thought they were buying an Everbright Bank product. If she had known what she was really getting, she said, “I one hundred percent would not have bought it.”

Before the 2008 financial crisis, there was very little shadow banking in China. In the aftermath of that shock, Chinese authorities launched a massive effort to stimulate the economy, mostly through a huge increase in lending. This led to a boom in property and infrastructure spending that continues today. Demand for credit increased sharply, especially from local and municipal government-owned companies.

To meet this demand, banks began selling wealth management products offering higher interest rates than normal deposits. Many investors believed these products were implicitly guaranteed by the issuer, even if it was not expressly stated in the contract. Banks also borrowed cash from other banks and companies.

For banks, these funds can then be lent to borrowers prepared to pay higher rates. But the banks want to sidestep rules designed to restrict lending to overheated sectors including property, mining and other resources. So, people in the shadow banking industry say, these loans are often disguised by directing them through a complex chain of intermediaries, including trusts, securities companies, other banks and asset managers.

To earn interest on these loans, a bank will buy a financial product from one of the intermediaries, which directs earnings back to the bank. That allows the bank to describe what is really a loan as an investment on its books. This type of lending can be more profitable because banks can set aside much less capital than they are required to hold for regular loans as a safeguard against defaults.


By the end of 2015, shadow lending was growing faster than traditional bank lending, and was equivalent to 57 percent of total bank loans, according to a 2016 report from investment bank CLSA. This dramatically accelerated the speed at which overall debt expanded in China’s financial system. Moody’s said in a November report that China’s shadow banking assets grew more than 20 percent in 2016 to 64 trillion yuan ($9.8 trillion), equivalent to 86.5 percent of gross domestic product.

To fund this lending, there is intense pressure on staff selling wealth management products who earn small salaries and rely on commission for most of their income. A typical base salary would be about 5,000 yuan ($763) a month, according to an employee of a Shanghai-based trust, who spoke on condition of anonymity.

The employee said sales staff needed to sell 100 million yuan worth of these products a year, at a commission of about 0.6 percent, to meet targets. And, he said, while the marketing was slick, the quality of many of the products was poor.

At the center of shadow banking are the 12 nationally licensed joint stock banks and many of the more than 100 city commercial lenders which hold about a third of China’s commercial banking assets. From 2010, these mid-tier banks and regional lenders set about competing with the country’s so-called Big Five lenders, the state-controlled behemoths that dominate the economy. The key to the upstarts’ growth is selling wealth management products and borrowing from other banks, allowing them to create loans wrapped in financial instruments to give the appearance of investments.

In the northeastern province of Liaoning, Bank of Jinzhou Co nearly doubled its profits to 12.2 billion yuan ($1.87 billion) in the 18 months through the end of June, according to the company’s accounts. Driving this growth has been a swelling balance sheet of shadow loans, which have been growing at 30 percent annually over the last three years, according to the accounts.

In an interview in September, 2016, the bank’s vice president, Wang Jing, asked by Reuters about these loans, compared the bank’s appetite to that of a growing teenager who isn’t afraid to eat fatty meat. “We want to grow quickly,” Wang said. “Once we have a certain body mass, we’ll be able to do more things, provide better customer service, and there’ll be more opportunity to work together with the big banks.”

One of the biggest dangers is that banks must repay investors in many of the wealth management products and other creditors in three or six months. But the loans the banks make to potentially risky borrowers in real estate or mining are usually for terms of a year or more. So, lenders need to keep raising funds from new wealth management products and interbank borrowing to back their loans.

Patricia Cheng, head of China financial research at CLSA, describes how a financial crisis might unfold. In the event of major shadow banking defaults, a loss of investor confidence could mean banks find it difficult to raise funds from new wealth management products. “Then, the funding chain would collapse,” said Cheng. That in turn could lead to panic and a liquidity crunch, she added.

In the event of widespread defaults, the government would be forced to bail out investors because so many are middle and high-income earners, commentators say. Many investors also believe the banks would guarantee these products even though there may be no contractual obligation to do so. “This is a kind of untested assumption,” says Andrew Collier, managing director of Orient Capital Research and author of “Shadow Banking and the Rise of Capitalism in China.”

In the short term, though, Collier and many leading economists familiar with the Chinese banking system think Beijing has the financial tools to avoid a crash if excessive risk can be controlled in shadow lending. They argue that a grinding, protracted economic slowdown that curbs the availability of credit to the more vibrant sectors of the economy would be a more likely threat from a series of shadow banking failures.

The Reserve Bank of Australia and other observers suggest a banking crisis in China would be unlikely to lead to global contagion because the country has limited direct financial links with other countries. But global growth would suffer. China vies with the U.S. for the title of the world’s biggest trading nation.

For Anne Xing and her family, the immediate challenge is to get their money back. In May 2016, they went to Everbright’s Beijing headquarters where they met officials from the bank and Chang’an Trust. Xing said the bank proposed lending Chang’an the money to pay out investors. Chang’an rejected this, she said.

In July 2016, Xing visited Chang’an Trust’s headquarters in Xi’an. Xing said that Chang’an told her it was Everbright that had sought to set up the wealth management product. She said Chang’an also told her that there was an agreement that Everbright would take responsibility for repayment of the principal and Chang’an would handle the interest payments. Chang’an said there was no written agreement, only an oral undertaking, Xing said.

The following month, Xing and other investors sued Chang’an, claiming the wealth management product had not been legally created.

In May this year, they directed their frustrations at Everbright, the bank. Along with other investors they took to the street, staging a 12-day protest outside Everbright’s headquarters in Beijing.

They are still waiting for their money. (By Engen Tham, Matthew Miller and David Lague; Additional reporting by John Ruwitch in Shanghai; Editing by Peter Hirschberg)

Financial Opening – Yale Law School Blog on Foreign Policy Magazine

Foreign Policy Lawfare

Don’t Trust China’s Opening of Its Financial Sector

Inviting foreign investors into a closed economy is a lot easier said than done.

| DECEMBER 8, 2017, 7:53 AM

Chinese 100 yuan notes and one U.S. dollar on Jan. 6, 2017. (Fred Dufour/AFP/Getty Images)
Two days after President Trump left China as part of his recent Asian tour, Beijing announced a radical policy to open its financial sector to foreign firms. The Nov.10 announcement took the world by surprise as there had been no advance talks and no leaks suggesting a change. Given China’s weak adherence to earlier World Trade Organization (WTO) rules on the financial sector, however, the question is: How serious will China be about the new policy?

Whether China takes this financial opening seriously will have a significant impact on its relations with the United States. The gradual opening of China’s financial system could integrate China more closely to global trade and financial flows, and thus advance the long-standing Western dream of a China that functions closer to a Western model — a

model that assumes the ground rules of capitalism, including larger financial markets and an openly traded currency.

But American skeptics say China has not lived up to its previous promises in the WTO to allow foreign access to its financial markets. Foreign commercial banks comprised
about 2 percent of China’s market share in 2006, when China adopted new rules five years after its WTO accession; that share has since fallen to a relatively insignificant 1.3 percent. Among brokerages, JPMorgan First Capital ranked 120th out of China’s 125 brokerage firms by net income in 2015, according to the Securities Association of China. UBS Securities ranked 95th, pretty far down the scale. In the past few years, several foreign securities firms have abandoned or lowered their stakes in Chinese joint ventures. There are also growing security concerns in the Trump administration, and among private companies, about financial technology that could be abused by China, including cloud computing, which is integral to modern banking systems. One recent example

is Amazon’s sale of its stake in its cloud-computing partnership in China due to China’s desire to control cloud data.

What exactly does China’s new policy do? As reported by the Financial Times:

  • Foreign firms will be allowed to own stakes of up to 51 percent in securities

    ventures, increased from 49 previously; China will scrap foreign ownership limits

    for securities companies three years after the new rules are effective.

  • China will lift the foreign ownership cap to 51 percent for life insurance

    companies after three years and remove the limit after five years.

  • Limits on ownership of fund management companies will be raised to 51 percent,

    then completely removed in three years.

  • Banks and so-called asset-management companies will have their ownership

    limits scrapped.

    Foreign firms quickly expressed enthusiasm for the new policy. JPMorgan Chase, Morgan Stanley, and Swiss bank UBS all said they are eager to take advantage of the new rules and increase their investments in China.

    Others are skeptical. The European Chamber of Commerce in Beijing called the new policy an “encouraging step towards the opening of China’s financial system overall.” But the chamber clearly believes the policy may not remove a host of existing barriers to entry. The chamber said the regulations come at a “late stage,” making it difficult for foreign firms to penetrate existing markets. Applicants may “be asked to apply for additional licenses or will face other restrictions.”

    Generally, given past experience, there are a number of roadblocks in the way of foreign entry, including institutional, financial and cultural issues.

    First, it’s not clear how far or how quickly China will lower the barriers to entry. Several years ago, the Shanghai Free Trade Zone was touted as a quick way for entry into China until applicants discovered they needed local Shanghai government approval — not just from Beijing — to register their companies and move money offshore. Under the new

financial policy, the central government through the people’s Bank of China and the China Banking Regulatory Commission are likely to expeditiously issue permits for foreign firms, but there could easily be registration requirements from other institutions lower down the hierarchy, including provincial governments and local regulators. Second, the biggest market — commercial lending — is the most difficult for foreign firms to crack. Most Chinese banks are at least partly owned by state entities that will be reluctant to sell stakes to outside investors beyond insignificant minority holdings. Weak, financially strapped local banks may be willing to sell but they offer myriad financial and compliance risks.

The most likely entrants will come in the insurance and securities industries. “Securities and insurance will be first,” said a research analyst for China’s State Council-affiliated think tank who I interviewed in Beijing on Nov. 15. He called the policy “good for reform” in China and noted that researchers analyzed the risks to China’s financial system in a report two years ago, suggesting this has been on the minds of the leadership for some time.

Foreign securities firms, in particular, offer a degree of global experience and technology that would be attractive to Chinese corporations. Also, there is far less balance-sheet risk for securities firms that take a fee for transactions, compared with a commercial bank making a long-term loan that remains on its balance sheet. In addition, China is increasingly seeking to raise capital abroad, both to avoid capital controls and due to tighter liquidity conditions domestically.

However, Chinese insurance and securities firms have been generally quite profitable and may be reluctant to sell majority stakes. Only the weaker ones would be willing to dispose of majority equity interests. Foreign firms also may be reluctant to import their most valuable trading technology and algorithms into a country with weak protection of intellectual property. Trading algorithms take years to develop. Also, many countries will be unwilling to allow Chinese access to important financial data such as the size of gold reserves or financial flows. China has its own view of national security that tends to be more protectionist than that of the West.

In addition, Chinese insurance and securities brokers have dipped heavily into the opaque shadow banking market, acting as if these loans are not their responsibility — a questionable assumption given China’s state-led financial system. This would raise red compliance flags among foreign firms.

Further complicating implementation of the new policy is an expected change in the leadership of the country’s central bank. Zhou Xiaochuan, the governor of the People’s Bank of China (PBC), is seen to be retiring in 2018. The two likely candidates to replace him, Jiang Chaoliang and Guo Shuqing, have differing views on financial liberalization. Guo, the former chairman of China Construction Bank, is considered more globally sophisticated and open to financial reform. He studied at Oxford for a year and later was in charge of China’s foreign exchange policies. In contrast, Jiang is more of a banker’s “insider,” having spent most of his career in the domestic Chinese banking industry. The

appointment will be important due to the PBC’s rising power. In July 2017, during a financial meeting held every five years, the PBC was anointed the chief financial regulator for the country, so this appointment will be key to any radical changes.
Expect a flurry of high-profile deal announcements from the securities industry — but little actual new capital. American firms dominate global finance and are likely to be the first movers. The real progress will come in 2018 when the foreign financial institutions, especially U.S. firms, have had time to digest the news and test the willingness of domestic regulators to allow significant foreign access. The new financial openness will encourage overseas banks to favor China’s foreign policy mandates due to their interest in expanding revenue. This would be good for China’s rising global influence.

However, there could be opposition among domestic groups in the United States concerned about American capital contributing to China’s economic improvement. The Trump administration is showing growing signs of launching trade policies against Chinese imports. While U.S. banks will be wary of waving the flag in China, senior Trump administration officials may be less reluctant to take action against Chinese institutions such as foreign branches of Chinese banks if they feel that China is taking advantage of American capital.

Andrew Collier is an independent macroeconomic researcher based in Hong Kong. He holds a master’s degree in international relations from Yale University, and is the former president of the Bank of China International USA, the BOC’s U.S. investment bank.

Notes from China – Inflation Worries

Notes from China

Beijing Sees New Problems


We just conducted a week of interviews in Beijing and nearby Jinan, Capital of Shandong Province. A few thoughts on these subjects:

l   Inflation.

l   Consumer Debt.

l   Growing Receivables. 

l   New Private Banks

l   Rising Power of Reformer Wang Yang

l   The Mantra of Private Public Partnerships


Inflation in Beijing’s Sites

The head of the PBOC’s research office told a colleague of mine that inflation was one of his top concerns. The data confirmed a rise in PPI – not so much CPI.  Inflation for materials has jumped from negative to plus 11.6% in one year; manufacturing inflation is up from negative to 7.5% in the same time period. 

 I also spoke to local firms and they agreed. A plastic pipe manufacturer in Jinan is struggling with rapidly rising costs, including 10-15% per year in labor. An online firm selling financial products is also seeing 10% plus increases in labor. A manufacturer of lighting for cars is experiencing rapid growth in labor and materials costs, but his margins have stayed flat as he is passing these on in higher prices. This, despite 20-30% in annual revenue growth. 

If the leadership is aware of this, especially the PBOC, expect a curtailment in lending activity to forestall additional growth. It’s also possible programs aimed at production may be throttled back. These potentially could include the One Belt One Road policy, designed to export excess capacity, along with production slowdowns in steel, aluminum and other raw materials (which would be in conflict with the state’s environmental goals.)

Consumer Debt is Now a Beijing Problem

Beijing has been relatively quiet on China’s rising consumer debt. That’s changing. According to the PBOC researcher, it is now considered a significant problem. Does this mean China’s deleveraging campaign – pushing debt from corporates to individuals – is over? There’s been no indication of a slowdown. The data below shows consumer debt rising, with mortgages and home loans up 23 percent YoY in June 2017. 

Rising Receivables Indicates Growing Corporate and Fiscal Weakness

We spoke to a manufacturer of plastic pipes for sewage systems. Receivables are stretching out to 12 months from six months previously. Some are taking as long as two years to pay. His customers are mainly local governments, but some of the receivables are fees paid by private clients for decorating expenses. The official data does not indicate that. We compared for 3000 Chinese companies between Q3 2017 and Q3 2016 and found an increase in the ratio of sales to AR, suggesting cash flow is improving. However, the Q3 2017 data may not yet reflect payment problems 

Expanded Private Banks

Beijing is quietly licensing private banks. There are now five approved and operating and another five waiting in the wings. While their assets are relatively small, this is a surprising affirmation of incipient capitalism in a country that is touting state control. The total size and growth has yet to be decided so we don’t know if they will amass size over time. However, this could be an opportunity for foreign banks now that they financial opening policy has been formally announced. 

Beijing’s Top Reformer – Wang Yang

Whatever reforms are coming out of Beijing these days – and there aren’t a lot – many are coming from Wang Yang. Wang is one of four vice premiers and was chosen at the 19th Party Congress to become a member of the Politburo Standing Committee. But his real baptism came as Party Secretary of Guangdong Province for six years until 2013. He was part of the renowned “Guangdong Model” of economic development (in contrast to the more rigid “Chongqing Model” under Bo Xilai) that encouraged free-market reforms at the grassroots level. (We won’t discuss the fact that Guangdong has one of China’s largest and best capitalized local government financing platforms, Yuexiu, that is busy shoveling state money into new companies.) A Beijing official who does financial research for the State Council noted, “Vice Premier Wang Yang has been pushing reforms under President Xi.” 

The real question is whether his rise reflects real power or appeasement to the political factions in the south. 

Private Public Partnerships

Along with “leveraging the consumer,” the other big economic policy mantra I hear frequently is Private Public Partnership. While it is viewed in Chinese policy circles as a way to develop China’s infrastructure and increase GDP through private funding, it has become a method of bypassing local debt limits and shifting the financial burden to consumers. That’s because many of these investments are securitized into WMPs and sold in the market. For the first nine months of 2017, 422 ABS were issued with a total amount of Rmb836bn, representing a 61% YoY increase .

We will delve into this in more detail in a separate report as this is a significant change in priorities. 



China’s Financial Opening – Promises, Promises…

Andrew Collier, Orient Capital Research


China has promised a new round of financial opening to foreign firms, its biggest overseas incursion since the country’s entry into the World Trade Organization fifteen years ago. But the reality is likely to be far less than expectations.

First, the history of western financial institutions in China is pretty dismal. After promising full bank entry within five years of WTO access, foreign firms now have less than 1.5%, compared with an average of 20% in emerging markets. Most of that hasn’t been terribly profitable. The commercial banks don’t reveal their onshore profits but most bank executives will admit they have struggled; the one exception may be HSBC, which would be partly due to Hong Kong’s special status that grants access to the Pearl River Delta. However, one banker from Hong Kong who split her time in Guangzhou said she struggled to find decent corporate borrowers. The good ones (usually state owned) were snapped up by the local banks while the poor ones had such bad credit they weren’t worth the bother.

The flourish of investments by foreign banks into China in the early heady days post-WTO did not turn out well. For example, the Commonwealth Bank of Australia suffered through a case of fraud at one of its equity holdings, Qilu in Shandong Province. Bank executives stole $292 million in commercial paper. Later on, when I asked one Qilu executive what they did to work with CBA, she said, “I think we’re doing local student loans.” Not much to build a foundation on.

The investment banks have had an even worse time. Although some of the big names like Goldman Gaohua and UBS Securities have broken into the top ten of A share bookrunners (at least before regulators clamped down on IPOs), the profits of all the western brokerages in China have been meager. Meanwhile, they are getting attacked in what was once their home turf – Hong Kong – by increasingly aggressive Chinese brokers who have access to cheap capital and are desperate to prove to Beijing that they are “going global” – even if that means losing money. The Chinese are rapidly gaining market share in Asia, contrary to what the foreign banks expected as recently as ten years ago.

That’s not to say there aren’t opportunities. Just today, leaving my television interview with Bloomberg News on this subject, I ran into the chief investment officer for one of America’s largest funds. He said he is eager to his $200 billion portfolio into domestic Chinese stocks and is looking for ways into the market. But he also said the state regulators are on his back about compliance issues in China.

I believe certain things are likely:

  • Domestic commercial banking market share will stay flat or actually increase. However, smaller banks may fail (due to domestic asset problems and shadow banking), a possible opening for western banks willing to take on a risky project in order to gain share.
  • Western securities firms will immediately attempt to buy market share through acquisitions or joint ventures. However, domestic Chinese firms have done quite well, some through the sale of dodgy shadow banking products, and will be reluctant to sell unless they are capital constrained.
  • However, securities firms will be sought to expand capital raising ex-China. The domestic firms will try to “ring-fence” them to provide this without granting them domestic access.
  • Fund managers are well placed to enter the market and offer access to global investments. This is a definite opportunity — assuming the regulators allow capital to move offshore, which is an open question. Domestic funds know they are completely outclassed globally and need to gain international experience.

China may open faster than I expect, simply as a repeat of the success of WTO entry, which pushed state firms to become more efficient, a difficult experience that sped up China’s modernization. But I remain skeptical due to the tremendous domestic politic forces in opposition – including financial institutions and others, such as local governments, that rely on banks as credit piggy banks.

Don’t expect too much action soon. There may be a flurry of deals as big firms test the waters. But they will be just that – tests – and won’t truly crack the barriers.



Bloomberg Interview: Financial Opening in China

China Opens Up Financial System