Author Archives: Andrew Collier

China Shadow Banking Defaults: Demographics Show RBM19 Trillion of WMPs Could Hit Banks

Summary

The weak link in China’s financialized economy is the country’s Wealth Management Products. They are short in duration, widely sold by formal and informal institutions, and are invested in important institutions including corporate bonds and smaller banks. We think a run on WMPs is quite likely as banks face a rising inability to pay interest on these WMPs, which exceed Rmb26 trillion. Demographic analysis of their ownership structure suggests these will become the explicit responsibility of state banks. We estimate Rmb 19 trillion of Rmb 26 trillion of WMPS will end up on bank balance sheets. WMP Defaults-Demographics

Bloomberg Radio: Trump and Xi Got Credit for Showing Up

Andrew Kemp Collier, Managing Director, Orient Capital Research joined Juliette Saly and Doug Kirzner to discuss the impact of geopolitical concerns such as the Syrian air strikes and the move of American warships to waters near North Korea. He also spoke on trade ties between the U.S. and China.

https://www.bloomberg.com/news/audio/2017-04-10/trump-and-xi-got-credit-just-for-showing-up-to-summit

False Dawn in China’s Economy

False Dawn in China’s Economy

Analysts Jump too Quickly on News out of the National People’s Congress

The economic news out of China recently has drawn glowingChina’s industrial output in January and February rose 6.3 per cent compared with the same period a year ago and fixed-asset investment strengthened to 8.9 per cent in the first two months. We think this view is far too optimistic. China continues to undergo a credit-fueled economic bubble.

False Dawn in China’s Economy

RTHK Radio: Fed Rate Rise and China

Fed fund rates

The US Federal Reserve Bank in a widely expected decision, has raised interest rates by 25bps. But its projections for further rates increases, economic growth and inflation were lower than expected. US treasury bond yields and the US dollar have tumbled and there has been a big reaction in emerging markets. On the mainland, Chinese Premier Li Keqiang says “We don’t want to see a trade war.” However, he warned that American companies would suffer most from a trade war between the US and China. But he added that he was optimistic about US-China relations.

Joining Money Talk this morning are Enzio von Pfeil of Private Capital, Andrew Colllier from Orient Capital Research and on the phone from Washington D.C., RTHK’s international economics correspondent Barry Wood.(8am-8.30am, email to moneytalk@rthk.hk,  text to 63 93 59 25,

 

http://programme.rthk.hk/channel/radio/programme.php?name=radio3/money_talk&d=2017-03-16&p=6972&e=417124&m=episode

SOE Reform: Liaoning’s Struggle for Capital

Liaoning’s Struggle for Capital

Summary

One of the likely outcomes of China’s rising debt will be a shortage of liquidity for more remote geographic regions, along with corporates with little access to the power centers in Beijing. One short-term solution is the debt-for-equity swap program, which is allowing local SOEs to place the debt in the banks in the form of equity, and permitting these firms to continue to borrow from the banks. This is one tool that is keeping local governments — and their ailing state firms – alive.

However, although this program has come from Beijing, the leadership has been reluctant to allow local governments full control over the swap as it encourages continued waste of capital in inefficient, older industries. It may use political methods – the anti-corruption campaign – for fiscal ends.

Right now, the poster child for this struggle for capital is occurring in Liaoning Province over the debts of Dongbei Steel. The outcome of this dispute will signal Beijing’s policies toward SOE debt restructuring.

Qualcomm-NXP in China

Qualcomm-NXP and China

Chinese Opposition Unlikely

Merger between Qualcomm and NXP

We think this is a win-win deal between NXP and Qualcomm, providing more upside for Qualcomm. On the one hand, Qualcomm is seizing the burgeoning

automotive market and IoT (Internet of Things), which is expected to bring economic scale and client loyalty in the near future. On the other hand, NXP has achieved its long-term goal of selling itself at a good price. In addition, the transaction fits within China’s goal to achieve significant present in “strategic” industries, which includes semiconductors.Qualcomm-NXP

China’s New Forex Strategy

The PBOC’s New Forex Strategy

Tapping Foreign Loans to Reduce Capital Flight

Chances of Success are Slim

As China’s economy slows, the country’s economic leaders have been cycling through stimulative policies, finding creative ways to generate additional leverage in a system already over-leveraged. In 2015, the stock market was view as an easy source of capital, to be pushed up and then used as a giant piggyback for debt- ridden state firms to tap into through new equity issuances. That policy failed because there were inadequate resources to prop up the market and investors in the end did not believe the government would support the market.

In 2016, the unofficial macroeconomic policy was to utilize the consumer as a source of capital. Both PBOC and banking officials said in interviews that they believed that the consumer was “underleveraged” (their words) and should be utilized for additional loans. After all, they noted, consumer lending, although rising, remained below international norms. This strategy continuea as is apparent in the continued rise in the sale of private investments (Wealth Management Products.)

In February, the precipitous drop in China’s foreign exchange reserves below the psychologically important number of $3 trillion has spurred the PBOC and senior politicians to alter tactics. It appears that the new stratagem to avoid the actual process of deleveraging is to access foreign sources of capital.PBOC Forex Strategy

Funding Crisis in China’s Property Market

Summary

Based on our interviews, we believe the property sector will face a liquidity crisis when the peak of debts come due in the second half of 2017 and beginning of 2018. According to the Centaline Group, China’s property developers raised Rmb1.14trn in 2016 through privately raised company bonds, corporate bonds, medium term notes and related sources. This was a 26% increase YoY, for the first time breaking Rmb1trn. However, both domestic and foreign financing channels have been blocked since last October due to tightening regulations on capital raising, along with a strong U.S. dollar As a result, property developers are confronting a significant increase in the cost of financing that could cause them to reach crisis levels in the near future. We estimate Rmb544 billion in corporate bonds alone will come due in 2H 2017 and early in 2018.

China’s Property Crisis