Centralizing Power in Beijing I find myself disagreeing with much of this article by Bill Overholt (ex investment banking economist now at Harvard) entitled “The Politics of China’s Anti-corruption campaign”. It adheres to the conventional wisdom of centralization of power economically and politically that may be more honored in the breach than in the observance. […]
We visited Chonging and Chengdu in Sichuan Province and also traveled to several smaller cities in the countryside. The property bubble is worse than we thought. Inventories in the Tier 4 and below cities is now at 10 to 20 years of supply and prices have fallen by 30% or more. We think Sichuan is in many ways a typical province and represents much of the country’s property sector. Approximately 60% of property construction activity occurs in these smaller cities. Local governments have been colluding with financial intermediaries to construct excessive amounts of residential and commercial property. With a slowing economy and tightening credit, there is a sense of panic within these governments.
The global markets are blaming China as the instigator for a global slowdown. As the New York Times noted, “The immediate trigger to the outburst of global volatility was China, where the sharp drop in stocks Monday continued a rout that has been underway — with periodic pauses thanks to government interventions — all summer.” We are usually not one to praise Chinese economic sagacity. However, We believe there is a widespread misinterpretation of Chinese policy over the past few months that has created this global crisis in confidence. Apart from a few notable missteps, China has continued to administer its economy with the same tools as before and in some cases has even made modest progress in reform.
There clearly is a conflict between different groups over the devaluation of the Renminbi. To get to the punchline: I see this as a progressive and aggressive move by Zhou Xiaochuan at the PBOC. However, I doubt the PBOC was very clear about the impact of the devaluation on the domestic economy or global sentiment. The pushback was much larger than they had anticipated. Still, it was a classic Chinese policy: internationalization as a tool to handle domestic problems. This was true with the WTO entry under Zhu Rongji, which led to reform of the state owned firms. Zhou Xiaochuan is among the most cosmopolitan of senior policy makers (USA PhD) and this is his style.
We conducted a survey of ten stainless steel distributors in China. Steel is a leading indicator of housing and construction as half of all steel is consumed by these two sectors. The survey was completed just as the Chinese equity market fell. Our survey concludes that demand is declining and producers are beginning a consolidation process. The Greek crisis has added to pressure on excess stockpiles. The housing market is not growing as quickly as the consumption data would suggest. The State Council is encouraging local investment despite efforts to curtail debt.
The economic impact of the collapse of the Chinese stock markets is likely to be minimal. The political effect will be larger. I can see a number of economic problems caused by the stock market fiasco.
China’s support of the stock markets smacks of sheer panic. Premier Li Keqiang held a series of hurried meetings with more than 20 of the top securities firms and the financial regulators on Sunday, clearly struggling with a response to a market that has fallen 30 percent in the past few weeks. The funds were […]
China’s Rmb 2 trillion bond swap program is designed to lower interest costs for provincial governments by exchanging bank debt for lower cost bonds. Beijing has not clearly defined the debt, leaving much responsibility to provincial governments. This will lead to difficult negotiations among all levels of government and financial institutions.
In addition, given total local debt at Rmb 17 trillion – and probably closer to Rmb 24 trillion – the current program will need to be radically expanded. The initial Rmb 2 trillion program only covers bank loans. But these cover just 20% of the total estimated Rmb 10 trillion. In addition, there is additional debt from Trusts and other institutions. As a result, the state banks could be responsible for up to Rmb 16 trillion of debt. Assuming default rates of 50%, we estimate in the worst-case scenario this could cause a 70% decline in combined bank equity and profits.
The growth of investments by China’s insurance industry into Trusts started in October, 2012 after the China Insurance Regulatory Commission (CIRC) released Document 91. This was the first time regulators gave explicit permission for insurance firms to invest in domestic Trusts. By the end of 2014, insurance firm investment in Trusts and cross-shareholdings nearly doubled to Rmb 281 billion. Approximately two-thirds of insurance investment in Trust plans are in property and infrastructure, each accounting for one-third of total investment. Both of these pose industry and systemic risks. In our previous report, we looked at investments by the insurance industry in alternative assets. In this report, we drill down on the relationship between the insurance sector and the Trusts in particular.
There are now more than 1,700 P2P online lending companies in China with a volume of $42 billion in 2014 to 630,000 cumulative borrowers. Although the loan balance is small compared with the total consumer loans of $3.8 trillion and business loans of $9.6 trillion at the end of 2014, it is growing at 3x to 4x per year. The real question is how far are the regulators going to allow private companies to take market share from the state banks?