Growing Use of Service Sector
“A VAT invoice issued by a restaurant in China could have more legal power than the receipt provided by an overseas company” — foreign commercial banker in Shanghai.
Chinese and western banks have discovered a new way to illegally transfer funds abroad – payments for services through false invoices, fake subsidiaries, and study abroad schemes.
Slowing Revenue. Our interviews with gaming employees in Macau suggests that the February holiday month over Chinese New Year delivered continuing declines
in line with poor results over the past six months. In most Chinese New Years, revenue rises 20% to 30% as mainland Chinese take advantage of the holiday period to travel to Macau. However, our interview group witnessed this increase halving to 5% to 10%. Some interview subjects suggested there has been a bottoming out in overall revenue but it’s probably too early to tell.
Local government companies have pulled bond sales in recent weeks because of confusion over whether governments support the debt. A Beijing policy appears to ban local debt issuance by these quasi-state firms. This policy — if enforced — threatens the fragile house of cards of local financing. Ultimately, the state banks are likely to be forced to step in and pick up these obligations.
Professor Rod Macfarquhar spoke at Hong Kong University last month. He thinks Xi Jinping is the strongest leader since Mao — but worries the corruption campaign will destroy the Party.
President Xi Jinping in his continuing corruption campaign has turned his sites from the oil sector to the banks. The president of one of China’s larger banks, Minsheng, has resigned, due to a corruption scandal, and a relatively new board member of the Bank of Beijing is under investigation. Is this part of a broader attack on the financial sector? What does it mean for the banks at a time when they are facing the potential for massive write-downs to due to a declining property market and 18 trillion yuan in local debt?
China officially has 17 trillion yuan in local debt. Almost half of the debt has been incurred by off-balance sheet companies, known as Local Government Financing Vehicles (LGFVs). We visited a number of these local projects and collected data on a wider group. The objective was to understand their source of capital – banks, trusts, bonds, and whether this source of debt represents a systemic risk to the Chinese economy. In addition, we also analyzed the structure and history of local government financing, with the aim of predicting how the leadership will handle the debt burden under the circumstances of a slowing economy.
Summary: The Shanxi Government has rescued 429 million of bonds near default
owned by Huatong Road and Bridge. At first glance, the last minute deal is another example of a government bailout. But the bigger question is who is really involved in these bonds? As defaults occur with more frequency among bonds, trust and wealth management products, assigning responsibility is going to get more difficult and will pose a systemic risk.
What caused Unilever’s 20% drop in third quarter earnings in China? Is this a systemic problem or another example of weak execution by multinationals in China? We think there are four reasons for slower growth by multinationals in China.
China is avoiding a massive liquidity injection in the hope that smaller, target injections will prevent the economy from going into freefall. But there still remains a pitched bureaucratic battle between the PBOC and other arms of government about how deep – and controlled – the stimulus will be.
For the past decade, land has functioned as a giant piggy bank for China’s cash starved local governments. Whenever they ran short of funds to pay for anything from retired steelworkers to eye exams there was usually a piece of land ready to put on the market. Unfortunately, the piggy bank is running on empty.
In 100 Chinese cities tracked by the China Real Estate Information, the volume of land sold fell 47 percent for third quarter this year. Revenue dropped a shocking 75 percent, with prices down 52 percent. For the first time in years, when they put up land for auction local governments suddenly found themselves with unsold parcels. In the past six months, almost 20 percent of land for sale failed to find a buyer.