Tarena (TEDU) is relying heavily on massive loans from outside firms to fund their expensive education, a relationship that may not be sustainable. We think the market has not priced in the problems caused by student debt.
Summary: Chinese Trusts currently have 11.7 trillion yuan ($1.9 trillion) in funds outstanding for investment. These Trust assets make up approximately one-quarter of all Shadow Banking funds in China. As China’s economy slows, there is concern that Trusts – and by extension Shadow Banking in general – will undergo a wave of defaults. Using a list provided by the Central University of Finance and Economics in Beijing, we have analyzed a list of 31 failed Trusts to see what common themes they provide and what they suggest for the future of the industry. The principal conclusion is there is a surprisingly lack of government support for these failed Trust investments. In only four cases did the Trusts, most of which are government owned, provide capital. The majority of the failed trusts were simply liquidated. This suggests the implicit obligation by the Trusts to support their products may not be in force.
One of the theories of China’s slowing economy is that it will run into a “Lehman moment”. This is when a single financial institution collapses, threatening the entire banking system, ultimately creating a financial crisis.
The theory has neat predictive power: find the weak links among Chinese banks, pin down a useful measure of financial liquidity such as the interbank lending rate and you have a nice way of keeping tabs on the strength or weakness of China’s economy. The problem is the theory may be wrong.
Investors trying to figure out if China plans to restimulate its economy should be aware that a debate is occurring among China’s top economic policy makers. The pro-‐ and anti-‐ stimulus camps disagree over fundamental issues of taxation, capital allocation, and whether there is a property bubble. This disagreement came to light in a series of articles published recently by two officials at the People’s Bank of China (PBOC).
Recently, People’s Bank of China Governor Zhou Xiaochuan said China would liberalize interest rates for consumer deposits within two years, a surprisingly frank timeline on a controversial subject. Liberalized interest rates would cause a chain reaction of problems in the financial system, all because of the government’s decision to keep the value of Renminbi in a tight range.
China’s largest bank, ICBC, formally declared it would not support a 3 billion yuan bankrupt trust investment product the bank sold through its branches. The Wealth Management Product (WMP), called the “Credit Equals Gold No. 1,” raised funds for a coal mine and is due for repayment January 31. The announcement brought a mild panic to China’s financial community and among overseas investors. Whether the Gold Trust defaults or not, here are five reasons why a financial crisis caused by a trust default is unlikely.
Myanmar is facing a stark choice – open the doors to the rule of law or slide into Chinesestyle state capitalism run by the military. So far, it looks like the country could go either way.
Investors have been worrying about the potential collapse of the Trusts in China. They should be paying attention to the bank failures in the rural areas.
Conducting company due diligence in China can be a risky undertaking. Company filings are inadequate, financial statements often cloak the truth, and executives are prone to mislead investors. There are two metrics often overlooked by Western investors that are helpful in judging whether a company is shaky or an outright fraud: Related Party Transactions (RPT) and what I call “State Connections.”
eijing’s desire to pump up the Chinese economy is leading it into dangerous territory.
Although China has piled on debt, the country has been relatively cautious about one of the big areas that led to the U.S. financial crisis: leverage. It was the slicing and dicing of mortgages into digestible bitesized chunks called derivatives that was a key contributor to the U.S. financial meltdown in 2007. Once they unwound, they threatened the banking system itself. Until recently, China has avoided complicated derivatives and other forms of leverage. However, desperate to keep the economy from slumping, the Chinese reluctance to wander down the leverage path seems to have faded.