Author Archives: Andrew Collier

China’s Winners and Losers


China has instituted several targeted stimulus measures designed to improve GDP growth and provide capital for small businesses, the country’s largest employment sector. These measures, however, are likely to be inadequate compared with the decline in capital due to the restrictions imposed on shadow lending. The results are likely to be:

  1. Difficulty maintaining land sales, which are already declining.
  2. A potential downward trend in the property market.
  3. Defaults of property developer bonds.
  4. Continued rise in defaults of local SMEs.

The key point is Beijing is responding to tighter credit conditions by picking winners and losers. It is lowering credit to certain regions in order to restrict the allocation of capital. While official policy via the Peoples Bank of China (PBOC) can affect credit flows, the political system has a significant say in how the process works out. And we are seeing a distinct preference in those allocation decisions.

These measures are likely to provide less of a stimulus than the capital that was raised by the shadow banking system prior to the earlier crackdown. Newly increased RMB loans only amounted to RMB 1.8 trillion, not enough to compensate for the decline of RMB 6.5 trillion in shadow banking, which is more than three times larger. Although loan growth remained steady at 13%, total social financing has slowed to 9.8% from 14% a year ago. The chart below shows the decline in non-bank lending through mid 2018.This figure only includes “official” shadow lending, such as Trusts, and does not include other forms of non-bank lending such as wealth management products, which have seen flat growth even though the outstanding amount remains high at around RMB 30 trillion.

China’s Broken Infrastructure Model

The widening fiscal deficit will restrict further stimulus efforts


China’s economic growth in the near term will depend on further investment in infrastructure, which has been the main driver in the past. The switch to consumption will take time. Our analysis suggests there are inadequate fiscal resources to continue to generate significant growth through investment expenditure. Local governments are spending above their official revenue and are clearly relying on non-tax revenue, either from one-off sales of assets (such as land) or additional debt.

As a result of these economic trends, by the end of 2018 local governments will have to pay more than Rmb500bn of interest on debt. Between 2019 and 2023, they will need to repay debt of approximately Rmb25.8trn, one-third of which consists of interest expense. Much of the capital raised by local companies (LGFVs) from bond sales will be required for interest expense. Attempts to raise private capital will be difficult due to the lack of reasonable returns from infrastructure projects. For these reasons, stimulus measures are unlikely to be effective in generating growth through the traditional Chinese infrastructure-driven model.

Can private capital provide the stimulus?

The answer is no. Although private fixed-asset investment has maintained 8.7% YoY growth, the primary industry has been the fastest growing sector with double-digit growth, compared to the low to mid-single digit increase within the secondary industry. “Because of the low profitability of infrastructure projects, most private capital has stopped investing due to the large capex requirement at the initial stages. Now is a special period for China given tightened liquidity, weak investment sentiment, and little confidence in the government,” said the chairman of a medium-sized private company in Shanxi. “Unless we can refinance the infrastructure projects we have invested in, no one wants to provide capital to government.” Unfortunately, it is unlikely that private capital will be able to access “easy money” in the future due to current credit constraints.

China bank survey: The return of shadow banking

China bank survey: The return of shadow banking

Andrew Collier |


Beijing is returning to stimulus to prevent a decline of GDP at a time of the threat from the Trade War. We see this growth in lending, both on and off balance sheet, in our October bank survey. One policy that has been surprisingly effective is the increase in lending to small businesses, a key driver of employment and economic growth. We plan to follow up with further analysis of the implications of the data.

Key points

China’s ongoing economic slowdown has increased stress on banks as they are under pressure to reduce off- balance-sheet financing while increasing support for small businesses, both of which carry considerable credit risks. To find out how banks are faring amid policy shifts, we spoke to 15 banks in 10 cities during the second week of October. These comprised seven state banks, four joint-stock commercial banks, and four local and city banks.

Here are some key points:

  1. Many banks are reducing the pace of sales of off-balance-sheet assets because they are under less pressure from regulators to reduce leverage.
  2. Lending to real estate and infrastructure companies is tapering off because of concerns of credit risks among debt-laden local governments and real estate developers.
  3. Infrastructure investment is likely to increase due to the growth of loans through Public Private Partnerships.
  4. Small business loans are gaining in popularity thanks to policy support, but structural problems such as a lack of collateral could weaken the current growth in lending to SMEs.
  5. Bad debt risks are still under control. Yet they could increase in the coming months as banks began moving off-balance-sheet assets, a large portion of which could go default, back to their books.

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