Tuesday, July 22, 2014

Corporate bond market might default before it matures - Sara Hsu

Sara Hsu
Sara Hsu
Hailed as an alternative way to raise funds, China´s corporate bond market faces a potentially fatal end as its second default is looming, writes financial analyst Sara Hsu in the Diplomat. Defaults were seen as way to discipline the market, but the opposite might happen.

Sara Hsu:
China’s corporate bond market is relatively underdeveloped. China’s overall corporate debt is higher than that in the United States, but only a relatively small proportion of this debt resides in corporate bonds. The ratio of corporate bonds to GDP in China is only 14 percent, which is below that of Singapore, at 31 percent, and Hong Kong, also at 31 percent. China’s corporate bond market is associated with insufficient market control: issuance of corporate bonds requires excessive administrative procedures, while bonds are subject to insufficient scrutiny by ratings agencies. This is evidenced by the fact that, while Chaori Solar’s credit rating was downgraded to CCC close to one year in advance of its default, Huatong Road’s rating agency underestimated the company’s creditworthiness until only recently when the company announced a potential default.
Compounding the problem, the current economic slowdown has reduced liquidity in the financial sector, making it more difficult to lend and borrow smoothly. When economic growth began to slow, the People’s Bank of China reduced the corporate yield spread to increase corporate borrowing. Additional yield over sovereign notes that AAA-rated companies pay to sell their bonds has declined since March 31, but it has recently widened again due to the potential Huatong Road default. In addition, weakness in the financial economy and bankruptcies of smaller firms continue to present a challenge to firms seeking to obtain loans.
How to interpret the corporate bond defaults is unclear. On the one hand, it is widely believed that corporate bond defaults discipline the market. However, the trend in defaults, with a second bond payment default coming soon after the first, may bode ill for the market’s wellbeing. The default of Chaori Solar was seen as gauging investors’ risk awareness in the corporate bond market. But a second corporate bond default just four months after the first may put investors off this still-nascent market.
More in the Diplomat.

Sara Hsu is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´request form.

Managing risks is important when doing business with China. Are you interested in more experts on risk management in China at the China Speakers Bureau? Have a look at this recent list. 

Monday, July 21, 2014

The Boeing hacking charges - Wendell Minnick

Wendell Minnick
Wendell Minnick
The FBI accused three Chinese citizens, including Su Bin (Stephen Su), owner of Lode-Technology, last month of hacking into US military projects. Defense analyst Wendell Minnick had a look at the FBI-document detailing the accusations for Defense News.

Wendell Minnick:
Details of other aircraft and US companies are sketchy. Su is alleged to have obtained F-35 test plans and “blueprints” that would “allow us [China] to catch up rapidly with US levels ... [and] stand easily on the giant’s shoulders,” according to Su’s emails.
A former US government counterintelligence analyst on China said the case is a “close parallel” to other cases involving Chinese businessmen “taking government information to ensure long-term success of [their] business.” He also said that Canada and Hong Kong were still popular technical transfer shipment points for Chinese industrial and military espionage.
According to the complaint, one of Su’s emails states that his team “secured the authority to control the website of the ... missile developed jointly by India and Russia and that they would ‘await the opportunity to conduct internal penetration.’ ”
Su also allegedly focused on military technology in Taiwan and files held by various Chinese “democracy” groups and the “Tibetan Independence Movement.” On Taiwan, the intelligence collected was focused on military maneuvers, military construction, warfare operation plans, strategic targets and espionage activities. According to one of the several emails, “we still have control on American companies like [identifying US companies] and etc. and the focus is mainly on those American enterprises which belong to the top 50 arms companies in the world.”
One attachment listed 32 US military projects and another listed 80 engineers and program personnel working on a “military development project.” Another lists the names and email addresses for four people at a “European company that develops military navigation, guidance and control systems.”
Cyber intrusions into Boeing and other companies were sophisticated. According to one of Su’s emails, they had control of an unidentified defense company’s file transfer protocol server. Jump servers, also known as “hop points,” were set up in France, Japan, Hong Kong, Singapore, South Korea and the US. According to emails, these were set up to avoid “diplomatic and legal” difficulties for China.
More in Defense News.

Wendell Minnick is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´request form.

Are you interested in earlier stories by Wendell Minnick? Do have a look at this regularly updated list. 

Estimation: in 50 years, 20 million Chinese in Africa - Howard French

Howard French
+Howard French 
How many Chinese will there be in Africa in 50 year´s time? How will the state-to-state relations develop? After dozens of interviews with author Howard French on his book China's Second Continent: How a Million Migrants Are Building a New Empire in Africa, The Shanghaiist found some uncovered areas.

The Shanghaiist:
If I could ask you to look into the future, where do you see the Chinese population in Africa in 50 years' time? Will most of the million there now stay? Will African countries have to acknowledge their second, third, or fourth-generation ethnic Chinese citizens? Will the Chinese there hold themselves apart as much as they have done so far?
If I am forced to go out on a limb, I would guess there might be 20 million Chinese people in Africa by mid-century, maybe more. They will be concentrated in African cities, which exhibit some of the highest growth rates in the world. Second and third generation Chinese will very often have African citizenship, and a great many of them will live in an integrated fashion, deeply socialized and networked within their societies of adoption.
You mention in your recent New York Times op-ed that China's foreign policy has historically been focused on state-to-state relations. Do you see any signs of improvement in this regard? Does the Chinese government now recognize the need to deal with more than just state institutions?
The Chinese state's preference for state-to-state relations stems from the way China itself functions, with the state arrogating tremendous power for itself even, as has been alluded to here, to decide such matters as "correct" history. The Chinese state is wary of independent authority at home, unwilling to see the emergence of much real pluralism. This makes the Chinese state far less willing and able to interact nimbly and constructively with independent civil society forces in other countries. I think that Beijing sees the need for it to be able to relate better to such forces abroad, but doing so is inherently difficult, and I don't see that changing much in the near to medium term.
More in the Shanghaiist.

Howard French is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´ request form.

Are you interested in earlier interviews with Howard French? Do have a look at this regularly updated list.

Wednesday, July 16, 2014

Two major myths on China-Africa relations - Howard French

Howard French
+Howard French 
Dealing with all-to-easy cliches when it comes to the Chinese in Africa, is one of the red lines in China's Second Continent: How a Million Migrants Are Building a New Empire in Africa, Howard French´s latest book. That story has been oversimplified he tells China Digital Times.

China Digital Times:
China Digital Times: What are the most common or serious pitfalls in thinking about Africa and China’s presence there, for those of us without a strong focus on or familiarity with the former?
Howard French: I would emphasize two things. The first [misconception] is that everything, or even most of what is happening in Africa with regard to China is directly driven in some centrally planned way by the Chinese state. Beijing has clearly made a priority of extending its influence on the continent, but a major theme of my book is that the large-scale migration of private Chinese citizens has become an important wild card in relations between China and Africa, one that defies real control or planning. For that reason, the tentative working title of the book was originally “Haphazard Empire.”
The other thing I would say is that the common notions of Chinese competition with the United States or with the West “for Africa” involve gross oversimplification. It is widely thought that China’s big successes in commerce and construction have come at the expense of Western interests, but because of the way the global economy is segmented and increasingly specialized, that is largely untrue. The goods that China is selling are generally not mainstays of Western commerce anymore. I would also say that China has large, inherent competitive advantages in infrastructure and public works, because of the scale of infrastructure building in China, and because of the low cost of capital there, and that much of the business it is winning in Africa in this sector isn’t so much being taken away from anyone as it is being allocated rationally.
More in China Digital Times.

Howard French is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´request form.

Are you interested in more experts on China´s outbound investments at the China Speakers Bureau? Do check out our recently updated list.

Tuesday, July 15, 2014

Mixed messages from China´s real estate - Sam Crispin

Sam Crispin
Sam Crispin
Follow the lead given by the government, is the key advice by real estate expert Sam Crispin. The market gives mixed signals, where some property developers do well, and others go down. But the government will stay in charge. A report by CKGSB Knowledge.

CKGSB Knowledge:
In reality, the outlook is mixed. Smaller developers are more exposed to market swings than their larger rivals, and are facing ever-tighter liquidity conditions. A period of accelerated consolidation seems likely—though just what shape it takes will depends on how both developers and policymakers respond. “You see the results of the Chinese developers listed in Hong Kong, and they tend to be doing pretty well. But at the same time, you’ve got smaller developers defaulting on bonds or cutting prices,” says Sam Crispin, a longtime China property analyst based in Shanghai. “That suggests there’s a real issue here.”...

“The question is: where have all the buyers gone?” says Crispin. “Because there’s seemingly not as many buyers out there in some places as there used to be.”...

Many developers are keeping an eye on the planned national property registration system in particular. The platform, which will allow authorities to track the home purchases of any individual and their family members, is due to be in place by 2018. “It’s a very powerful tool,” says  Crispin. In theory, it could allow watchdogs to sniff out when an official or wealthy individual owns a piece of property far more valuable than what their official salary could afford. Yet similar systems are already in place, suggesting the announcement is more about signaling to property owners to clean up their act. “This must be a warning,” says Crispin. 
“‘You’ve got three or four years before this system is in place—so do something about it.’” Crispin thinks the effect will be softer prices in the market for the next three to five years. If that scenario does play out, it is likely to accelerate the trend among developers to focus more on mass-market homes—small and mid-sized homes aimed at middle-class consumers. These projects are less profitable than the luxury condos, says Leung of Moody’s. But developers have already been increasing their proportion because the luxury market is faltering. 
In any case, developers will probably continue to focus on mass-market homes because Beijing wants them to, argues Crispin. If they wish to avoid Xingrun’s fate, falling into line with government policy may prove equally important. 
“I think there’s a realization from developers that if they are aligned with government policy, then they will get more support from the state, including state-owned banks, land auctions, and so on,” says Crispin. “And if they don’t, then sorry, it’s bye-bye.”
More at CKGSB Knowledge.

Sam Crispin is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´ request form. Sam Crispin recently moved from Shanghai to the UK, to focus on outbound Chinese investments, in his case mostly in real estate. 

Are you interested in more experts at the China Speakers Bureau on China´s outbound investments? Do have a look at our updated list. 

China´s unpredictable GDP growth - Sara Hsu

+Sara Hsu 

Slowing economic growth, uncertainty about measurement tools being used and promises by the government for reform. Those are just three elements making assessing China´s GDP for the coming years tough. Financial analyst Sara Hsu gives it a go at the Diplomat.

Sara Hsu:
Taking a step back, we can define GDP as a measurement of the market value of goods and services produced during a particular period. GDP tells policymakers whether an economy is generally healthy or not, to determine what approach should be taken to improve circumstances. However, China’s problem with inflated GDP numbers and its alternative method of reporting debt (rolling it over and recording it as an asset) lead us to mistrust the reported GDP numbers. Alternative indexes, most recently provided by Premier Li Keqiang, in the form of railway volume, electricity consumption, and bank loans, are problematic as well. Electricity consumption is subsidized, so that even in a downturn, electricity consumption is likely to be buoyant. Bank loans are often provided to larger state owned enterprises that may put the loans to unproductive use. Railway volume fails to capture the services component of the economy. 
Although China’s GDP measurement is a serious problem, there may be ways to determine whether GDP data is more or less reliable. The National Bureau of Statistics performs checks against reported data using alternative sources. For example, household consumption expenditures are first tallied from the retail sales of consumer goods, and later checked against household surveys. We may choose to conduct our own checks on reported GDP figures as well, as some financial analysts already do. Looking at the reported figures of the primary, secondary and tertiary sectors, we can compare elements of the Li Keqiang Index and other proxies. Primary sector figures can, for example, be checked against metric tons of rice or wheat production. The secondary sector reported figures can be compared against the railway cargo volume. The tertiary sector may be checked against sales of new automobile sales and white goods, as well as against housing starts. 
We can also compare the national and provincial GDP statistics. In 2011, the National Bureau of Statistics published economic data for 2010 that revealed a growth rate of 10.3 percent, while China Economic Net reported growth rates in more than 90 percent of provinces that were above this amount, revealing a large discrepancy.
More (including some conclusions) in the Diplomat.

Sara Hsu is a speaker at the China Speakers Bureau. Do you need her at your meeting or conference? Do get in touch or fill in our speakers´request form.

Sara Hsu produces a wide range of financial analyses. For a regularly updated overview, check our page here. 

Monday, July 14, 2014

Income inequality grows, as economy declines - Sara Hsu

+Sara Hsu 

 Income inequality is nothing new in China, but as economic growth declines, inequality seems to grow disproportionately, writes financial analyst Sara Hsu in Triple Crisis. And that wealth moves abroad, in stead of helping the domestic economy to develop.

Sara Hsu:
Rapidly increasing wages in the financial and IT industries, contrasted with stable or slowly increasing wages in most other sectors (for example, utilities, construction, and transportation) has led to a sharp divergence between the income of the average worker and incomes of workers in privileged industries. What is more, the skyrocketing pay of top executives has enriched certain individuals over the masses.
China’s private financial wealth amounts to US$22 trillion, according to the Boston Consulting Group. This is equivalent to well over double China’s GDP in 2013. While the average per capita income was US$6,747 in 2013, Chinese executives averaged well over US$100,000. The poorest workers have also face delayed or partial payment of wages. In many cases, this has led to protests and legal action against employers.
Many of China’s super rich experienced poverty in their earlier years, and 80% of the super-rich became wealthy by building up their own businesses. The argument against burgeoning inequality is not that the wealthy have not worked hard to obtain their status, but rather that their status is far higher than that of the working man or woman. It is also that the current and changing economic structure in China appears to preserve this yawning income gap.
More in Triple Crisis. Sara Hsu is a speaker at the China Speakers Bureau. Do you need her at your meeting or conference? Do get in touch or fill in our speakers´ request form.

Are you looking for more financial experts at the China Speakers Bureau? Do check out this recent list. 

China´s real estate: no panic needed - Sam Crispin

Sam Crispin

Government interference, dropping prices, dropping occupation rates: China´s real estate has always been good for some panic in the media headlines. But there is no reason for panic, says real estate expert Sam Crispin with 20 years of China experience under his belt in GPB News, although some diversification is in order.

GPB news:
Sam Crispin, who has spent two decades following China's real estate sector, thinks prices will gradually drop, and people, eventually, will buy. He cites the history behind Shanghai's Pudong New Area, which had huge vacancy rates in the 1990s.

"The whole of Pudong was a bit of a basket case," Crispin says, sitting in an office in the area's Lujiazui financial district, overlooking the cruise ship terminal along Shanghai's muddy Huangpu River. "Fifteen years ago, not many people wanted to make the move, but now we see some of the most desirable, most expensive real estate here in Pudong. It's been a massive success for Shanghai."

Of course, Shanghai is a prestigious, coastal city and a magnet for the wealthy and ambitious, dramatically different from Wuxi. As for Crispin, earlier this year, he moved home to England for family reasons.

He says no one should read too much into this, but he has sold all but one of his properties in China. He says he's looking for better rent revenue.

"I can see the capital growth is slowing and it's time to go and invest elsewhere where there might be better income," Crispin says.

Seems like a good time to diversify.
More in GPB news.

Sam Crispin is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´request form.

Sam Crispin recently moved from Shanghai to the UK, to focus on outbound Chinese investments, in his case mostly in real estate. Are you interested in more experts at the China Speakers Bureau on China´s outbound investments? Do have a look at our updated list.