Tuesday, April 22, 2014

Why the issue of shadow banking is fading away - Sara Hsu

Sara Hsu
Sara Hsu
Shadow banking was one of those China issues that kept financial people awake at night. But after a decade of studying shadow banking, Sara Hsu argues in Triple Crisis that the issue has been cut up in manageable parts, and will fade away by 2015.

Sara Hsu:
Financial reforms, many of which are expected to begin this year, will also reduce the size of the shadow banking sector. Elimination of deposit rate ceilings, coupled with deposit insurance, will allow depositors to earn more interest on and have more confidence in their bank deposits, and will likely act as a deterrent to demand for higher yielding but riskier shadow banking products. A more market-based system will allow traditional financial channels to compete with shadowy finance.
Finally, as a crisis of economic confidence is provoked—and we have already seen signs of this in the real estate sector—consumers will look to keep their assets safe. They will put their money in bank deposits, keep it in real estate (although they will likely not buy more housing), lend money to their friends for real business transactions, and buy gold or jade jewelry. It is highly unlikely that they will continue to purchase wealth management and trust products that have already shown indications of deterioration, and even less likely that they will lend to companies that already have scarred images, such as credit guarantee companies. The “animal spirits” that played such a large role in creating the shadow banking boom are reversing, and can be depended on to greatly reduce the size of the sector in the coming bust.
I predict, then, that by this time in 2015, shadow banking in China as we know it will be something else, and this buzzword will no longer abound on the mouths of babes. Trust companies will be freshly disciplined and the myriad types of shadow banking entities that exist today will be fewer in number. The financial sector will continue to contain the formal banking sector and many non-bank financial institutions, but the latter will soon be forced to become braver, and less shadowy, than they have been at their commanding height. What a difference a year may make.
More in Triple Crisis.

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Why a freely convertible Yuan is needed fast - Paul Gillis


Paul Gillis
Paul Gillis
Relaxing capital controls is needed fast, argues Beida professor Paul Gillis at his accounting weblog, as he analyses the position of Chukong Holdings Limited. They filed last week for a US IPO, but also use a so-called variable interest entity (VIE) structure, a source of many problems, argues Gillis.

Paul Gillis:
I suspect that Chukong is actually burning cash in its VIE. That would make sense, since 89% of revenues and presumably most of the business is in the VIE. It also appears that company got the cash to burn by selling preferred shares in the Cayman Islands parent company, and then somehow transferred that cash to the VIE.
Chukong carefully explains in their filing that they may not be able to convert the proceeds of their offering into RMB and to capitalize PRC operations. That is because China has strict capital controls. With proper approvals, Chukong would have been able to contribute the proceeds from the preferred stock sales as capital (or made a loan) to its Chinese subsidiaries, known as wholly foreign owned enterprises (WFOE). But getting the money from the WFOE to the VIE is where it gets tough. SAFE Circular 142 says that the RMB obtained from a capital contribution cannot be used for an equity investment in China. SAFE Circular No. 45 prohibits converted funds from being loaned to another company through entrust loans. Direct company-to-company loans (commercial paper) are not allowed in China, so entrust loans, with a bank in the middle, get around the prohibition. But entrust loans cannot be made from converted contributed capital. So how did Chukong get the funds into the VIE? Lots of ways have been invented to circumvent China’s capital controls, but all of them have one thing in common – they are illegal.
Chukong dutifully explains that all these rules may continue to limit the use of proceeds of the offering. That gets to the principal accounting issue – Is Chukong a going concern? Auditors have to assess whether a company has the financial wherewithal to survive another year. If they conclude that it is more likely than not that the company won’t make it, they are to issue a going concern opinion and the offering would likely be doomed. ...
Readers know I have a poor opinion of the VIE structure. This is just another example of the deepening contradictions of it. This problem will be relieved when China relaxes capital controls, but a comprehensive solution to the VIE problem is needed.
More at the China Accounting Weblog by Paul Gillis.

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The KFC, McDonald's shoot-out - Ben Cavender

Ben Cavender
Ben Cavender
Both KFC and McDonald's have been struggling to keep market share in China by expanding fast. Localizing has become a key word,  but sometimes at the expense of quality, says business analyst Ben Cavender in AdAge.

AdAge:
The U.S. giants have also faced headwinds from questions over their chicken supply, avian flu fears and a slowdown in economic growth. McDonald's China comparable store sales were down 3.6 % in 2013 from 2012. KFC is also revamping its China offering, with an updated menu and much-needed store renovations.
"One of the problems KFC had is they've expanded so quickly they haven't done a good job of cleaning up and modernizing stores, whereas McDonald's has been very aggressive about doing that," said Ben Cavender, principal at China Market Research Group. "We're starting to see a shift where consumers are saying they actually like the McDonald's dining experience, more than at KFC."
McDonald's is also getting more aggressive about store openings: Last year it debuted 275 China locations and this year it plans 300.
More in AdAge.

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Friday, April 18, 2014

Super-rich earn fortunes in China´s car-industry - Rupert Hoogewerf

Rupert Hoogewerf
Rupert Hoogewerf
China´s billionaires not only spend a huge part of their money on luxury cars, they also make it from the car-industry, says Rupert Hoogewerf, founder of the Hurun Rich list in the China Daily.25 Percent of the super-rich in the automotive industry come from China.

The China Daily:
A quarter of top car-industry billionaires call China home, a list from Shanghai-based Hurun magazine that documents the life of the wealthy, showed.
This year's Richest People from the Car Industry list named 45 billionaires from 13 countries. Their average fortune was $3.75 billion. Among them, 11 are from China.
Wei Jianjun, 50, chairman of the Hebei-based Great Wall Motors Co Ltd, is the richest self-made car entrepreneur in China. He ranked fifth with $7.7 billion. His company is China's largest private car brand and the biggest domestic manufacturer of SUVs and pickups.
Great Wall's market capitalization is more than $16.7 billion and annual production capacity is 800,000 vehicles. Total sales revenue was 56.8 billion yuan ($9.19 billion) in 2013 and net profit 8.3 billion yuan.
"It is no longer a secret that Chinese billionaires are huge buyers of luxury cars," Rupert Hoogewerf, chairman and chief researcher of Hurun Report, said. "But still it is quite a surprise for us to find out that Chinese are not only major buyers but also major profit-makers."
Most of China's leading automobile companies are State-owned, making it difficult to calculate personal wealth, he said.
More in the China Daily.

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Thursday, April 17, 2014

Alibaba: great numbers, despite growing competition - Shaun Rein

Shaun Rein
+Shaun Rein 
Alibaba´s IPO is nearing, and their latest figures are great, tells business analyst Shaun Rein at Bloomberg TV, boosting even Yahoo´s results. But competition in China by Tencent is growing, making Alibaba not the only player in the country´s e-commerce.

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Strong economy, no stimulus needed now - Shaun Rein


Shaun ReinAgainst many predictions, China´s economy is doing relatively well and business analyst Shaun Rein does not see the need for a stimulus to fire up growth now, he tells CNBC.

Shaun Rein:
The key is that a lot of analysts have said that the Chinese economy was in a downturn and there were fears like Lehman (like crisis). That is not going to happen anytime soon. The Q1 of GDP growth at 7.4 percent leading almost all of the expectations from Wall Street and the key areas, that is, wage growth and employment number continue to remain very strong. The government is going to get nervous if people are getting unemployed and that is not happening and consumer confidence is up which also beats expectation. So, overall positive numbers but the economy is still in a fairly fragile phase...
I have always argued that China shouldn’t and wouldn’t put together a big stimulus in next one to two month period. The economy is bad but it is not that bad and as the number show today. The government has another quarter or so to try to put (in place) major economic reforms to sort of reign in monetary policy, reign in non performing loans before you are going to see any type of stimulus because the economy is still growing. We see the industrial production drop but that is a good thing because the government is trying to push the country away from heavy investment-oriented growth more towards consumer oriented growth which we saw today getting retail fell, which is good. I do not expect stimulus anytime soon in a major way.

More at CNBC. 
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Can China urbanize in a sustainable way? - Sara Hsu

Sara Hsu
+Sara Hsu 
China´s urbanites are expected to growth with a few hundred million over the coming yers. But can cities grow in a sustainable way, wonders urbanization expert Sara Hsu in The Diplomat. The is both room for doubt and for hope, she writes.

Sara Hsu:
The plan outline looks good, but the devil, as always, is in the details. Will the environment really be protected? Will increased urbanization lead to a larger carbon footprint for the newly urbanized residents, particularly since one goal of urbanization is to increase domestic consumption? Will local governments protect farmers’ land rights when they often have not in the past? Will there be sufficient provision of services, such as a waste and water management when these services already fall short in many regions? The promises of the plan, coupled with inability to support these same policies in many regions, gives rise to doubt over whether the urbanization plan can indeed be implemented in a sustainable way.
Further, China’s urbanization process is already underway. This has taken place in several different ways, through constructing residences on the outskirts of large cities, through building up small and medium sized cities, and through construction of new cities. Some difficulties have been encountered, in terms of attracting people to new cities and resulting in existence of “ghost towns,” or in attracting sufficient industry and employment to newly populated areas, as in Shaanxi province, where rural residents resettled in urban areas have found themselves jobless. Although the Shaanxi urbanization process has resulted in part in the creation of ecological farmland towns, it is still too soon to tell whether the impacts of urbanization will be altogether environmentally sustainable.
China faces a difficult task in increasing urbanization—essentially, some analysts view China as under-urbanized, in comparison to Western nations, while others view China as over-urbanized in its struggle to care for its vast urban population. How can these two views be compromised? Given an increase in urbanization, will the country indeed be able to implement sustainable development, as it claims it will but heretofore has been unable to achieve? Based on past performance, the likelihood of China’s urbanization process falling into the sustainable category is low, but hopes are high. We hope to be pleasantly surprised.

More in the Diplomat.

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Why Sina weibo´s valuation is too high - Shaun Rein

Shaun Rein
+Shaun Rein 
Sina´s weibo is preparing for an IPO, but business analyst Shaun Rein feels that their valuation is way too high, he tells at Bloomberg TV. Weibo is not longer the hot company it used to be, after a government crackdown and competition by WeChat.

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