China Economic News

[level13]

Using the skyscraper curse to predict the next financial crisis is not entirely hocus pocus and has its merits. Because most of the time, under normal circumstances, building such mega structures wouldn't make financial sense in terms of the debt load and how much and how long will the developer need to breakeven its investment.

In order to get approval from the management/government for the development, analysts will have to apply wildly optimistic figures as their projection basis. As these fantastic numbers are projected using the lookback on most recent few years where the economy is booming, chances of the approval party giving the green light is greatly enhanced. All these will 'make sense' because everything is good and well as far as one can remember.

Most probably this is the inflexion point where everything starts to go downhill.
The term to describe it will be: REVERSION TO THE MEAN

[BlueKelah]

I have been saying that China stocks and property was in an unsustainable bubble that will be followed by a big crash, most probably spectacular.

The chinese stock market has crashed and has no credibility now.

3rd and 4th tier cities are basically ghost towns now with overbuilt property which even if they have structures up are just empty shells.

All thats left is for their property market in the first and second tier cities to tank once the government support runs out.

That's why I have been posting that any property counter with exposure to China is a big risk.

China's electrical energy use last quarter only up 0.6% YoY. For me that is a very good indicator that means their GDP growth is essentially flat, 1% at best. THis also correlates well with bad PMI numbers and big drops in trade numbers with Korea/Japan/Taiwan.

The defaults in US bond markets for china developers is just tip of the iceberg... Reckoning is just a matter of time IMHO, how much time is the question, like a time bomb tic-toc tic-toc, China central bank just delaying the inevitable DELEVERAGING.

Japan 2.0 here we come WooHoo!!

[fundamentalman]

As for electricity usage increase of 0.6% yoy ...

Maybe because of the structural shift going in in the economy. Old industries that are electricity-intensive (e.g. cement, steel, coal mines, low-end manufacturing) are being reduced or move overseas.

While new sectors of economy that is doing well (software, tourism and aviation, food/beverage, e-commerce, insurance, telecom) are less electricity intensive and more value-adding. And also, new home appliances like aircons and fridges are getting more energy efficient over time.

You can see from the Manufacturing PMI and Service PMI. Manufacturing PMI keeps contracting, service PMI keeps expanding.

Consumption already accounts for about 2/3 of econ growth last year. Retail is still growing strongly. Personal income is still strongly growing. And unemployment rate is not that scary.

===

USA's electricity consumption also increasing at a meagre rate c1% even when the econ is doing relatively well, as manufacturing accounts for less than 20% of their economy.

===

China now is undergoing very painful structural changes towards more services and more consumption ... but whether the economy would crash ... I have no idea ... in these past few years, when I go to Thailand, I feel like I am in China (so many mandarin-speaking tourists)

[fundamentalman]

The composition of their export is climbing the value ladder.

Companies that help built china's infrastructure 10-20 years ago (e.g. high speed rail, oil/gas rig, telecom infrastructure, nuclear plants) are now seeing competition from Chinese companies.

Their export/import is down ... but the export/import of the rest of the world is down even more, so the Chinese is actually gaining market share in trade. Not to mention their current account surplus is going up these 2-3 years (as import is down even more than export).

==

As for home prices in tier1 cities, clearly, in a bubble (rental yield 2-3%).

[fundamentalman]

Not easy to shut down capacity, have to think about unemployment too ... painful structural change

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China Tries to Tackle Its Commodities Crisis

The steel industry suffers from a severe glut—but will resist cuts.


from Bloomberg Businessweek Reprints


February 26, 2016 — 1:26 AM WIB

China has had an overcapacity problem in its aluminum, chemical, cement, and steel industries for years. Now it’s reaching crisis levels. “The situation has gone so dramatically bad that action has to happen very soon,” said Jörg Wuttke, president of the European Union Chamber of Commerce in China, at a press conference in Beijing on Feb. 22, where a chamber report on excess capacity was released. That report’s conclusion: “The Chinese government’s current role in the economy is part of the problem,” while overcapacity has become “an impediment to the party’s reform agenda.”

Many of the unneeded mills, smelters, and plants were built or expanded after China’s policymakers unleashed cheap credit during the global financial crisis in 2009. The situation in steel is especially dire. China produces more than double the steel of Japan, India, the U.S., and Russia—the four next-largest producers—combined, according to the European Union Chamber of Commerce. That’s causing trade frictions as China cuts prices. On Feb. 12 the EU announced it would charge antidumping duties of as much as 26.2 percent on imports of Chinese non-stainless steel.

Steel mills are running at about 70 percent capacity, well below the 80 percent needed to make the operations profitable. Roughly half of China’s 500 or so steel producers lost money last year as prices fell about 30 percent, according to Fitch Ratings. Even so, capacity reached 1.17 billion tons, up from 1.15 billion tons the year before.


With about one-quarter of China’s steel production coming from Beijing’s neighboring province of Hebei, excess production is a major contributor to the capital’s smoggy skies. And with average steel prices likely to fall an additional 10 percent in 2016, fears of spiraling bad debts are growing. A survey released in January by the China Banking Association and consulting firm PwC China found that more than four-fifths of Chinese banks see a heightened risk that loans to industries with overcapacity may sour.

In December, Premier Li Keqiang warned that money-losing industrial “zombie companies” are wasting scarce resources and must be shuttered. In February, China’s State Council announced plans to eliminate up to 150 million tons of steel production in five years and said regulations will be loosened to speed up mergers and acquisitions in steel and other industries. China will “actively and steadily push forward industry and resolve excess capacity and inventory,” the People’s Bank of China said on Feb. 16 after a meeting with the National Development and Reform Commission, the banking regulatory commission, and other agencies.

The government may find it hard to achieve that goal. The steel industry will lose as many as 400,000 jobs as excess production is shuttered, Li Xinchuang, head of the China Metallurgical Industry Planning and Research Institute, predicted in January. Hebei and the industrial northeastern provinces of Heilongjiang, Jilin, and Liaoning, home to much of China’s steel production, don’t have lots of job-creating companies to absorb unemployed steelworkers. “They are concerned about the possibility of social unrest with workers’ layoffs,” says Peter Markey, Shanghai-based China and Mongolia mining and metals leader at consultants Ernst & Young. “As you can see around the world, steelworkers are pretty feisty people when it comes to protests.”

Provincial and city governments, which control the local branches of China’s state-owned banks, are likely to resist the mandate to downsize. Officials are often promoted based on the economic performance of their regions. And cities rely on local companies for much of their tax revenue. The central government “will really have to push hard” to make a dent in excess production, says May Zhong of Standard & Poor’s Ratings Services. “Reducing overcapacity will take time because of pushback.”


While central government officials claim 90 million tons of steel production capacity was shut down for good over the past five years, that figure doesn’t count newly built mills, says Sebastian Lewis, Shanghai-based editorial director for China at Platts, the commodities research firm. And steelmakers have developed elaborate strategies to avoid Beijing’s orders. Common ploys include turning off one blast furnace while increasing production in the remaining ones, or temporarily idling a facility and claiming the shutdown is permanent. How many real closings there will be “is always unclear,” says Lewis. “It is really hard to get a sense of when capacity really is being retired.”

The bottom line: Steelmaking capacity in China keeps rising despite government pledges to cut production and end easy credit.

[fundamentalman]

It still doesn't make sense to invest in A-shares right now

Even at 2700 level, most A-shares listed in SSE are still more expensive than their H-share counterparts listed in HK ..

====

China stocks plunge 6.4% on worries about market liquidity

Published: Feb 25, 2016 4:31 a.m. ET

Rough day puts Shanghai 47% lower since last summer





Stocks in China plunged Thursday amid heightened worries about market liquidity, just as leaders of the world’s largest economies are preparing to meet in Shanghai.

The Shanghai Composite Index SHCOMP, +0.95% tumbled throughout the trading session to finish down 6.4% at 2,741.25. That was the worst percentage drop for China’s leading benchmark since Jan. 26 and took the benchmark down to a 47% loss since last summer.

The sudden selloff appeared to be due to several reasons, from worries about tighter liquidity in the market to withdrawal of money by investors who have been hammered by months of volatile trading in China.

It comes at an awkward moment for the Chinese government, which is hosting the world’s leading central bankers and finance ministers starting Friday. China has been expected to use the G-20 meeting to address global anxiety about its economy and financial markets. Worries about China’s economic slowdown and the volatility of its markets have weighed on investment decisions around the world.

Read: Everyone’s on the hot seat as G-20 comes to Shanghai

Thursday’s selloff, which started in the morning, was abrupt and came as a surprise to many investors. Some had hoped authorities would soon release plans to improve state-owned enterprises, and such expectations have boosted Chinese shares at times recently.

Liquidity injections by China’s central bank in recent weeks had helped the benchmark stabilize since late January.

By the close, the Shenzhen Composite Index 399106, -0.12% had dropped 7.3%, and China’s Nasdaq-style ChiNext board was down 7.6%. More than 1,300 stocks in Shanghai and Shenzhen fell by 10% — the maximum level that Chinese authorities allow an individual stock to fall in one day.

Elsewhere in the region, shares were mixed. The Hang Seng Index HSI, +2.52% finished down 1.5%, but Australia’s S&P/ASX 200 XJO, -0.02% was up 0.1% and Japan’s Nikkei Stock Average NIK, +0.30% gained 1.4%. South Korea’s Kospi SEU, +0.08% was up 0.3%. Thursday was a stark contrast from the beginning of the year when selling in China spread across the region — and even the world.

Traders said Chinese shares sold off as the rate at which commercial banks lend to each other rose. The overnight rate jumped to 2.004%, the highest since late January. That compares to 1.956% on Wednesday.

“Investors are increasingly wary of risks associated with funds from banks and insurance firms.”
Li Lifeng, an analyst at Sinolink


A total of 960 billion yuan of reverse repurchase agreements — a kind of short-term loan to commercial banks by China’s central bank — are due to mature this week, squeezing liquidity in the market. The People’s Bank of China withdrew 455.5 billion yuan of short-term loans from the financial system last week, the highest weekly net withdrawal level in three years.

Analysts also pointed to an announcement by China’s banking regulator early Thursday afternoon that it had banned Zhongrong Life Insurance from adding stock investment due to solvency risks.

“Investors are increasingly wary of risks associated with funds from banks and insurance firms,” said Li Lifeng, an analyst at Sinolink.




The losses took place against the backdrop of an already weak equity market: The Shanghai Composite Index is down 23% year to date, making it one of the worst performing stock indices globally.

Chinese “retail investors haven’t recovered from the stock market disaster early this year while institutions are incentivized to take profits once market recovers a bit,” said Zhang Xin, an analyst at Guotai Junan Securities.

Trading volumes in Shanghai and Shenzhen totaled 664.8 billion yuan on Thursday, up from 579.6 billion on Wednesday. But volumes have fallen dramatically from more than 2 trillion yuan on days last year, before the summer meltdown.

Meanwhile, the Chinese yuan CNYUSD, +0.0076% has been weakening just slightly against the U.S. dollar, under the weaker guidance of the central bank in the past three sessions. On Thursday, the central bank fixed the yuan at 6.5318 yuan to one U.S. dollar, compared with Wednesday’s fixing of 6.5302. The onshore yuan can trade within a 2% range up or down of the daily guidance.

[fundamentalman]

Hank Paulson: China needs to let ‘failing companies fail’

Leslie Shaffer | @LeslieShaffer1
5 Hours Ago
CNBC

Former U.S. Treasury Secretary Henry Paulson, who oversaw bank bailouts during the global financial crisis, has different advice for China: Let companies fail.


"They can show right now they're very serious about dealing with inefficient state-owned enterprises as they take capacity out of the steel industry, coal industry and others by letting some failing companies fail," Paulson, who was Treasury secretary from 2006-2009, told CNBC's Squawk Box on the sidelines of an Institute of International Finance event organized in conjunction with the G20 meeting in Shanghai.

As Treasury secretary, Paulson oversaw a $700 billion government-funded bailout of U.S. financial institutions that were seen as "too big to fail" in the global financial crisis.

Paulson, who is also a former chairman and CEO of Goldman Sachs, added that China needed to move faster to promote competition.

"Competition is about opening up to the private sector, which is the future, and it's about putting the state-owned enterprises on a level playing field," said Paulson,, who earlier this decade founded the independent think tank Paulson Institute promoting sustainable and environmental projects. "There's clearly room to move faster."

Last year, China issued guidance on reforming often-inefficient state enterprises, such as introducing mixed public-private ownership as well as pushing for mergers and share sales, but the market isn't always certain of progress on this front.



Yuan currency China
At least one China risk seems to be fading


Paulson's comments come as China's policymakers have faced sharp criticism after what appeared to be a ham-fisted approach to managing recent months' volatility in its currency and stock markets.

But Paulson noted that reforms of state-owned enterprises face a lot of pressure from vested interests even as they remain important for China's market.

"When I say where is the new growth going to come from, it's got to come from the private sector and the magic I think is letting the private sector in areas where they are at a disadvantage because they're dealing with inefficient oligopolies and monopolies," he said.

China's economic growth rate slowed to a 25-year low of 6.9 percent in 2015, as the world's second-largest economy continues to shift away from its manufacturing roots.

"They need to move away from the past growth drivers, overreliance on investment. And I'm pleased that they're doing that. They're allowing their economy to slow down. That's a positive," Paulson said.

That slowdown has spurred renewed fears of a hard-landing for China's economy. But Paulson said that the risks can be manageable.

"To put it in perspective: this is an economy that's still growing at over 6 percent," he said. "The biggest risks for China, and by extension the rest of the world, are still in in the future, and they can be avoided if China does the right things now and if China speeds up reform."

Paulson also had praise for China adding green financing to the agenda for the G-20 meetings of finance ministers and central bankers in Shanghai; the two-day meeting kicked off Friday.

While Paulson was positive that the U.N. summit on world climate change in Paris last year resulted in countries setting targets on combatting climate change and reducing carbon emissions, he didn't think it would be enough.

"Governments don't have the money. That's the bad news. The good news is the technologies are available and there's a lot of private capital so governments need to create the conditions to marshal private capital to roll out these technologies," Paulson said. "That's the magic of this green finance and China has been taking a lead."

At the end of last year, Beijing effectively launched its local currency green bond market by publishing a set of standards and guidelines, known as the Green Financial Bond Directive. The initiative was welcomed by many, with the World Resources Institute predicting it would translate into more low-carbon projects, including renewable energy and public transit systems, as a result.

"Given the size of China's markets and China's willingness to test these, (it) is going to be a great example for the rest of the world and I think putting this on the agenda is in and of itself very important," Paulson said.

-Nyshka Chandran contributed to this article.

[CityFarmer]

The real work started in China, to tackle the over-capacity of steel and coal industries...

China plans to lay off 1.8m workers

BEIJING - China said on Monday it expected to lay off 1.8 million workers (15 per cent of the workforce) in the coal and steel industries, as part of the country’s efforts to reduce industrial overcapacity.

It is the first time China has given figures that underline the magnitude of its task in dealing with slowing growth and bloated state enterprises, Business Insider reported.

China’s Minister for Human resources and Social Security Yin Weimin told a news conference that 1.3 million workers in the coal sector could lose jobs, plus 500,000 from the steel sector.

According to the data published by the National Bureau of Statistics, China's coal and steel sectors employ about 12 million workers. "This involves the resettlement of a total of 1.8 million workers. This task will be very difficult, but we are still very confident," Yin said

For China's stability-obsessed government, keeping a lid on unemployment and any possible unrest that may follow has been a top priority.

The central government will allocate 100 billion yuan ($15.27 billion) over two years to relocate workers laid off as a result of China's efforts to curb overcapacity, officials said last week.
...
http://www.dailytimes.com.pk/business/29...8m-workers

[BlueKelah]

The real work started in China, to tackle the over-capacity of steel and coal industries...

China plans to lay off 1.8m workers

BEIJING - China said on Monday it expected to lay off 1.8 million workers (15 per cent of the workforce) in the coal and steel industries, as part of the country’s efforts to reduce industrial overcapacity.

It is the first time China has given figures that underline the magnitude of its task in dealing with slowing growth and bloated state enterprises, Business Insider reported.

China’s Minister for Human resources and Social Security Yin Weimin told a news conference that 1.3 million workers in the coal sector could lose jobs, plus 500,000 from the steel sector.

According to the data published by the National Bureau of Statistics, China's coal and steel sectors employ about 12 million workers. "This involves the resettlement of a total of 1.8 million workers. This task will be very difficult, but we are still very confident," Yin said

For China's stability-obsessed government, keeping a lid on unemployment and any possible unrest that may follow has been a top priority.

The central government will allocate 100 billion yuan ($15.27 billion) over two years to relocate workers laid off as a result of China's efforts to curb overcapacity, officials said last week.
...
http://www.dailytimes.com.pk/business/29...8m-workers

and where are these people going to work after getting laid off?  Will they be defaulting on their mortgages?

I guess its back to the communist farms for them huh, lol

Not looking good for CHina if they have to resort to this kind of wholesale consolidation, it seems like they are running out of budget to support unsustainable companies so start to see where they can cut, but no choice I guess after all the BOOM years...

[weijian]

Most of these folks will be sent somewhere else. For example, China is investing a lot of money in other countries' projects n a vertically integrated style in which its banks partake the project financing, provide the management/technical know-how and the Chinese labour to build it. There are a lot of Chinese property projects just across the causeway, a lot of them are built with Chinese labour.

After close to 100 tumultuous years from the start of the end of the Qing Dynasty (Taiping Revolution) to the end of Great Leap, nothing is more important to a Communist Gov than ensuring social stability. All their policies from ensuring 7% GDP growth to their implicit guarantee (although disastrous in outcome) to bail out naive lenders/stock market is aimed at ensuring that (social stability) happens.

There are 1.6bil Chinese, compared to 4mil Sporeans. If SG can produce a few great brains to make it leap forward, by sheer probability, there will be enough talents/experience in the Chinese Communist Gov to solve its problems. The first step to solving their problems (tackling a fundamental greed that is propagated in the form called corruption) has already been well acknowledged and tackled by Chairman Xi. Personally, I would say that betting against China's long term future, is similar to trying to bet against US's long term future which has odds that Warren Buffet suggests is not good.