China’s Hidden Debt Risk

China’s Hidden Debt Risk

20 March 2013

Zhang Monan. Zhang Monan is a fellow of the China Information Center, a fellow of the China Foundation for International Studies, and a researcher at the China Macroeconomic Research Platform.

BEIJING – In the last 200 years, there have been more than 250 cases of sovereign-debt default, and 68 cases of domestic-debt default. None of these was an isolated incident. Indeed, such defaults – combined with factors like large current-account or fiscal deficits, overvalued currencies, high public-sector debt, and insufficient foreign-exchange reserves – have always triggered financial crises, from the Mexican peso crisis in 1994 to the Russian ruble crisis in 1998 to the American subprime mortgage crisis in 2008.

Since China’s era of reform and opening up began, the country has experienced three instances of large-scale public-finance problems. In the late 1970’s, the country faced a debilitating fiscal deficit. In the 1990’s, its corporate sector was plagued by “triangular debts” (when a manufacturer that has not been paid for its product is unable to pay its suppliers, which in turn struggle to pay their suppliers). Later that decade, financial institutions were burdened by bad debts generated by state-owned enterprises.

Now China is experiencing a fourth instance of elevated debt risk, this time characterized by high levels of accumulated local-government and corporate debt. To be sure, China’s national balance sheet, which boasts positive net assets, has garnered significant attention in recent years. But, in order to assess China’s financial risk accurately, policymakers and economists must consider the risks that lie in the country’s asset structure – and the liabilities that are not included on its balance sheet. Read more of this post

Swedish business is being cast as a model for long-term stability and growth; the Swedish model of active ownership of companies – the distinctive way Sweden has placed corporate power not with management but with shareholders who are obliged to elect board directors and be involved in big strategic decisions

March 20, 2013 6:52 pm

Scandinavia: Model management

By Richard Milne

Swedish business is being cast as a model for long-term stability and growth

The two men joke, finish each other’s sentences and defend the other from attack. “You start!” jokes one when the subject turns sensitive.

But behind this veneer of camaraderie, the two are rivals: Börje Ekholm and Anders Nyrén are two of Sweden’s most important businessmen, heading the holding companies that together control more than half of Stockholm’s stock exchange.

For the first time in the 69 years that their two companies – Mr Ekholm’s Investorand Mr Nyrén’s Industrivärden – have existed side by side their chief executives have agreed to give a joint interview.

The subject that has brought them together is the Swedish model of active ownership of companies – the distinctive way Sweden has placed corporate power not with management but with shareholders who are obliged to elect board directors and be involved in big strategic decisions.

With a structure that promotes long-term thinking, the Swedish model is attracting interest worldwide from regulators and governments looking to head off financial crashes. Some think that adapting the model’s tenets could reduce the short-term thinking that can damage companies, while also boosting local industry. Read more of this post

Biggest Solar Collapse in China Imperils $1.28 Billion; China’s Solar Billionaire Undone as Banks Push Suntech to Brink

Biggest Solar Collapse in China Imperils $1.28 Billion: Energy

Investors stand to lose most of the $1.28 billion they put into Suntech Power Holdings Co. (STP) after the solar manufacturer said it wouldn’t resist a bankruptcy petition filed in China.

The company, based in Wuxi, outside Shanghai, had more than $2 billion in debt and defaulted on $541 million in bonds due on March 15, prompting eight Chinese banks to ask a local court to push Suntech’s main unit into insolvency.

“There’s a host of companies that have gone to Wall Street investors and gotten billions of dollars, and these investors are ultimately going to be on the hook and get nothing out of it,” Angelo Zino, an analyst at Standard & Poor’s Financial Services LLC in New York, said in an interview yesterday. Read more of this post

Easy money over for Asian junk bonds; 50% of January deals are now trading underwater

Easy money over for Asian junk bonds

Bankers and investors warn high-yield bonds from Asian issuers face headwinds due to compressed spreads.

By Jame DiBiasio | 21 March 2013

After a banner year of issuance, capped by a record $10.6 billion issued in January 2013, investors in Asian high-yield debt face a tougher environment.

“Income will dominate and capital appreciation will be limited,” says Bryan Collins, portfolio manager at Fidelity Worldwide Investments.

Tim Jagger, head of Asian fixed income at Aviva Investors, says that in contrast to the equity-like returns that investors enjoyed in 2012, this year they will only make money from the coupon of Asian high-yield bonds.

Julian Trott, head of debt syndication for Asia ex-Japan at Goldman Sachs, says 50% of those January deals are now trading underwater. He expects credit investors will return to high grade instruments. “There will be more discrimination of high yield by investors,” he says. Read more of this post

Buffett Says Bet on Natural Juices of Market; “Never bet against what humans can accomplish if they’re operating in the right soil. And we have the right soil.”

Buffett Says Bet on Natural Juices of Market

Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc. (BRK/A), said investors should bet on the “natural juices” of capitalism in the U.S. even as lawmakers struggle to narrow the budget deficit.

People tend to “focus too much on what the government’s done, and to give them either credit or blame,” Buffett said in an interview conducted by the chief executive officer of Business Wire, the Berkshire subsidiary that distributes press releases. “The real credit belongs to our system.”

Buffett, 82, has used annual letters to shareholders and public appearances to highlight the prospects for the world’s largest economy, where most of Berkshire’s operations are based. He’s also called for an increase in taxes on the wealthiest individuals to help reduce budget deficits and forestall cuts, an approach that Republicans say would hurt growth.

The U.S. economy “is coming back because of the natural juices of capitalism and not because of government,” Buffett told Business Wire’s Cathy Baron Tamraz in a video interview posted online today. “We have a wonderful system that eventually is self-cleansing and always moves forward.” Read more of this post

Brainbox nation: America remains the world’s biggest spender on R&D, though others are inching up

Brainbox nation: America remains the world’s biggest spender on R&D, though others are inching up

Mar 16th 2013 |From the print edition

IT IS NOT much to look at: an anonymous suburban office building, wedged between a shopping mall and a car dealership. Yet the Defence Advanced Research Projects Agency, or DARPA, has had a hand in many of the most celebrated technologies of the age, from the internet to global positioning systems to radar-foiling stealth aircraft. Its boss, Arati Prabhakar, jokes about having invented fire.

DARPA remains gamely engaged in research that to outsiders sounds like science fiction. Its Living Foundries programme, for example, is trying to work out how to use microbes to detect and repair worn or corroded materials. Blood Pharming aims to create a kit to grow blood from a culture for battlefield transfusions. ChemBots is investigating robots that can change their shape to squeeze through small openings and then reconstitute themselves on the other side.

America puts more into R&D than any other country, and agencies like DARPA are in the vanguard. Yet by the National Science Foundation’s latest count, in 2009, the country’s share of global spending on R&D had fallen to 31%, from 38% in 1999. As a share of GDP its expenditure now ranks only ninth in the world, at almost 2.9%. Investment in research even fell slightly in absolute terms for a couple of years during the recession, whereas in other countries it continued to grow quickly. China’s outlays, for instance, raced ahead by 20% a year in the decade to 2009. Read more of this post

SocGen’s Black Swan Risk Map

HERE IT IS: SocGen’s Black Swan Risk Map

Sam Ro | Mar. 19, 2013, 8:49 AM | 3,543 | 4

Here’s Societe Generale’s review of some of the tail risks, or unlikely scenarios, out there.  For now, they believe we should be more worried about the downside risks.

CHART OF THE DAY: The Most Outrageous Reason Why A Company Would Raise Its Dividend; senior management are compensated in options that are much more likely to increase dividends

CHART OF THE DAY: The Most Outrageous Reason Why A Company Would Raise Its Dividend

Sam Ro | Mar. 19, 2013, 8:18 AM | 1,477 | 

Read more of this post

The Fed’s Effect On Commodity Prices Has Vanished

The Fed’s Effect On Commodity Prices Has Vanished

Sam Ro | Mar. 18, 2013, 10:04 PM | 3,682 | 5

Read more of this post

Is Bali losing its allure? There have been several reports this year already that indicate the island has seen the number of foreign visitors retreat to levels not seen for several years

Is Bali losing its allure?

There have been several reports this year already that indicate the island has seen the number of foreign visitors retreat to levels not seen for several years. -Jakarta Post/ANN

Chris O’Connor
Wed, Mar 20, 2013
The Jakarta Post/Asia News Network

The Tirtha Empul Temple in Bali draws tourists who seek its holy waters.

BALI – There have been several reports this year already that indicate the island has seen the number of foreign visitors retreat to levels not seen for several years.

Specific groups, such as Chinese and European visitors, have been highlighted and a variety of explanations offered as to why.

Certainly the cafes and restaurants do appear quieter than normal and even the steady stream of domestic bus tours seems reduced.

Analyses of relevant data are very important if any industry is to develop its market and adjust its planning and policies accordingly, and statements made by key players within the sector can be taken as a measure of understanding of both businesses and the administration. Read more of this post

Chinese Premier Li Cutting Wrist and pledging to cut the “hand” of the state in the economy pushes borrowing costs of railway network up; yield of 3.95% is lower than the 8.99% for similar-maturity notes of Indian Railway and slightly higher than Suntech’s 3% CB in China’s first high-profile bond default

Li Cutting Wrist Lifts Rail Costs Most in 16 Weeks: China Credit

China’s railway network became the first test case for Premier Li Keqiang’s pledge to cut the “hand” of the state in the economy, pushing its borrowing costs up the most in 16 weeks.

The yield premium over government notes for one-year bonds from the former Ministry of Railways, whose debt was transferred to the newly created China Railway Corp. on March 17, jumped 10 basis points last week to 118, the biggest rise since the period ended Nov. 23, data compiled by Bloomberg show. The yield of 3.95 percent is lower than the 8.99 percent for similar-maturity notes of Indian Railway Finance Corp.

China Railway will take over commercial operations from the ministry, according to a March 14 cabinet statement. The authority had more than 2 million employees and 2.66 trillion yuan ($427.8 billion) of debt that’s larger than Denmark’s economy. While the government offered assurances the company will receive its backing, Premier Li said three days later that he would act when the “hand” of the state shouldn’t be involved in the market, even if it feels like “cutting one’s wrist.”

“Previously creditors legally had recourse to the ministry,” said Ivan Chung, a Hong Kong-based senior credit officer at Moody’s Investors Service. “While investors expect there will be very strong support from the government for China Railway Corp., they no longer have a direct claim on the government as they used to.” Read more of this post

More bond investors bet on US rate rise

March 19, 2013 7:37 pm

More bond investors bet on US rate rise

By Stephen Foley, Michael Mackenzie and Dan McCrum in New York

More US bond investors are seeking new ways to hedge against the risk of a sharp rise in interest rates in case growth in the world’s largest economy picks up and the Federal Reserve starts to wind up its current stimulus policies.

The US central bank is expected on Wednesday to maintain its current level of bond purchases, which have pushed up bond prices and kept rates low. However, some investors are taking positions in exchange traded funds and leveraged loans that are designed to profit if market interest rates spike higher. Read more of this post

The ghosts of ’94: Veteran bond traders fear the omens point to a repeat of the catastrophic collapse of the mid-nineties

March 19, 2013 6:32 pm

Markets: The ghosts of ’94

By Michael Mackenzie, Robin Wigglesworth and Stephen Foley

Veteran bond traders fear the omens point to a repeat of the catastrophic collapse of the mid-nineties

Nineteen-ninety four. Nelson Mandela was inaugurated South Africa’s first black president. Ace of Base dominated the pop charts on both sides of the Atlantic. And Pulp Fiction introduced “Royale with cheese” to the vernacular. On Wall Street, 1994 was the year many money managers lost their shirts.

A sharp, unexpected rise in interest rates wrecked the value of bond portfolios and turned profitable trades into money losers. Hedge funds blew up, banks plunged into the red and the resulting shockwaves even hurt the equity market, which reversed a strong start to end down on the year.

It was, in other words, a year for investors to forget. But it is also a year that is important to remember. Today, with interest rates at rock-bottom thanks to the US Federal Reserve and other central banks, some bond market veterans are hearing echoes of 1994. What will happen, they ask, when the Fed decides it has done enough to stimulate the economy? Could there be another shock?

Richard Tang, now head of North America sales at RBS Securities, recalls the “gigantic roar” that went up across the trading floor at Salomon Brothers on February 4, 1994, when the Fed unexpectedly raised rates.

“I remember 1994 very well, clearly like it was yesterday. It was my first bear market in the business,” he says.

The Fed kept tightening through the year, as the US economy picked up steam and the central bank decided to put down a marker against inflation. Traders who had loaded up on debt, notably in mortgage securities, were squeezed, and the leverage in the nascent securitisation market meant the pain was magnified. Read more of this post

Indonesians left to pick up the pieces; “I want to become smart, I want to make my parents proud. I want to take them on the Hajj.”

March 19, 2013 8:36 am

Indonesians left to pick up the pieces

By Ben Bland in Bantar Gebang

©AFP

Rastinah lives in the midst of Indonesia’s decade-long economic boom, without being part of it.

Along with her husband and five children, the 40-year-old ekes out a living as a scavenger at the vast Bantar Gebang landfill site on the outskirts of Jakarta, scouring a mountain of trash every day to find material that she can sell for recycling.

Even in a good month, her family rarely earns more than $180. So, when it costs about Rp30,000 ($3) for a very basic family meal, life is a struggle.

“It’s barely enough for food, sometimes it’s not enough,” she says as she picks plastic bags from the trash heap, a foul stench in the air and the midday sun beating down, the only shade provided by a Komatsu digger operating perilously close by.

Mrs Rastinah and her family are among the tens of millions of people who have been left behind as Indonesia’s economy has taken off on the back of a fast-growing middle class and Indonesia’s plentiful natural resources. Read more of this post

China: Politicizing discovery: A system of political patronage often forces scientists to choose between career advancement and real innovation

Politicizing discovery

Wednesday, March 20, 2013

A system of political patronage often forces scientists to choose between career advancement and real innovation

Bill Dodson is chief China industry analyst at market research firm TrendsAsia in greater Shanghai and author of several books, most recently “China Fast Forward: The Technologies, Green Industries and Innovations Driving the Mainland’s Future,” published last August.

Throughout 2010, Fang Shimin – China’s self-appointed “Science Cop “ – had been relentless in his pursuit of Dr Xiao Chuanguo. Fang Shimin had publicly accused the medical researcher of falsifying test data in trials with children. The doctor had retaliated against Fang Shimin by hiring thugs to beat the Science Cop to “send him a message.” Despite Xiao Chuanguo’s confession, the court had shown great leniency toward the doctor.

The public accusations against Xiao Chuanguo, his confessed attacks on his accusers and the court’s light sentences for his crimes point to a fundamental flaw in China’s plan to surpass the United States as a preeminent innovation nation. The country lacks checks and balances within its own scientific community and society. Science prides itself on its scientific method of repeatable results rigorously tested and approved by a group of peers.

As Thomas Kuhn wrote in his seminal study of the work of scientists, “The Structure of Scientific Revolutions,” most often discoveries are resisted by peers who have vested interests, yet eventually the community of scientists adapts – typically in nonviolent ways – as the discovery becomes a fact that expands on previous understanding. The scientific method is supposed to weed out wrong or misleading results and researchers to contribute to a base of standing knowledge upon which others may continue to build. The court systems in a civil society function similarly, with judgments passed based on a body of evidence that is indisputable in its objectivity and certainty.

Both science and society in China are based on patronage, though. Read more of this post

SEC Digging Into Fund Fees; Focus on Expenses Billed to Investors by Hedge Funds and Private-Equity Firms

• Updated March 19, 2013, 7:57 p.m. ET

SEC Digging Into Fund Fees

Focus on Expenses Billed to Investors by Hedge Funds and Private-Equity Firms

By JULIE STEINBERG

The Securities and Exchange Commission is closely scrutinizing the fees and expenses, including travel and entertainment, that hedge funds and private-equity firms charge to their investors.

Many managers of hedge funds and private-equity funds—collectively called “private investment advisers”—had long been largely unregulated and therefore had less oversight in how they billed their investors.

As part of the Dodd-Frank financial law, the SEC now oversees more than 1,500 additional such advisers that were required to register with the agency. In that capacity, the SEC is checking to ensure they are charging their investors reasonable expenses.

“Exotic” expenses like travel, entertainment and consulting arrangements are more likely to attract the agency’s attention than routine charges like legal and accounting fees, say compliance consultants who advise funds on registration and reporting requirements. Read more of this post