Massive fund outflow challenges China’s forex management

Massive fund outflow challenges China’s forex management

Staff Reporter

2013-05-15

The influx of hot money and outflow of funds via various channels in China underscores the increasing challenge to the country’s foreign exchange management system, reports the Beijing-based China Economic Weekly. According to Jones Lang LaSalle, a multinational real estate service firm, overseas commercial property investments by Chinese investors have jumped by 33% last year to US$4 billion and may reach US$5 billion by the end of this year. The investments coincide with an increase of Chinese nationals choosing to emigrate, a group which totaled more than 150,000 people in 2011. The huge amount of funds flowing out of the nation via various channels are reportedly due to the official restriction on outward forex remittance, which is capped at US$50,000 per person a year. The People’s Bank of China, aware of the futility of efforts to stem the outflow of money, recently summoned representatives from a number of foreign banks, including HSBC, Citibank, Standard Chartered, and DBS, to discuss the establishment of a system governing offshore investments by Chinese nationals, the China Economic Weekly said. The government also discussed the issue during a meeting of the National People’s Congress Standing Committee on May 6, and will now aim to monitor cross-border fund movements, which currently evades government inspection. Liu Jinchuan, a financial expert, said that underground channels for fund outflows include underground financiers, assets transferred via trade and investment, money laundering via offshore casinos and offshore bank cards. There are many brokers for overseas investments in Shenzhen, on the border with Hong Kong, with many of them operating as local underground financiers, the paper said. Adi (pseudonym), a money broker, said that the State Foreign Exchange Administration, while capable of controlling the cross-border movement of large amounts of funds, is powerless to regulate the movement of smaller amounts of money, equivalent to several millions or tens of millions of renminbi. Adi said he can remit funds out of the country within half an hour of receiving notice from his clients, for which he charges a fee of 0.8%-1.5%, adding that the transfer of large-scale funds can be carried out in installments. Chinese investors have also been funneling funds abroad via foreign trade, such as bloating import prices or underreporting export prices, especially in the case of hi-tech products. The underground outflow of funds via foreign-trade channels explains in part the increase of Hong Kong’s export value, which shot up by 74.2% year-on-year to US$105.6 billion in the first quarter of this year, much higher than its import figures.

That sighing sound you hear from China… is strategists everywhere cutting their GDP forecasts

That sighing sound you hear from China

Kate Mackenzie

| May 15 09:45 | 1 comment | Share

… is strategists everywhere cutting their GDP forecasts. Last week Standard Chartered’s China economist Stephen Green and his team slashed their 2013 forecast to 7.7 per cent from 8.3 per cent. Their 2014 forecast was cut to 7.5 per cent from 8.2 per cent. Today, BAML’s Ting Lu cut to 7.6 for both 2013 and 2014, from 8 per cent and 7.7 per cent, respectively. It seems that April data has dampened any hopes that the Q1 surprise of just 7.7 per cent growth was due to simple base effects such as a missed leap year day or variations in the Chinese New Year holiday. Here are charts of Green et al’s favoured indicators suggesting that this economy won’t be powering back to 8 per cent levels of growth: What went wrong? Green cites a slow and patchy real estate recovery and pressure on local government investment vehicle cash flows, plus slow land sales outside big cities. BAML’s Lu says that, unusually, the quarter-on-quarter rate will keep rising: To be sure, we continue to expect a recovery of sequential growth; however, we have decided to revise down quarterly year-over-year GDP growth as well as annual growth in 2013E. More specifically, we maintain the view that sequential growth (QoQ, seasonally adjusted but not annualized) could bounce from 1.6% in 1Q to around 1.9%-2.0% in 2Q-4Q this year, but we cut quarterly YoY growth to 7.7%, 7.6% and 7.5% in 2Q, 3Q and 4Q (vs 7.7% at 1Q13) from the previous 8.1%, 8.0% and 8.0% respectively. Interesting, but we’re not sure of the significance of the non-annualised quarter-on-quarter figures; it’s true the non-annualised figures have moved around a lot since they were first published a couple of years ago, but most countries give annualised figures so figures like 1.9 per cent growth probably aren’t going to float many people’s boats. Lu however argues that the focus on the year-on-year figures might leave investors overly spooked and, in turn, lead to a more bullish tone if/when the focus shifts. We’re a little more sceptical that the favoured data points change any time soon, considering China’s main quarterly GDP growth number is already quite unusual. Another bullish theory was that the surge in credit growth, particularly in March, might just take some time to generate more growth. Credit data for April however showed that even if that’s the case, it’s not a sustained surge anyway:  Finally, the chance of a renewed stimulus push looks ever less likely (not that many pundits have been openly expecting this anyway). From Bloomberg News: “To achieve this year’s targets, the room to rely on stimulus policies or government direct investment is not big — we must rely on market mechanisms,” Li said in a May 13 speech broadcast to officials around the country, according to a transcript published last night on the central government’s website. Relying on government-led investment for growth “is not only difficult to sustain but also creates new problems and risks,” he said. Incidentally, Green says big stimulus is unlikely unless unemployment begins to look like a problem. Makes sense.

Trade between Hong Kong and Guangdong artificially skewed; Firms inflate trade data to cash in on currency exchange gains

Firms inflate trade data to cash in on currency exchange gains

Staff Reporter

2013-05-15

Many Chinese trading firms have been inflating their performance without the knowledge of the local banking system, Shanghai’s First Financial Daily has reported. The news comes in the wake of unusually high import and export data which was recorded during both March and April and prompted China’s State Administration of Foreign Exchange to issue a notice that it will enhance inspections of firms’ transactions and adjust policies for goods which leave the country. China’s bilateral trade with Hong Kong jumped 66% year over year for the first four months ending April 30. The mainland’s exports to Hong Kong grew 92.9% in March from the same period a year ago, which is the highest growth reported since March 1995. Many companies are found to have made up or adjusted their import data in order to receive foreign currency loans and increase their credit limit from local banks, the report said. Many banks in China offer currency clearing services for international firms as part of the central government’s policies to help domestic firms expand globally and to internationalize the renminbi. The special clearing service is a win-win for both the companies and the banks. The services generate certain revenue for trading firms, which helps them cut down on overall expenses, and also helps the banking sector earn service fees. Companies have to make a full down payment, which translates into sizable and virtually risk-free deposits for banks, said a risk manager at a bank in Shenzhen, who wished to remain anonymous due to the sensitive nature of the issue. The practice may result in the banks’ loose regulations on trading firms’ applications for the clearing service, he said. There is mounting speculation that the growing trading figures might be inflated by companies that routinely moved goods in and out of special trade zones to claim tax rebates. For the first four months ending April 30, exports from Guangdong province rose 35.6% from a year ago. Of that increase, Shenzhen’s share accounted for more than 90% of the growth due to the city’s special trade zones which allow for smoother processing for exports.

Trade between Hong Kong and Guangdong artificially skewed

Staff Reporter

2013-05-14

China’s total trade reached 6.12 trillion yuan (US$995 billion) in the first quarter of the year, marking year-on-year growth of 13.4%, after excluding the effects of foreign exchange. The country recorded an 8.4% increase in exports for the quarterly period ending March 31, the Guangzhou-based Southern Weekly reports. Read more of this post

Sham shampoo: China’s market for impersonal care products; A 400ml bottle passing itself off as Procter & Gamble’s Pert shampoo sells for 10 yuan (US$1.60) per bottle while the genuine article sells for US$5.30

Sham shampoo: China’s market for impersonal care products

Staff Reporter

2013-05-15

The market for personal care products is a breeding ground for knockoffs in China, with manufacturers cashing in on the low costs and high returns involved, reports Shanghai’s First Financial Daily.

Rural areas in Henan, Guizhou and Anhui provinces have become the epicenter for cheap imitations of personal care products. Mo Lei (pseudonym), an Anhui-based entrepreneur who primarily trades in counterfeit goods, said that there are knockoff factories everywhere in China and there are also wholesale markets that primarily deal with fakes.

A 400ml bottle passing itself off as Procter & Gamble’s Pert shampoo sells for 10 yuan (US$1.60) per bottle at local retailers, while the genuine article sells for 32.80 yuan (US$5.30) for the same amount. Read more of this post

Legend Holdings, which owns Lenovo Group, the world’s second-largest PC maker, is planting itself deeper into the agricultural sector with Joyvio Group

Legend puts down deeper roots in agribusiness

Staff Reporter

2013-05-15

Legend Holdings, which owns Lenovo Group, the world’s second-largest PC maker, is planting itself deeper into the agricultural sector with Joyvio Group, which specializes in investment in and operation of related businesses in the area of modern agribusiness, the Beijing-based The Economic Observer reports. By using satellite technology to manage its farms, Joyvio can immediately see the condition of its crops. It has installed GPS on its drug-injecting carts to monitor pesticide sprays. Read more of this post

Did some traders have advance knowledge of huge Sony revamp and make big money?

Published: Wednesday May 15, 2013 MYT 9:02:00 AM

Did some traders have advance knowledge of huge Sony revamp and make big money?

NEW YORK: A surge in option market bets on Sony Corp just before a large hedge fund investor announced a big stake and called for a major restructuring of the company has raised concerns that some traders may have had advance word of the news.

U.S.-listed shares of Sony Corp <6758.T> jumped 9.9 percent to close at $20.76 after Daniel Loeb’s Third Point hedge fund said on Tuesday it accumulated more than 6 percent of Sony’s shares – a stake worth $1.1 billion – making it the largest shareholder in Japan’s biggest electronics company.

But on Monday, the day before that announcement, trading volume in Sony options soared by more than seven times the average daily activity in the last three months. Volume in its stock rose to 6.1 million shares, more than doubling the average 2.7 million shares over the past 25 days. Read more of this post

How Can We Tell If ‘Abenomics’ Is Working?

How Can We Tell If ‘Abenomics’ Is Working?

Japan is in the midst of a grand experiment to revivify its economy through a three-pronged campaign of monetary easing, fiscal stimulus and structural reforms. The markets have noticed: The Nikkei stock index has gained more than 70 percent while the yen has become more than 22 percent cheaper relative to the dollar and the euro since mid-November. At the same time, the difference in yields between 5-year Japanese government bonds and their inflation-indexed equivalents has widened by more than a percentage point.

All of this has led some observers to declare that Japanese expectations about inflation and growth have been transformed, thereby leading to a resurgence of domestic spending, hiring and investment. It’s unclear, however, that this has actually happened.

Let’s start with the obvious: Wages, prices, retail sales and industrial production are all flat or falling. On the bright side, the earnings outlook for Japanese firms is much better than it was six months ago, both in absolute terms and relative to firms in other rich countries. Those forecasts, however, are predicated on the belief that the Japanese economy will live up to the hype. Read more of this post

BMWs Cheaper Than Hyundais on Tariffs Imperil Korean Maker; “Customers who were loyal to the brand for over 20 years are breaking away. It shows that imported brands are now perceived as something accessible.”

BMWs Cheaper Than Hyundais on Tariffs Imperil Korean Maker: Cars

Lee Tack Young says Hyundai Motor Co. (005380)’s luxury vehicles are oversized, overpriced gas guzzlers. So he opted for a more modest alternative: a BMW 528i.

Foreign brands have seen their share of South Korea’s market for premium vehicles surge to 41 percent from 28 percent in the past two years, according to Korean industry groups, as lower tariffs make their cars cheaper and local buyers abandon a decades-long preference for domestic brands.

“I was looking for a quality car that wasn’t too big,” said Lee, president of Cosmetic Engineering, a packaging-machinery maker near Seoul. The 65-year-old’s last seven cars were all Korean, starting with a Hyundai Excel in the 1980s.

This time, he chose his 71 million won ($64,000) BMW over an 85 million won K9 from Hyundai affiliate Kia Motors Corp. (000270) “Unless Hyundai and Kia change and offer me more variety and better quality, I don’t see any reason to go back,” Lee said.

The shift has made South Korea a growth market for Bayerische Motoren Werke AG, Daimler AG (DAI)’s Mercedes-Benz, and Volkswagen AG (VOW)’s Audi. Their gains are coming at the expense of Seoul-based Hyundai and Kia, which count on sales of luxury vehicles in their home market for much of their earnings. Read more of this post

Chinese Suggestions for Improving Internet Disappear

Chinese Suggestions for Improving Internet Disappear

Chinese president Xi Jinping may claim to be interested in hearing the voice of his people, but it’s increasingly clear that this openness doesn’t always extend to people on the Internet.

On Sunday night, billionaire real-estate developer Pan Shiyi tweeted to his 15.3 million followers on Sina Weibo, China’s leading social-media platform: “Soon I might meet a top government Internet regulator,” he announced. “Anything you’d like me to pass along?” By 7:48 a.m. the next morning the tweet had been re-posted 3,455 times and generated 3,891 comments.

Few things irritate Chinese netizens as much as how their government acts on the Internet: blocking access to many foreign websites, censoring content and comments on Chinese websites and directing paid commentators to promote the government’s viewpoint. Over the past few days, the accounts of at least three prominent microbloggers were deleted, and one suspended, including accounts that belonged to Murong Xuecun, the pen name of Hao Qun, a novelist with 1.85 million followers on his Sina Weibo account when it was yanked. Read more of this post

China Corporate Debt to Overtake U.S. Within Two Years, S&P Says; China will need more than $8 trillion for refinancing during the five years, accounting for half of such needs in the Asia-Pacific region

China Corporate Debt to Overtake U.S. Within Two Years, S&P Says

Chinese corporate borrowing will probably exceed that of U.S. companies within the next two years, according to Standard & Poor’s.

Non-financial institutions from the world’s second-largest economy will need $18 trillion of debt during the five years ending 2017, the ratings company said in a report yesterday. That’s 34 percent of the $53 trillion in bonds and loans S&P estimates will be sought globally and compares with $13 trillion forecast for U.S. companies.

Chinese and Hong Kong borrowers sold $41.2 billion of U.S. dollar-denominated bonds since December, the busiest start to a year on record, according to data compiled by Bloomberg. Cnooc Ltd. (883), the nation’s biggest offshore energy explorer, raised $4 billion this month with the largest offering out of Asia in a decade, as it looks to replace part of a loan used to acquire Canada’s Nexen Inc.

“High levels of investment, primarily in manufacturing, real estate, and infrastructure, have supported the country’s strong economic growth rate, particularly over the past five years – and credit is fueling this investment,” S&P said in the report. “While China is now on a lower growth trajectory than in the prior decade, the trajectory is still very high by global standards.”

China’s economic expansion unexpectedly slowed to 7.7 percent last quarter from a year earlier, losing momentum from the 7.9 percent expansion in the previous three months, according to the statistics bureau. Read more of this post

In Asia, private-equity firms are cashing out of the Asian companies they own by adding debt to those businesses

May 14, 2013

In Asia, Private-Equity Buyers Borrow to Cash Out

By Fiona Law

Some private-equity firms are cashing out of the Asian companies they own by adding debt to those businesses. The fact that borrowers can raise cheap funds and use the cash to pay dividends to shareholders is more proof that debt markets in Asia are booming. But by leaving the companies with more borrowings and less cash, the tactic also makes the debt riskier for investors who buy it. In a recent example, school operator Nord Anglia Education raised $475 million through two bonds sold this year and last year. One-third of the first $325 million issue was used to repay a loan to Baring Private Equity Asia, which owns the company. The second $150 million issue was used to finance Baring’s and Nord Anglia’s purchase of WCL Group Ltd., which runs international schools in the U.S., Spain and Qatar. In such deals, known as dividend recapitalizations, private-equity-owned companies raise cash by issuing debt. Part, or all, of the proceeds are distributed in the form of dividends to buyout groups. Bond buyers usually prefer that companies use funds raised by borrowing for projects that will generate cash, or to pay down existing debt.

Read more of this post

China’s Premier Li Keqiang said the economy is facing downwards pressure but warned that there is little room for stimulus or official investment to take up the slack

TUESDAY, MAY 14, 2013 – 19:26

China’s Li Warns Econ Under Pressure; Little Room For Stimulus

BEIJING (MNI) – China’s Premier Li Keqiang said the economy is facing downwards pressure but warned that there is little room for stimulus or official investment to take up the slack. He said the economic situation remains “complicated” and said market forces will be needed to support growth. Li’s comments were posted in a statement about reforming the structure of the State Council on the government’s main website late Tuesday.

Li Signals Reluctance on Stimulus to Boost China Growth

Chinese Premier Li Keqiang signaled policy makers are reluctant to use stimulus to counter a slowdown in the world’s second-largest economy because the risks outweigh the benefits. “To achieve this year’s targets, the room to rely on stimulus policies or government direct investment is not big — we must rely on market mechanisms,” Li said in a May 13 speech broadcast to officials around the country, according to a transcript published last night on the central government’s website. Relying on government-led investment for growth “is not only difficult to sustain but also creates new problems and risks,” he said.

The comments indicate China may be unlikely to boost government spending or follow central banks across Asia in cutting interest rates as Li tries to pare the state’s role in the economy. Bank of America Corp. and JPMorgan Chase & Co. this week lowered 2013 growth estimates to 7.6 percent after April industrial production and investment trailed forecasts. Read more of this post

Urban rail transit projects across China costing 800 billion yuan are going to weigh heavily on the already high level of local government debt.

More debt trouble is rolling along rails
Wednesday, May 15, 2013
Urban rail transit projects across the mainland costing 800 billion yuan (HK$1.01 trillion) are going to weigh heavily on the already high level of local government debt. The warning about funding challenges presented by subway projects in 24 cities is from the state’s China Economic Weekly. It follows on from US-based Fitch Ratings last month cutting China’s long-term local-currency debt rating, citing rising risks to financial stability given a lack of transparency in the increased borrowing of local governments. It estimated this debt was 12.85 trillion yuan at the end of 2012. On the rail projects, the fear is that 24 cities simply lack the means to pay for the schemes. Guo Tianyong, a professor at the Central University of Finance and Economies in Beijing, pointed to the projects as making the local debt crisis more acute. New projects on the move include Harbin, Changsha, Ningbo and Zhengzhou laying 387 kilometers of track, and eight cities are extending existing networks. Guangzhou Metro Corp executive Ye Zichuan said most subway operators can expect to see greater losses this year. CATHY WU

Billionaires Juan Roig and Hortensia Herrero, the husband-and-wife team that controls Mercadona SA, Spain’s largest supermarket chain, created thousands of jobs last year as their country’s economy crumbled

Spanish Billionaires Hire 4,000 Amid Country’s Job Slump

Billionaires Juan Roig and Hortensia Herrero, the husband-and-wife team that controls Mercadona SA, Spain’s largest supermarket chain, created thousands of jobs last year as their country’s economy crumbled. Revenue at the closely held operation rose 7 percent to 19.1 billion euros ($24.5 billion) in 2012, according to its annual report, as demand for its low-priced, private-label goods lured cash-strapped Spanish shoppers. Net income also jumped 7 percent to 508 million euros, a performance that helped allow the company to hire 4,000 new workers. Roig, the country’s fourth-richest person and a well-known figure in the Spanish press for his economic commentary and pronouncements, controls 51 percent of Mercadona. He has a $4.5 billion fortune, according to the Bloomberg Billionaires Index.

“Mercadona, under the Roigs’ instruction, has posted extraordinary growth over the last 10 years,” said David Bain, the London-based head of research at Campden Wealth, a networking community for the world’s wealthiest family businesses. “Roig is a big believer in the family business model, and is strict about his family actually contributing rather than providing a nice place to hang out in a high-paying non-job.” Herrero, 62, is vice president of the Valencia, Spain-based company, which commands 14 percent of all food retail space in the country, according to the annual report. She controls a 28 percent stake in the company and has a net worth of at least $2.6 billion. Read more of this post

India’s demographic challenge: India will soon have a fifth of the world’s working-age population. It urgently needs to provide them with better jobs

India’s demographic challenge

Wasting time

India will soon have a fifth of the world’s working-age population. It urgently needs to provide them with better jobs

May 11th 2013 | PATNA, BIHAR |From the print edition

ONE of India’s bigger private-sector employers can be found in Patna, the capital of Bihar, a poor, populous state in the east of the country. Narendra Kumar Singh, the boss, has three gold rings on his right hand and arms big enough to crush rocks. His firm, Frontline, has 86,000 people on its books. They are mostly unskilled men from rural areas in poor states like Bihar; thanks to Mr Singh they have jobs in cities all over India.

There is lots to celebrate about this. Mr Singh’s business has sales of $185m and its employee base has grown by 1,600% since 2000. He is looking for a Western partner and wants to expand to Sri Lanka and Bangladesh. He is providing paid work for part of the large cohort of young people now entering the workforce. And by shifting people from farms to cities he is helping urbanisation of the sort that underpinned startling progress elsewhere in Asia.

Yet Frontline is also a symptom of a colossal failure. For it is not supplying labour for a manufacturing boom of the kind that helped so many in China, South Korea and Taiwan out of poverty, or for the IT services at which India has excelled. Instead it offers relatively unproductive service-sector jobs—in particular, security guards. It has become de rigueur for every ATM, office, shop and apartment building to have guards. Across India millions of young men now sit all day on plastic seats in badly fitting uniforms with braids and epaulettes, unshaven and catatonically bored as the economic miracle passes by. This isn’t how East Asia got rich. Read more of this post

Water With Some Pop to It: New Drinks Go After People Who Don’t Like the Bland Taste; Controlling the Flavor

May 14, 2013, 7:43 p.m. ET

Water With Some Pop to It

New Drinks Go After People Who Don’t Like the Bland Taste; Controlling the Flavor

By SARAH NASSAUER

With soda and diet soda sales in decline, drinks companies are coming up with waters that look more like soda than water. Sarah Nassauer joins Lunch Break with a look.

When is water actually soda? As bottled-water sales boom and traditional soda sales slump in an almost decade-long decline, companies are marketing water that hints it could taste like soda. The consumer targets: People who know they should drink more water but don’t always like the taste. These water-fussy drinkers are a quiet but large group—about 20% of Americans, say drinks companies and consumer research firms. Some complain water tastes metallic or chlorinated. Others say water is too boring. The products becoming popular with these folks aim to mimic water: They have no calories and market themselves as natural, though some have artificial sweeteners and colorings, or other ingredients that help deliver a soda-like fix. The makers of these drinks hope people who like water or soda but want more variety will also buy the products. Read more of this post

European authorities raid Shell, BP and Statoil offices to probe suspected manipulation of oil prices

Published: Wednesday May 15, 2013 MYT 9:27:00 AM

European authorities raid Shell, BP and Statoil offices to probe suspected manipulation of oil prices

LONDON/OSLO: European authorities have raided offices of oil majors Shell, BP and Statoil in an investigation of suspected manipulation of oil prices, one of the biggest cross-border actions since the Libor rigging scandal. Authorities have sharpened scrutiny of financial benchmarks around the world since slapping large fines on some of the world’s biggest banks for rigging interest rate benchmarks. On Tuesday, the European Commission said it was investigating major oil companies over suspected anti-competitive agreements related to submission of prices to leading oil pricing agency Platts, a unit ofMcGraw Hill Group. “Officials carried out unannounced inspections at the premises of several companies active in and providing services to the crude oil, refined oil products and biofuels sectors,” the Commission said. The inspections took place in two EU member states and one non-EU country, it said. “The Commission has concerns that the companies may have colluded in reporting distorted prices to a price reporting agency to manipulate the published prices for a number of oil and biofuel products,” it said.

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Why Foxconn’s Switch to Robots Hasn’t Been Automatic

05.14.2013 17:43

Why Foxconn’s Switch to Robots Hasn’t Been Automatic

With the wages of workers rising, the huge manufacturer has pursued increased automation, but the effort has not gone smoothly

By staff reporter Li Xuena

(Beijing) – In the face of rising labor costs in recent years, manufacturing companies at home and abroad have tried to find new ways to control spending and improve productivity. At the same time, Foxconn International Holdings, the original equipment manufacturer for companies such as Apple Inc. and its iPhones and iPads, has been at the center of controversy over its labor practices since a spate of worker suicides at its facilities in 2010. This prompted the company to give employees a raise. In June 2010, Foxconn said that starting from October 1, 2010 its entry-level workers’ wages would be increased to 2,000 yuan per month from 1,200 yuan after a three-month probation. It also spurred Foxconn to speed up its pursuit of automation. The company’s president, Terry Guo, said in 2010 that it would produce 1 million Foxbots, a mechanical arm researched and developed by Foxconn to perform dull and dangerous jobs. The robots would be implemented from 2012 to 2015 to increase the rate of automation and productivity. However, a poor financial showing in 2012 has become an obstacle realizing the plan. Foxconn’s net loss in 2012 was US$ 316 million, the biggest loss it has suffered since listing in Hong Kong in 2005, the company’s financial report shows. Read more of this post