As Australia’s decadelong mining boom evaporates, the government is girding for what the finance minister calls a harsh “new reality.”

May 1, 2013, 6:22 a.m. ET

Australia’s ‘New Reality’ Sets In as Mining Boom Wanes

By ENDA CURRAN

SYDNEY—Australia faces a harsh “new reality” as a decadelong mining boom evaporates, forcing future governments to seek unpopular savings to avert steep deficits, Finance Minister Penny Wong said. “We have to deal with this new reality,” Ms. Wong said from her Sydney offices ahead of a budget in two weeks that the government already has warned will miss its revenue forecast by about 12 billion Australian dollars (US$12.4 billion). “The new norm is, certainly in the near term, a lower level of revenue growth,” she said. “This budget has to deal with that economic reality, and that is not a popular thing to go out and sell to the public.” And controlling deficits will become even harder in future, Ms. Wong said., as the mining boom fueled by Asia’s demand for Australian raw materials peaks this year and begins to cool.

Read more of this post

Tough times for hedge funds that bet on market tumult using complex trading strategies

Tough times for hedge funds that bet on market tumult

7:06am EDT

By Katya Wachtel

NEW YORK (Reuters) – Nelson Saiers, a trader and math whiz, runs the type of hedge fund that tends to perform best when markets are going haywire. The $600 million Saiers Capital fund and other so-called volatility funds use complex trading strategies to take advantage of pricing discrepancies caused by gyrations in global financial markets. These funds flourished in the years after the financial crisis, when volatility was running hot, but this year is a different story. Financial markets have been largely moving upwards with few wild swings along the way. The Standard & Poor’s 500 index is up about 11 percent and the closely watched CBOE Volatility Index hit a six-year low in March. Saiers Capital’s fund is down about 1.24 percent through April 26, according to an investor. Overall, volatility funds gained 1.16 percent in the first quarter, according to hedge fund tracking firm eVestment, underperforming the broader hedge fund industry’s 3.7 percent gain. Read more of this post

Wall Street to Best Buy – Now, get out of China

Wall Street to Best Buy – Now, get out of China

1:06am EDT

By Dhanya Skariachan

NEW YORK (Reuters) – Best Buy’s move to exit Europe has many on Wall Street hoping the big box retailer does the same in China.

The company sold its stake in a European joint venture to Carphone Warehouse Group this week for less than half of what it paid five years ago. Despite the loss, investors welcomed the news and sent shares up to their highest level in a year.

Many are betting that the next move for the world’s largest consumer electronics chain will be out of China, where it has struggled to fend off local rivals and failed to carve a niche in a cluttered market. That unit has also been without a leader for more than a month.

“They are really struggling in China, much more so than they were in Europe,” said BB&T Capital Markets analyst Anthony Chukumba, who predicted the company could divest its assets there later this year. “There are no strategic benefits to them being in China.” Read more of this post

China Past Due: Hukou ‘Economic Apartheid’

China Past Due: Hukou ‘Economic Apartheid’

APRIL 30, 2013 ⋅ POST A COMMENT

After school in her scruffy Shanghai migrant neighborhood, Yang Liping strolls over to a community center for migrant kids, sits down with an ancient Chinese stringed instrument, and loses herself in the music. “I started playing the guzheng here, three years ago, “ says Yang, an affable 16-year-old in a ponytail and a navy and white tracksuit. She moved to Shanghai from Sichuan in 2008, just after the earthquake, to join her migrant worker parents. And she’s impressed with Shanghai. “There’s a lot more going on here than in my hometown – a lot more ways I can improve myself.” Yang would like to stay in Shanghai for senior high school, so she’ll be likely to do better on the all-important college entrance exam. Not only are Shanghai schools better funded, with better facilities and teachers, but the better universities in Shanghai also require higher scores from those outside Shanghai than from those who go through the school system here. But staying in the city through senior high school and into college is not an option for Yang, or for millions of other migrant schoolchildren like her. That’s thanks to the household registration – or hukou – system, which requires students to take the college entrance exam in the place where their parents are registered. And very few migrant workers can move their hukous to the cities where they work. So some 260 million Chinese migrants – about 20 percent of China’s total population — live as second-class citizens in their adopted cities, in them, but not of them.

China has had a hukou system for at least a couple thousand years, mostly, to keep track of who was in what family. But it was only under Communist Party rule, starting in the late 1950s, that the hukou system started to be used to restrict movement and enforce a kind of economic apartheid. Read more of this post

It is indisputable that China is over-issuing currency. But the reasons behind China’s massive liquidity growth – and the most effective strategy for controlling it – are less obvious

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.

Controlling China’s Currency

01 May 2013

BEIJING – It is indisputable that China is over-issuing currency. But the reasons behind China’s massive liquidity growth – and the most effective strategy for controlling it – are less obvious.

The last decade has been a “golden age” of high growth and low inflation in China. From 2003 to 2012, China’s annual GDP growth averaged 10.5%, while prices rose by only 3% annually. But the unprecedented speed and scale of China’s monetary expansion remain a concern, given that it could still trigger high inflation and lead to asset-price bubbles, debt growth, and capital outflows.

Data from the People’s Bank of China (PBOC) show that, as of the end of last year, China’s M2 (broad money supply) stood at ¥97.4 trillion ($15.6 trillion), or 188% of GDP. To compare, M2 in the United States amounts to only roughly 63% of GDP. In fact, according to Standard Chartered Bank, China ranks first worldwide in terms of both overall M2 and newly issued currency. In 2011, China accounted for an estimated 52% of the world’s added liquidity. Read more of this post

Where the Chinese credit is going; there is plenty of evidence to suggest that financial distress is another reason why credit expansion has not worked well

Where the Chinese credit is going…

Kate Mackenzie | May 01 10:51 | 3 comments | Share

Part of the CHINA’S CREDIT CONUNDRUM SERIES

After Chinese first quarter GDP missed expectations, there was some hope that the relatively strong manufacturing PMIs in March would point to a better second quarter. Now that we know China’s April PMIs are definitely not supporting that notion, it is worth revisiting, again, the whole question of the country’s recent surging credit growth. The significance of the debt-to-GDP ratio can be argued over, and it’s impossible to say at what level it might become a big problem. But here are a couple of ideas to consider. First, UBS’ China economist Wang Tao has taken a look at the debt/GDP question. Her estimate is that government debt was about 55 per cent of GDP at the end of 2012, and total debt is about 210 per cent of GDP. (China’s official government debt to GDP ratio is only about 15 per cent, going purely on government bonds, but that ignores many government corporations, local debt, and the asset management companies that took on bad debt in the early 2000s financial crisis.) Anyway, 210 per cent is broadly in line with other credible estimates. Wang argues this absolute level in itself is not cause for dismay. In comparison to developed economies it may seem high, but it’s less dramatic measured against other emerging and Asian economies, which she points out typically have high savings rates which in turn provide some of that credit: There are a couple of other reasons not to worry. The growth might simply be lagging the credit surge, and some credit might have been double-counted: To be fair, we think credit growth has a delayed effect on economic growth, and expect construction an investment to pick up in Q2 and Q3 this year on the back of strong credit growth so far. Also, the TSF may overstate (or double count) the leverage increase in the real economy – corporates that engage in interest arbitrage by borrowing cheaply in the interbank credit market and lend to other corporate and/or local governments have both legs of their transaction included in TSF. While Wang doesn’t think a debt crisis is imminent, she does believe there are certainly reasons to worry. One is the recent rapid increase in the debt-to-GDP ratio. This is a very good point which we mentioned in February and forgot to point out in our ruminations of the past couple of weeks. To recap: Morgan Stanley’s Ruchir Sharma sums up some of these reasons in a WSJ op-ed, citing a BIS paper by Mathias Drehmann and Mikael Juselius which finds that if the private debt-to-GDP ratio increases by 6 per cent or more above its 15-year average, that is a “very strong indication that a crisis may be imminent”.

Wang believes there’s another reason for worry:

However, there is also plenty of evidence to suggest that financial distress is another reason why credit expansion has not worked well. Some local governments and companies do not have sufficient cash flow to pay interest on their existing debt, and have to borrow new debt to help service older debt. This is not hard to imagine for local governments – even if they have invested in sound projects in the last stimulus program, most of the projects do not yet have a cash return. In a downturn where local governments face weak tax revenue, dropping land sales, and more demand for pushing up investment and GDP from higher levels of government, the logical solution would be to incur more debt to keep the ball rolling. Read more of this post

China: Subprime for the masses

China: Subprime for the masses

May 1, 2013 11:54am by Simon Rabinovitch and Naomi Rovnick

With Chinese workers enjoying a break from their travails on May 1 for Labour Day, it is an opportune time to look at one gift recently bestowed on them by the country’s financiers. The gift is a new investment opportunity going by the name ‘fund of trusts’, which conjures up a sense of diversification and safety. But a more accurate name might be ‘subprime for the masses’. China’s funds of trusts are inspired by the funds of funds that are common in developed financial markets, allowing people to invest in a blend of other funds – whether mutual funds or hedge funds – to gain broader and more dispersed exposure. In China, the funds are invested in a cocktail of different trust products, which include some of the riskiest, high-yielding investments legally available in the country.

This innovation is notable for one major reason. Until now trust products have typically required minimum investments of Rmb1mn ($162,000) as a way of ensuring that only wealthy individuals put their money at risk. With funds of trusts, the entry barrier has been cut to as little as Rmb100,000 ($16,200). That puts trust investments within the reach of tens of millions of middle-class Chinese. Read more of this post

Chinese officials ‘taking lavish displays, banquets and secret sauna parties underground’

Chinese officials ‘taking lavish displays, banquets underground’

BEIJING — China’s top newspaper warned yesterday that some government officials were finding ways around President Xi Jinping’s graft-busting instructions to be frugal by taking banquets and other lavish displays underground, including hiding liquor in water bottles.

BY –

6 HOURS 35 MIN AGO

BEIJING — China’s top newspaper warned yesterday that some government officials were finding ways around President Xi Jinping’s graft-busting instructions to be frugal by taking banquets and other lavish displays underground, including hiding liquor in water bottles. Mr Xi has made battling pervasive corruption a top priority of his administration, warning the problem is so severe it could threaten the party’s survival. But despite his repeated admonitions for officials to practice frugality and stop wasting public funds, some people still have not got the message or are finding ways around it, the Communist Party’s official newspaper, People’s Daily, reported.

“In some places, the use of public money for eating and drinking has switched from high-end hotels to private venues and places of business … which has become known as ‘low-key luxury’,” the paper said. Cases had come to light of “saunas in farmhouses” and “maotai being put in mineral water bottles”, it said, in reference to the expensive spirit traditionally drunk at banquets. “These ways of pulling the wool over people’s eyes is typical of not following instructions and not stopping what is banned,” the commentary added. This phenomenon has reminded the party of the need to strictly enclose power “in the fence of supervision” and “the cage of regulation”, it said.  Read more of this post

Biofuel Pioneer Alan Shaw Forsakes Renewables to Make Gas-Fed Fuels; “Everybody but me is still in this nightmare. This model is broken.”

Biofuel Pioneer Forsakes Renewables to Make Gas-Fed Fuels

Alan Shaw, the chemist and executive who led a six-year effort to turn inedible crops into fuels to displace gasoline, has renounced the industry he helped pioneer and decided the future instead lies with natural gas.

Formerly chief executive officer of Codexis Inc. (CDXS), the first advanced biofuel technology company to trade on a U.S. exchange, Shaw now says it’s impossible to economically turn crop waste, wood and plants like switchgrass into fuel. He’s trying to do it instead with gas, in his new post as CEO of Calysta Energy LLC.

Shaw’s views put him at odds with the emerging segment of biofuels that’s invested about $3 billion since 2008 in the U.S. developing processes that turn biomass into new types of fuel. Amyris Inc. (AMRS) and Gevo Inc. (GEVO) are among producers that have yet to make fuel on commercial scales and slid since their initial public offerings.

“Everybody but me is still in this nightmare,” Shaw, 50, said in an interview in San Francisco. “This model is broken.” Read more of this post

Feedback Loops And The Unsustainability Of China’s ‘Moderate’ Growth; the ‘rage’ among the Chinese at any suggestion of the sustainability of their growth model suggest a level of fragility in China’s social fabric

Feedback Loops And The Unsustainability Of China’s ‘Moderate’ Growth

Tyler Durden on 05/01/2013 19:11 -0400

With last night’s China PMI disappointing expectations and eking out a just-expansionary miasma of hope for the growth enthusiasts, the very real question of global growth sustainability (while not on US equity market participants’ minds) is coming to the fore. As Michael Pettis notes, Martin Wolf’s recent perspective that it may be useful to think about Japan as a model for understanding the adjustment process in China since the Japanese model shows how risky it is to shift to a slow-growth model.

Being in the significant non-consensus camp of “malevolent outsiders”, Pettis fears the ‘rage’ among the Chinese at any suggestion of the sustainability of their growth model suggest a level of fragility in China’s social fabric and its self-confidence that could make any slowdown more difficult to manage. The reason he is most-concerned is ‘feedback loops’; self-reinforcing mechanisms that are virtuous (with surprising growth expectations on the way up), but become vicious in an equally destructive manner. Read more of this post

Crude Inventories Surge To Record High As Energy Demand Collapses

Crude Inventories Surge To Record High As Energy Demand Collapses

Tyler Durden on 05/01/2013 11:38 -0400

A month ago we highlighted the somewhat stunning reality of the real economy via the EIA’s detailed energy supply and demand data. The key takeaway was  that we hoped this did not represent the true state of the economy since the data was so dismal. Fast forward to today and the DOE just released a much higher than expected build in crude inventories that took the stuffed-channel of oil products to all-time highs.The 395.3 million barrels is higher than the previous record in July 1990. There appears to be a number of factors at play – none of which are positive. There is a surge in supply due to the incessant harvesting of shale oil (which could have its own problems as we noted here). Second, we suspect there is a degree of ‘channel-stuffing’ occurring – if we pump it, they will buy – as producers and transporters are desperate to keep active and show incremental business (despite fading railcar loadings). But perhaps most important, as EIA data has shown, there has been a collapse in end demand for crude products not seen since the 1990s. Today’s surge in inventories appears to confirm demand remains subdued at best.

Crude Declines for Second Day on Record Inventories

West Texas Intermediate oil fell for a second day as U.S. inventories reached a record high last week and on signs of economic slowdown in the U.S. and China.  Read more of this post

In China, a Persistent Edge for Big Insiders: Study

April 30, 2013, 1:30 P.M. ET

In China, a Persistent Edge for Big Insiders: Study

By Ben Levisohn

The U.S. has gone to great lengths to root out insider trading–just ask Martha Stewart, Rajat Gupta or any one of the folks at SAC Capital that have been charged with the crime. In China, however, it might just be how the game is played. In the NBER working paper Informed Trading and Expected Returns, authors James Choi,Li Jin, and Hongjun Yan tracked institutional buying of Chinese stocks. Their finding: Stocks that are bought aggressively by institutions outperform those with the least by a wide margin. NBER summed up the report,which is available here:

The authors first show that stocks bought heavily by institutions subsequently outperform stocks sold heavily by institutions. Thus, institutions appear to have a strong information advantage over individual investors, and that is true for stocks of all sizes. Moreover, the authors confirm that the institutional sector’s future information advantage is larger in stocks that it previously traded more aggressively. Therefore, the aggressiveness of institutional trading in a stock, as measured by prior institutional ownership volatility, can be used as an ex ante predictor of future information asymmetry in this stock.

…the authors find that the 20 percent of stocks with the greatest information asymmetry have future annualized returns that are 10.8 percentage points higher than the 20 percent of stocks with the least information asymmetry. Read more of this post

Chinese Way of Doing Business: In Cash We Trust; Many experts say it is not a refusal to enter the 21st century as much as wariness, of the government toward its citizens and vice versa

April 30, 2013

Chinese Way of Doing Business: In Cash We Trust

By DAVID BARBOZA

SHANGHAI — Lin Lu remembers the day last December when a Chinese businessman showed up at the car dealership he works for in north China and paid for a new BMW 5 Series Gran Turismo — entirely in cash. “He drove here with two friends in a beat-up Honda,” Mr. Lin recalled. “One of his friends carried about $60,000 in a big white bag, and the buyer had the rest in a heavy black backpack.” Lugging nearly $130,000 in cash into a dealership might sound bizarre, but it’s not exactly uncommon in China, where hotel bills, jewelry purchases and even the lecture fees for visiting scholars are routinely settled with thick wads of renminbi, China’s currency. This is a country, after all, where home buyers make down payments with trunks filled with cash. And big-city law firms have been known to hire armored cars to deliver the cash needed to pay monthly salaries.

For all China’s modern trappings — the new superhighways, high-speed rail networks and soaring skyscrapers — analysts say this country still prefers to pay for things the old-fashioned way, with ledgers, bill-counting machines and cold, hard cash. Many experts say it is not a refusal to enter the 21st century as much as wariness, of the government toward its citizens and vice versa. Doing business in China takes a lot of cash because Chinese authorities refuse to print any bill larger than the 100-renminbi note. That’s equivalent to $16. Since 1988, the 100-renminbi note, graced by Mao Zedong’s visage, has been the largest note in circulation, even though the economy has grown fiftyfold. (The country’s national icon, Chairman Mao, appears on nearly every note: the 1-, 5-, 10-, 20, 50- and 100- renminbi note.) Read more of this post

Qianhai zone may become China’s Cayman Islands

Qianhai zone may become China’s Cayman Islands

Staff Reporter

2013-05-01

Many foreign private equity firms are interested in registering their companies in the Qianhai Special Financial Zone in Shenzhen, although most have no interest in actually operating there. This makes the zone akin to a Chinese version of the Cayman Islands tax haven, the Guangzhou-based 21st Century Business Herald reports.

At least two private equity firms have already registered in Qianhai, and several others are considering a move. The firms are less interested in actually operating within the zone but instead are seeking the tax breaks offered to businesses there, the report said. The zone is desirable because it enables the inflow of overseas-held renminbi, since firms registered in the zone can invest in China’s economy using assets they raise overseas. The zone will start to look something like the Cayman Islands if firms don’t actually rent offices or hire staff in Qianhai, effectively negating the government’s plans to boost the local economy, said one accountant.

Read more of this post

Economic revolution sprung from China’s grassroots rather than top-down approach

Economic revolution sprung from China’s grassroots: scholars

Staff Reporter

2013-05-01

China’s economic reforms, which begun under the late Deng Xiaoping more than 30 years ago, are often thought of as a top-down revolution presided over by the ruling Communist Party. The country’s rapid economic growth in the last three decades proves that the party’s plan was well-conceived and executed and the credit for China’s economic miracle thus accrues to them, says the Beijing-based Economic Observer.

This view has been challenged however by Nobel laureate Ronald Coase, an economist at the University of Chicago, and his coauthor Wang Ning. Coase and Wang have pointed to the vital role played in China’s economic reforms by people at the grassroots level. Read more of this post

Puffer-fish protests and Xi’s China dream; ordinary Chinese have been watching their unelected representatives gorge themselves on their tax renminbi for decades

April 30, 2013 6:19 pm

Puffer-fish protests and Xi’s China dream

By Patti Waldmeir in Shanghai

Officials are discovering the power of the middle-class Nimby, writes Patti Waldmeir

Something about the tale just did not add up: several hundred people turn up to protest because officials of a provincial city in China are eating swordfish, puffer fish and other forms of lethal seafood at the taxpayer’s expense?

Sure, there’s an austerity drive on in China: these days, bloated bureaucrats are not meant to be eating, drinking or being merry at public expense. But ordinary Chinese have been watching their unelected representatives gorge themselves on their tax renminbi for decades. Surely it takes more than another government anti-corruption campaign to rouse them to revolution? Read more of this post

Korea behind Japan in entrepreneurship; Only 11 of Korea’s top 50 richest businesspeople are self-made, the rest inherited their fortunes

2013-04-30 17:13

Korea behind Japan in entrepreneurship

By Na Jeong-ju
Only 11 of Korea’s top 50 richest businesspeople are self-made, the rest inherited their fortunes from their father or grandfather, a survey showed Tuesday.
In contrast, 34 of the 50 richest people in Japan earned their success through Their own means.  Read more of this post