Bamboo Innovator

The Limits of China’s Market Model; An interview with James McGregor, whose book “No Ancient Wisdom, No Followers” argues that the long-term prospects for China’s economy are being hurt by state dominance and protectionism.

MARCH 27, 2013, 10:00 AM

The Limits of China’s Market Model

In his book “No Ancient Wisdom, No Followers,” the author James McGregor delivers a sharp critique of China’s recent development path, and what he calls “authoritarian capitalism.” In Mr. McGregor’s China, the government plays too large a role in the economy, and big state-owned entities dominate because of government subsidies and preferential treatment. Private entrepreneurs and multinational corporations are at a distinct disadvantage, one that he argues is likely to damage China’s prospects in the long run. With China determined to create its own global brands, he says, the government is putting rules and regulations in place that seem increasingly protectionist.  Read more of this post

China: gold before swine; Should gold traders be paying attention to Chinese pork prices?

China: gold before swine

Mar 28, 2013 8:24am by Leslie Hook

Should gold traders be paying attention to Chinese pork prices? It may sound outlandish, but new research has uncovered an interesting link between global gold prices and Chinese inflation (which in turn is often driven by pork prices). China accounts for a quarter of the world’s physical bullion demand so it’s no surprise to find it has a big role in setting global prices. But just how its influence works is not always clear, especially when weighed against other factors like crude prices, quantitative easing, or the strength of demand from India, the world’s biggest gold buyer. Now there is evidence to suggest a strong correlation between bullion prices and Chinese inflation, according to Na Liu, head of CNC Asset Management. He wrote in a recent note to clients: We have reviewed many Chinese macro indicators to detect their correlation with the gold price, and we are basically brought down to the very basics: the gold price is highly correlated to China’s inflation and real interest rate… This makes intuitive sense. Over the past few years, China’s jewellery demand shows only steady growth. The key driver for demand volatility comes from investment demand, and investment demand was driven by the need for purchasing power preservation and therefore varies as inflation expectation surges and ebbs. Last year, as China’s inflation cooled, gold demand did not increase in China at all. His chart illustrates how peaks in the gold price match peaks in Chinese inflation, while rising inflation is correlated with rising gold prices:

Source: CNC Asset Management

So what does this mean for gold bugs? Officials have warned that China faces inflationary pressures this year, with central bank governor Zhou Xiaochuan saying this month that China should be on “high alert” against inflation. Inflation for the first two months of this year came in at 3.2 per cent, its highest level in 10 months. The fear is that inflation could be pushed even higher by rising prices for pork, which is heavily weighted in the consumer price index because it is so widely consumed. As Rahul Jacob noted on beyondbrics, pork prices are expected to rise sharply this year, by as much as 16 per cent according to some estimates. If that happens, it could be good news for gold bugs.

The end is nigh’ for global oil demand growth: Citi; global oil demand would plummet by 18%, to around 74 million barrels a day from the current 90 million

Citi: ‘The End Is Nigh’ For Oil

Rob Wile | Mar. 26, 2013, 11:21 AM | 5,312 | 10

Citi‘s Seth Kleinman has a pretty sweeping note today, titled “The End Is Nigh,” in which he argues crude oil demand — and with it, prices — are is set to fall dramatically in the coming decade thanks to the rise of natural gas and more advanced fuel economies.  And the trend is worldwide. Kleinman on gas: One of the many unforeseen ripple effects of the US shale revolution is a push to substitute natural gas for oil. This is set to accelerate with LNG already challenging diesel’s 13 mb/d heavy duty truck use globally but especially in China, bunker’s 3.7 mb/d seaborne market, and CNG and propane set for exponential growth not only in markets such as Brazil, Egypt, Iran and India, but in Russia and the US as well. Oil-based power generation is increasingly being replaced by gas-fired generation. As much as 2 mb/d of power generation demand in the Middle East in total could be switched to natural gas by the end of the decade, and the increasing availability of LNG towards end-decade could back out other oil for power generation needs in India and Latin America amongst others. And on fuel economy: Higher prices, the removal of many fuel subsidies and rising fuel economy mandates have dramatically improved the outlook for fuel efficiency in global automotive and truck fleets. Citi’s automobiles team estimates that new car fuel efficiency is now improving by 3-4% p.a., with trucks managing 1-2%. As cars make up ≈60% of the total global road fleet we conservatively estimate that new vehicles (cars and trucks combined) fuel economy increases by 2.5% p.a. Here’s the key chart showing global demand forecasts.

Kleinman concludes that the oil price spikes of the late ’00s were basically a fluke: The structural bull market of the previous decade was a result of surging global oil demand and consistently disappointing non-OPEC supply growth, compounded by a collapse in Iraqi and Venezuelan production. The outlook for each of these factors has now reversed, reinforcing Citi Research’s long term view that by the end of the decade Brent prices are likely to hover within a range of $80-90/bbl. The shale boom’s effects are still rippling across the globe.  Read more of this post

Driving the Asian Century Beyond Clans, Cliques, Clones in Indonesia

Driving the Asian Century Beyond Clans, Cliques, Clones in Indonesia
Michael L. Bak | March 27, 2013

Dynamic Asia. Amazing Asia. Rising Asia. Wherever you turn, wherever you read, wherever you tweet, facebook or youtube, nothing could be as clear; Asia is where it’s at.  Action. Growth. Change. If Asia is the future, then welcome to the mothership: Indonesia.

China is dominating the world’s headlines and cover pages; are we now witnessing the fall of the West and the rise of the rest, or as The Economist most recently put it: “is America ready to be Number 2”? We’d be forgiven for instantly gazing China-ward. Even the OECD says China will become the number one economy in 2016; but there’s a whole lot of Asia out there that’s not the Middle Kingdom. It’s the Asian Century after all, and Indonesia is leading the charge.

Indonesia’s democratic credentials bolster its confidence in regional security and economic matters, from Myanmar’s transition to a more engaged and engaging Association of Southeast Asian Nations. Growing economically by leaps and bounds — many predict the land of the mystic Garuda will outpace China and India in 2013, barreling along at 6.3 percent this year. But the story of the Asian Century goes well beyond markets, per capitas, and growing middle classes.

Crucial to our story, Indonesia brings a seriously democratic (if not messy) government, fiercely independent (and wildly free) press, one of the world’s most diverse countries (in so many aspects), and a super-active civil society (masters of multi-platform activism). Malaysia may have staked a claim to “Truly Asia,” but Indonesia definitely gets the Oscar for animating the Asian Century.

With Indonesia’s colorful democracy leading, the Asian Century will tell the story of Southeast Asia breaking the bonds of socio-economic imperialism, ditching patronage and growing through enlightened governance.  Read more of this post

As the Pace of China’s Junk Bond Sales Grows, So Do Worries. Chinese junk bonds also have a unique structure, which could leave investors vulnerable. Chinese bonds are issued through offshore holding companies and tend not to be backed by the actual businesses and underlying assets in mainland China. That means foreign bondholders may have little legal recourse if a company defaults on its debt

MARCH 28, 2013, 2:53 PM

As the Pace of China’s Junk Bond Sales Grows, So Do Worries

HONG KONG — It has an all-too-familiar ring. Investors in search of better interest rates rush to risky, high-yield bonds, raising worries that the market is overheated. But the concerns — which have already been voiced about the $120 billion of European and American junk bonds issued this year — are now being applied to the fledgling Chinese market. While American and European companies have been selling high-yield debt for decades, Chinese businesses only recently started to tap into the junk bond market in earnest. It’s a sign that Chinese companies are growing up. As the country’s economy continues to open up, private sector businesses have looked to foreign investment to finance their expansion efforts, rather than relying on hard-to-get loans from the state-controlled banks. The junk bond market in China took off this year. Although the deals still account for a small share of the global total, Chinese companies have sold $8 billion of high-yield bonds to overseas investors since January. That’s up from $2.3 billion during the same period a year earlier, according to figures from Dealogic. “Bond markets are booming because companies have had difficulty getting the level of debt they want out of banks onshore or offshore, and in tapping equity markets,” said Nick Gronow, a senior managing director atFTI Consulting in Hong Kong and an expert in Chinese bankruptcies. “So bonds have really taken up the slack.”

But the pace of growth is troubling to some analysts. As investors have plowed into junk bonds across the globe, yields have plummeted. In the United States, rates on junk bonds have dipped below 6 percent, compared with historical payouts of roughly 10 percent or more. The trend is similar in China. Country Garden, a builder based in the southern city of Guangzhou, raised $750 million in January by selling 10-year bonds that paid 7.5 percent a year. In 2011, the company sold $900 million of seven-year bonds at a much higher 11.125 percent. The borrowing costs for Kaisa Group Holdings, a commercial real estate company in the southern city of Shenzhen, have also dropped rapidly. In September, it sold $250 million of five-year bonds at 12.875 percent. By January, it was able to sell $500 million of bonds at 10.25 percent. This month, it issued new bonds at 8.875 percent. “Chinese real estate issuance is happening for structural reasons: 50 percent of the population needs to be urbanized and housed, traditional funding from banks may be more restricted now, and global appetite for yield is on the rise,” said Gregorio Saichin, the London-based head of emerging markets and high-yield, fixed-income portfolio management at Pioneer Investments. “When you combine all the above factors with a massive refinancing exercise by Chinese property developers, you get this type of outcome.” But it’s a slim difference in yields for such disparate markets. Chinese high-yield bonds have many of the same characteristics — and risks — as American debt. They tend to be sold by companies looking to finance ventures in new or untested areas or businesses that compete in industries where earnings are subject to volatile swings.

But the Chinese market has its own set of potential problems, and some analysts worry that investors aren’t being properly compensated for the added layer of risks. For one, the bulk of the high-yield bonds in Asia this year — roughly half — come from Chinese real estate companies. The fear is that the housing market, which has been booming, is a bubble that will eventually burst. The industry is especially uncertain, given the periodic government intervention. On March 1, Beijing announced new measures to curb excess in the market, including the strict enforcement of a 20 percent capital gains tax on the sale of preowned homes. “With the new leadership in China, people are still not sure which way things will go in terms of property policies,” said Suanjin Tan, an Asia fixed-income portfolio manager based in Singapore at BlackRock. “That also adds to the desire among these guys to remain cashed up, so they can take advantage of any wobbles in the market to pick up land on the cheap.”

Chinese junk bonds also have a unique structure, which could leave investors vulnerable. Mainland China’s domestic bond market remains largely off limits to foreign buyers. So most investors buy offshore Chinese bonds, which are issued through holding companies headquartered in places like the Cayman Islands. The bonds tend not to be backed by the actual businesses and underlying assets in mainland China. That means foreign bondholders may have little legal recourse if a company defaults on its debt, especially if local banks or other Chinese creditors make claims. Bondholders are now facing such difficulties with the bankruptcy of Suntech Power.

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Buchheit On Cyprus: “The Situation Is Spiralling Down”, And Why A Second Bailout May Be Needed

Buchheit On Cyprus: “The Situation Is Spiralling Down”, And Why A Second Bailout May Be Needed

Tyler Durden on 03/28/2013 17:05 -0400

When the world’s leading expert on Sovereign debt restructurings believes that the endgame for Cyprus might be another round of restructuring, adding that “I’m not sure this is over,” it is important to listen. With the calmness in Cyprus today more reflective of paralysis than confidence,  Lee Buchheit senses that the parameters of how much money will be needed to recapitalize the banks have changed. He tells Bloomberg TV’s Lee Pacchia in this brief clip, “the situation is spiraling down… they’ll need more money because the economy is worse, tax collections less, deposits will flow out when they can flow out.” As for which European nation will be next in need of assistance with its sovereign debt burdens? Buchheit agrees with us that while many are looking to Slovenia, he sees real economic and political problems in both Italy and Spain remaining especially since the EU “have certainly changed the rules of the game.”

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Small companies struggling to repay loans in Italy and Spain signal bigger problems on the horizon for the euro zone after the dust has settled on Cyprus’s last-ditch bailout

Small businesses spell big problems for Italy and Spain

2:10am EDT

By Silvia Aloisi and Sarah White

MILAN/MADRID (Reuters) – Small companies struggling to repay loans in Italy and Spain signal bigger problems on the horizon for the euro zone after the dust has settled on Cyprus’s last-ditch bailout this week.

Defaults by small and medium-sized enterprises (SMEs), easily the biggest employers in Spain and Italy, are rising at a worrying clip, spelling trouble for the banks and two countries at the heart of Europe’s debt crisis.

“You can be sure that if these companies’ bad debts rise, you’re going to see more bad loans to families, and credit card bills that won’t be paid,” said Javier Santoma, finance professor at Spain’s IESE business school.

The ability of Italy and Spain, which account for 28 percent of the euro zone economy compared with Cyprus’s 0.2 percent, to pull themselves out of crisis and avoid full-blown bailouts depends on the health of their banks; weak banks conserve capital rather than lend to get the economy moving. Read more of this post

Student loan write-offs hit $3 billion in first two months of year as many graduates remain jobless, underemployed or cash-strapped in a slow U.S. economic recovery

Student loan write-offs hit $3 billion in first two months of year

By Elvina Nawaguna | Reuters – Mon, Mar 25, 2013

By Elvina Nawaguna

WASHINGTON (Reuters) – Banks wrote off $3 billion of student loan debt in the first two months of 2013, up more than 36 percent from the year-ago period, as many graduates remain jobless, underemployed or cash-strapped in a slow U.S. economic recovery, an Equifax study showed. Read more of this post

Emerging Stocks Head for Worst First Quarter Since 2008

Emerging Stocks Head for Worst First Quarter Since 2008

Emerging stocks fell, extending the biggest first-quarter slump since 2008, as China’s banking regulator tightened rules on wealth-management products and the cabinet called for new measures to deregulate interest rates. Read more of this post

Aberdeen, Manulife Seek More Independent Boards: Southeast Asia

Aberdeen, Manulife Seek More Independent Boards: Southeast Asia

Southeast Asia’s companies need to add more independent directors to their boards and boost diversity to attract foreign investors including Aberdeen Asset Management Plc (ADN) and Manulife Asset Management.

One of the biggest obstacles is strengthening the roles of independent directors because many publicly traded companies in the region are family-owned, Stephen Schuster, a financial sector specialist at the Asian Development Bank, said in an interview yesterday from Manila. Other challenges include disclosure and cross-border dispute resolution, he said. Read more of this post

Hong Kong Drops New Law Restricting Access to Directors’ Details

Hong Kong Drops New Law Restricting Access to Directors’ Details

Hong Kong’s government dropped legislation that would restrict public access to the personal details of company directors, following opposition from unions, small businesses and journalists.

The Financial Services and Treasury Bureau removed provisions obscuring company directors’ residential addresses and full identification numbers from an overhaul of the city’s companies ordinance, according to a legislative briefing document sent by e-mail from Shirley Wong, the department’s spokeswoman.

Opponents of the change said it would protect bosses from scrutiny and erode the city’s reputation by making it easier to launder money and cheat on taxes. Trade unions have used the database to track down runaway employers who owed wages, and small businesses use the information to conduct background checks on trading partners. Read more of this post

Zoomlion, China’s second-biggest construction equipment maker, Misses Estimates on Finance Costs, Demand Weakness; The stock has slumped 21 percent since Ming Pao reported on Jan. 8 that it had received an unsigned letter alleging that Zoomlion’s sales are exaggerated

Zoomlion Net Misses Estimates on Finance Costs, Demand Weakness

Zoomlion Heavy Industry Science and Technology Co., China’s second-biggest construction equipment maker, posted profit that missed analyst estimates as government measures to cool the property market damped demand while finance costs and provision for bad debts increased.

Net income in 2012 fell 9.1 percent to 7.33 billion yuan ($1.18 billion) from 8.07 billion yuan in the prior year, according to a filing to the Hong Kong stock exchange today. That compares with the 8.49 billion yuan average of 26 analysts’ estimates compiled by Bloomberg. Sales climbed 3.8 percent to 48 billion yuan.

Zoomlion, based in Changsha, Hunan province, and bigger rival Sany Heavy Industry Co. face a drop in orders as slowing economic growth and government curbs on the property market sap demand. Zoomlion is also seeking to boost investor confidence after its shares slumped following a January report in Hong Kong’s Ming Pao newspaper that the company’s sales may have been exaggerated.

“Economic growth in China remained slackened with low investment in infrastructure,” the company said in today’s statement, “The construction machinery industry was also under severe challenges brought by the sluggish growth of production and sales and the increase in credit risks.”

Shares (1157) of Zoomlion rose 0.9 percent to HK$9.37 at the close in Hong Kong trading, before the earnings were released. The stock has slumped 21 percent since Ming Pao reported on Jan. 8 that it had received an unsigned letter alleging that Zoomlion’s sales are exaggerated. Read more of this post

When Will Deposit Haircuts Take Place In Other European Countries?

When Will Deposit Haircuts Take Place In Other European Countries?

Tyler Durden on 03/28/2013 11:55 -0400

When all is said and done, what happened in Cyprus over the past two weeks, is nothing but the culmination of re-marking the “assets” in the country’s financial system (which as noted previously, were a preponderance of worthless Greek bonds and countless other non-performing loans), long priced at assorted “myth” levels, to a long overdue reality. As a result of delaying resolving the mismatch between non-performing assets and liabilities for years, the resolution was one which saw some €16 billion of the total asset base impaired, which in turn necessitated the impairment of billions of deposits: the primary liability funding the Cypriot financial system. Furthermore, as a result of the “Freudian Slip” by the Eurogroup’s new head earlier this week, we know that Cyprus will be the template for all future bank resolutions, which seek to avoid a democratic popular vote of depositor self-impairment (a vote which is now known will never actually pass) and proceed to restructuring the banking sector a la carte, by liquidating bad banks and impairing liabilities to the point where the balance sheet is once again viable (however briefly).

The bottom line is that at its core, it is all simply a bad-debt problem, and the more the bad debt, the greater the ultimate liability impairments become, including deposits. Which means that the real question in Europe is: how much impairment capacity is there in the various European nations before deposits have to be haircut? Thanks to Credit Suisse we now know the answer. The chart below shows the liability breakdown for various Eurozone nations, of which the key line item is the Total Deposits, and which in Europe comprises the bulk of bank funding. It becomes obvious why Cyprus had no choice but to crush depositors: they make up a whopping 84% of all liabilities (the highest in Europe and matched only by Greece), so assuming all other liabilities are liquidated, there still would be impairments if the total bad assets (assuming all bank assets are loans which in Europe, unlike the US, is more or less the case) pushed above 16% which in Cyprus they did. So applying some simple balance sheet equality math, one can quickly calculate how much of a “Bad-Debt Impairment” assorted European financial systems can withstand before they too have no choice but to follow in Cyprus’ footsteps and begin crushing depositors, who in bankruptcy court are known by a different, less friendly term: General Unsecured Claims.

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