Friday, 28 February 2014

Research Paper: "How Far Can Renminbi Internationalization Go?"

I can only agree that the road ahead will be long and bumpy.  Capital controls are key.  London stands to benefit from internationalisation but there will be increased competition for this business.  George needs to be on the case.

ADBI Working Paper 461

YU YONGDING, Chinese Academy of Social Sciences (CASS)

Since the formal launch of the renminbi trade settlement scheme in 2009, renminbi internationalization has made impressive inroads. The progress in renminbi trade settlement is especially impressive. However, Hong Kong, China’s offshore renminbi deposits failed to make significant progress as expected. The question of how far renminbi internationalization can go has become a common concern in the international financial community. This paper argues that the sheer size of the People’s Republic of China’s (PRC) trade and the convenience of using the renminbi for transaction settlements is one contributing factor, but that exchange rate arbitrage and interest rate arbitrage matter also. As well, a fundamental constraint for renminbi internationalization is the PRC’s capital controls. Before fully opening up its capital account and making the renminbi freely convertible, however, the PRC needs first to put its own house in order, most importantly making the renminbi exchange rate flexible. While the renminbi can and will become a major international currency eventually, the road to internationalization is bound to be long and bumpy.

Friday, 21 February 2014

Opium wars, trade and precious metals

China economics blog always keeps an eye on trade.  The Opium wars are a fascinating case study.  A recent article provides an interesting reminder of the issues.

Old Time Farm Crime: The Opium Wars [Modern Farmer]

"It was a major drug bust with more than 1,600 arrests and the confiscation of 11,000 pounds of a highly addictive substance.

No, this wasn’t a DEA raid of a major meth operation, or an Interpol investigation into international drug smuggling. It was the year 1839 and the Chinese government was cracking down on British importation of opium. The drug issue was a powder keg that led to a series of wars between the two countries over the course of more than 20 years and changed both nations for generations.

To the British, the Chinese crackdown was a matter of business. It was a perceived trade imbalance on the British end due to Chinese officials requiring silver in trade for their goods, most notably tea, that led the British to realize that opium could tip the scales in their favor.

The British government, initially through its East India Company, had tried trading everything from woolens to scientific instruments to pottery, but the Chinese only cared about precious metals."

 What is interesting here is that Chinese imports of gold and silver and yet again reaching record levels.

"In a 50 year period prior to 1828, Britain paid out £27m in silver to the Chinese. During the same period they only sold about £9m of British goods to them. That balance shifted dramatically when the British went full bore into opium smuggling.

In the decade of the 1830s, despite an imperial decree outlawing the export of silver, China exported more than seven times more silver than it took in (an estimated $7 million in and $52 million out) a lot of that used to buy opium. And that doesn’t include the gold that was exported in the same decade.

By the eve of war British merchants were exporting about $25 million (about $245 million today) worth of opium to China from their Indian possessions."
Interesting how things change and yet stay the same.

Thursday, 20 February 2014

China rebalancing - rural income rises suggest light at the end of the very long tunnel

China is currently getting a bad rap.  Everyone from this blog to Robert Peston's documentary are highlighting doom and gloom ahead.  This recent Bloomberg piece suggests there is some light at the end of the tunnel.

China needs to increase consumption and rely less on exports.  My view has been that the gulf is too great and that there is some serious pain ahead.  I have not changed that view yet but it is always good to see some progress.

Debt fuelled investment remains a major concern.

I am working on a couple of projecting looking at urbanization and energy use.  Urbanization in China is an interesting and in my view important topic where government policy is changing and that will impact China and the world economy.  There is also a close tie in with migration and registration issues.  This Bloomberg piece is a nice summary. [My bold]

China Rural-Income Gains Aid Shift Toward Consumption [Bloomberg]

"Chinese incomes rose faster in the countryside than in cities for a third straight year in 2012 as migrant workers boosted their pay and the government strengthened the social safety net.

Rural per-capita net income advanced 10.7 percent, compared with 9.6 percent for urban dwellers, partly on the rise in migrant laborers and their wages, the National Bureau of Statistics said Jan. 18. Rural residents’ income from benefits payments rose 21.9 percent, almost double the urban pace, as the government boosted its budget for health-care handouts. 

Rural spending power has been lifted by wages earned by peasants working in cities, underscoring the broader benefits of the urbanization drive championed by incoming Premier Li Keqiang. Spreading gains in consumption would help sustain a growth rebound and reduce the economy’s reliance on exports, which rose last year at less than half 2011’s pace. 

“Rising rural incomes should definitely help boost consumption and aid rebalancing,” said Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong. “Growth will gear down a bit as rising labor costs diminish investment incentives, but such consumption-led expansion will be more sustainable.” 

The trend may persist for a while as a declining working- age population helps push up migrant laborers’ pay and the government keeps improving social safety-net funds including for health care in the countryside, said Zhang, who previously worked for the International Monetary Fund.

Retail Sales

Rural per-capita net income, which includes migrant workers’ pay, rose more than that of urban residents in 2010 for the first time since 1997. Retail sales in rural regions rose 14.5 percent last year, exceeding the gain in urban areas, which increased 14.3 percent, for the first time in three years. That compares with 17.2 percent growth for urban consumption in 2011 and a 16.7 percent advance for rural dwellers.

Rural spending, at 2.78 trillion yuan ($447 billion) last year, was still less than one-fifth of what urban households spent. Urbanites account for about 52.6 percent of China’s population of 1.35 billion, according to the statistics bureau. 

The central government’s transfer-payment budget for rural health-care coverage in 2012 increased 36 percent to 106.3 billion yuan, according to the Ministry of Finance. 

“Income and wealth reallocation favoring rural households should definitely help boost consumption, as the lower-income households normally have higher propensity to consume,” said Ren Xianfang, a Beijing-based analyst with researcher IHS Inc. “This should help rebalancing.”

Registration System

The situation highlights the urgency of measures such as overhauling a household-registration system that keeps 642 million rural dwellers from permanently joining the urban workforce, limiting their ability to contribute to the economy. 

The State Council, or cabinet, said in February 2012 it will implement a policy of helping people register as urban residents in small and medium-sized cities and small townships and ensure equal benefits for countryside residents who have an urban registration. At the same time, the government will continue to “reasonably control” the population of bigger cities including Beijing and Shanghai.

China had about 230 million people by the end of 2011 who lived in cities without permanent residence, Chen Xiwen, China’s top rural-policy adviser, said Nov. 29. The Chinese government has a huge challenge in providing education, health care and jobs for these people, Chen said.

Major Tasks

Strengthening consumption’s role in boosting economic growth is one of the major tasks this year, the government said after the annual central economic work conference in December. Stephen Roach, former non-executive chairman for Morgan Stanley in Asia, said in a Project Syndicate opinion article this week that “without rebalancing and reforms, the days of the automatic Chinese soft landing may be over.” 

A resurgence in optimism for China’s economy has given stocks a boost. The Shanghai Composite Index (SHCOMP), the nation’s benchmark gauge, advanced 20 percent through yesterday since its 2012 low on Dec. 3, a threshold used by some investors to signal a bull market. The index fell 0.1 percent as of 1:08 p.m. local time today. 

While economic growth for the full year was the weakest since 1999, expansion rebounded in the fourth quarter to a 7.9 percent year-on-year pace following a seven-quarter slowdown.
 Gree Electric Appliances Inc. (000651), China’s biggest air- conditioner maker, may benefit from growing sales in the countryside, China International Capital Corp. analysts said in a Jan. 21 note. Gree said Jan. 18 that its 2012 profit may have increased 41 percent.

Bigger Cake

Even with the gains in China, per capita rural net income last year was 7,917 yuan, less than a third of per capita urban disposable income of 24,565 yuan, statistics bureau data showed. Ma Jiantang, head of the agency, said Jan. 18 that China must on one hand, “make the cake bigger, and on the other hand, we must do a better job in sharing the cake.” 

Under President Hu Jintao and Premier Wen Jiabao, both set to retire in March, the government since 2003 has abolished agriculture taxes, expanded health-care coverage and increased minimum purchase prices of grains under efforts to boost rural development.
 The difference between rural and urban income growth was smaller in 2012 than the 3 percentage-point gap in 2011. 
 “As the narrowing of the gap in the pace of gains shows, more needs to be done to reduce income disparities, and I expect the new government to move in this direction,” said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong."


Tuesday, 4 February 2014

Scared of shadows? You should be - China's shadow banks

China economic watch article. There are warning signs written all over the Chinese economy at the moment.

Meet China’s Biggest Shadow Bank [The Peterson Institute for International Economics]

 Shadow banks in China come in a variety of forms and guises. The term is applied to everything from trust companies and wealth management products to pawnshops and underground lenders. What surprising is that China’s biggest shadow bank is actually a creation of the central government and receives billions in financing directly from the banks.  Even more interesting, this shadow bank recently pulled off a successful international IPO where it raised billions of dollars.

First, let’s deal with the terminology. The “shadow” in shadow banking doesn’t imply nefarious doings, although it frequently involves a bit of regulatory arbitrage. At the most basic level, shadow banking is borrowing funds and extending credit outside of normal banking structures.

So what is this mysterious shadow bank that has such tight government connections? It’s none other than Cinda Asset Management Company, a creation of the Ministry of Finance (MoF) and the beneficiary of a recent 2.5 billion U.S. dollar IPO in Hong Kong.  In terms of total assets, Cinda is more than 15 times as large as any of the country’s trust companies.

The normal business of a distressed asset management company (AMC) is not shadow banking. It involves purchasing troubled loans at a discount and trying to collect a higher amount from the debtors. Cinda was one of the four AMC’s created by the central government to bailout the banking sector in the 1990s. The initial round of bad debt purchasing was policy-directed, starting in the late 1990s and lasting through the mid-2000s. In the second half of the 2000s, the big four AMCs began to purchase NPLs from banks on commercial terms and in the process tried to transform themselves into market-oriented businesses.

Over the last three and a half years, Cinda’s business has diverged from this model. In addition to purchasing bad debts from banks and other financial institutions, it has accumulated a vast stock of distressed debt assets directly from non-financial corporations.

Sunday, 2 February 2014

China currency crisis to cause "global meltdown"

The Telegraph do a good global crisis story. My bold.

It appears that Chinese firms have been borrowing a lot of foreign money.  The question is why given they have enough money of their own (this is another story).  The risk is that US rate rises will lead to serious problems for Chinese borrowers and then "meltdown".

China should be able to print enough money to solve most problems so fears are likely to be overdone but it is interesting to highlight the extent to which China is now borrowing from abroad.

Currency crisis at Chinese banks 'could trigger global meltdown’ [Telegraph]

The growing problems in the Chinese banking system could spill over into a wider financial crisis, one of the most respected analysts of China’s lenders has warned.

Charlene Chu, a former senior analyst at Fitch in Beijing and now the head of Asian research at Autonomous Research, said the rapid expansion of foreign-currency borrowing meant a crisis in China’s financial system was becoming a bigger risk for international banks. 
“One of the reasons why the situation in China has been so stable up to this point is that, unlike many emerging markets, there is very, very little reliance on foreign funding. As that changes, it obviously increases their vulnerability to swings in foreign investor appetite,” said Ms Chu in an interview with The Telegraph. 
Ms Chu has been warning since 2009 about the growth of a shadow banking system in China that has helped fuel the credit expansion seen in the country in the wake of the Western financial crisis.
 However, fears are growing that the build-up of foreign borrowing by the Chinese, particularly in US dollars, is creating an even greater build-up of risk than that seen before the crisis of 2008.
 Figures published by the Bank for International Settlements (BIS) in October showed foreign currency loans booked in China, as well as cross-border borrowing by Chinese companies, had reached $880bn (£535bn) as of March 2013, from $270bn in 2009.
Analysts say this figure is now likely to exceed $1 trillion and is continuing to grow, raising the prospect of the potentially dangerous vulnerability of the Chinese financial system to a rising dollar.

“It is very hard to work out the exposures of individual banks to the Chinese financial system, but it seems to us there are some very large numbers on some of the bank’s balance sheets,” said the analyst.

“Without a doubt, that has been on the rise [foreign currency borrowing] and was really starting to grow fast in the latter half of last year and it’s only going to continue. For the time being, it is only a fraction compared to the massive size of the financial sector, but still we’re talking about a growing amount of funding coming from offshore sources,” she said.

“You look at the exposure numbers from the BIS and the Hong Kong banks . .. you’re going to encounter a few [foreign] institutions that are going to have a sizeable exposure to China.”

George Magnus, senior independent economist at UBS, said the Chinese banking system resembled that of Japan during the 1980s in the years leading up to the country’s financial crash.

“If the dollar were to appreciate it could cause problems for those banks that have borrowed in dollars. Anywhere you have a banking system that uses a non-domestic currency, there is a possibility of a mismatch that could cause issues when the value of your liabilities runs away from you,” said Mr Magnus.
 The BIS figures show foreign-currency loans are already at a decade high, though the body said there was no reason this should mean there was a “currency mismatch”.