Posts Tagged ‘China’
Chinese President Xi Jinping launched the new “Asia Infrastructure Investment Bank” (AIIB) in Beijing on the 16th Jan 2016.
The AIIB represents a shift in global lending from global banks like the International Monetary Fund (IMF) or the World Bank, as is presents new options for country-states to access funds.
AIIB is a $100 billion funded bank with a list of founding stakeholders from 31 countries. See AIIB.
Leading Investors Major shareholders include the BRIC countries. China, India and Russia form lead investors.
Un-aligned Investors Traditionally non-BRIC aligned investors include Britain, Germany, France, Australia and South Korea.
Abstaining Investors Countries that have abstained from investing in AIIB include the United States, Japan and Taiwan.
The implication of the new AIIB bank is a changing global shift of investment via entities in the USA. Coupled with other initiatives to de-couple the global financial system from the USA, this shift presents a financial shift that could spell danger for the US banking system.
The irony of the $100 billion dollar investment is that it is priced in US dollars.
This is the second time the chinese stock market has halted trading.
Chinese stocks plunged Monday, spurring a trading halt for the rest of the session, and other APAC stock markets after feeble manufacturing surveys revived concerns over the mainland’s economic slowdown.
The Shanghai Composite tumbled 6.85 percent to 3296.66 and the Shenzhen Composite plunged 8.1 percent.
The CSI 300 briefly plummeted 7.02 percent; when that index rises or falls 7 percent, a trading halt in China’s markets is triggered for the rest of the session.
Hong Kong’s Hang Seng was also down 2.48 percent at 21,370.62. Stocks in Australia, Japan, South Korea and India also fell. Energy plays, however, saw some gains after oil prices bounced during Asian trading hours.
7% down in Shanghai and 2% down in Hong Kong. Those are pretty massive adjustments. If China does indeed have sizable investment in Iran’s oil industry, the severing of Saudi diplomatic ties should be good news rather than bad.
At a time of slowing economic growth and massive corporate debts, a deflationary spiral would be China’s worst nightmare. In addition, the risk is mounting. The producer price index (PPI) has been in negative territory for 39 consecutive months, since February 2012.
The growth of China’s consumer price index (CPI), though still positive, has also been falling steadily, from 6.5 percent in July 2011 to 1.2 percent in May 2015. If experience is any indication, China’s CPI will turn negative very soon.
In China’s last protracted bout of deflation, from 1998 to 2002, persistent declines in prices were the result of monetary and fiscal tightening that began in 1993, compounded by the lack of exit mechanisms for failed enterprises. After peaking at 24 percent in 1994, inflation began to decline in 1995. However, GDP growth soon began deteriorating rapidly. In an effort to revive growth in a difficult global environment and buffer exports against the impact of the Asian financial crisis, the Chinese government loosened monetary and fiscal policy beginning in November 1997.
However, it was too little, too late. By 1998, when CPI inflation began to fall, producer prices had already been declining for eight months, and remained negative for a total of 51 months, with CPI growth beginning to recover after 39 months.
An obvious lesson is that the government should have switched to loosening earlier, and more forcefully. However, this experience also underscores the impotence of monetary policy in a deflationary environment, owing to the unwillingness of banks to lend and of enterprises to borrow. The fact that loss-making enterprises were allowed to churn out cheap products, eroding the profitability of high-quality enterprises (and thus their incentive to invest), prolonged the deflation.
Nonetheless, China eventually managed to rid itself of deflation and return to rapid economic growth. For starters, a decline in investment during the deflationary period — together with firm closures, mergers, and acquisitions — reduced overcapacity, clearing the way for investment to rebound strongly in 2002. At the same time, expansionary fiscal policy increased effective demand, while the government, backed by its strong public-finance position, was able to tackle nonperforming loans effectively, thereby increasing commercial banks’ willingness to lend, and firms’ ability to borrow.
Moreover, housing market reforms and the development of a mortgage-loan market in the late 1990s fuelled rapid growth in real estate investment, which reached an annual rate of over 20 percent in 2000. As a result, real estate development became the most important contributor to economic growth, even as exports boomed following China’s accession to the WTO.
The problem with the emergence of these new growth engines is that it enabled China’s leaders to delay important structural reforms. As a result, China now faces many of the same challenges it faced in the late 1990s — beginning with overcapacity.
After 15 years of rapid growth in real estate development, this is not surprising. But that does not make it any less risky. In fact, allowing overcapacity to continue putting downward pressure on prices, China’s economic growth will not stabilise at a rate consistent with its potential. Instead, the economy will end up in a vicious spiral of debt deflation.
At this point, the authorities could eliminate overcapacity through firm closures, mergers and acquisitions, and other structural measures. They could also seek to eliminate excess capacity by using expansionary monetary and fiscal policies to stimulate effective demand. In theory, the long-term solution would be to pursue structural adjustments that would improve the allocation of resources. However, that would be painful and slow. Striking a balance between the short- and long-term approaches will prove to be a major challenge for China’s leadership.
Complicating this effort is the fact that, unlike in 1997–2002, China cannot absorb overcapacity by stimulating real estate investment and exports. And no one knows whether the much-discussed ‘innovative industries’ can have the impact that real estate investment and exports did — not least because there is so much excess capacity in the traditional industries.
China must do whatever it takes to avoid falling into the debt-deflation trap. Fortunately, China still has room to invest in growth-enhancing infrastructure and innovative industries. Policies to expand social security and improve the provision of public goods could support these efforts, boosting domestic consumption by allowing households to reduce their precautionary savings.
Nevertheless, at the same time China’s leadership must continue to pursue its agenda of structural reform and adjustment, even if it may have an adverse impact on growth in the short run. China simply cannot afford to continue to kick the reform can down the road.
Mark Twain once purportedly said, ‘History doesn’t repeat itself, but it does rhyme’. China should brace itself for a period of deflation, which may be even more protracted than the last one. However, with the right approach — and a bit of good luck — China can make sure that, this time, it recovers more sustainably than in the past.
Don’t bet more than you can afford. Don’t borrow to play. Don’t chase your losses. Quit while you’re ahead.
If only Chinese stock market investors had followed these basic gambling rules. Seduced by dreams of getting rich quick, millions of inexperienced Chinese investors have lately been treating China’s stock market like a casino. With the help of social media, the optimistic sentiment spread quickly, pulling more in. The index for the main board of the Shanghai Stock Exchange almost doubled in the past year. The index of small cap stocks has tripled or better. It became a classic asset bubble. Then it all came crashing down.
The role of the Chinese government
The government-engineered bull market was meant to help resolve China’s real estate bubble and over-leveraged local governments, incentivise innovation and facilitate reform of state-owned enterprises. Instead, it was hijacked by highly-leveraged greedy individual investors. As the government became concerned and began to deleverage margin trading, it set off a stampede, with everyone rushing to the blocked exit doors because of the 10% price limit trading rule. Over the past three weeks the market dropped by 30%. Even after this correction, many small cap stocks remained over-valued.
In an effort to calm the market, the government has taken measures to buoy the prices of blue chip stocks, temporarily halted IPOs and lifted insider trading rules to make it easier for company directors to buy back their own shares. It has also imposed a one year stock sale ban on anyone owning 5% or more of shares in a company. When the government began focusing support on blue chips, at least 1,439 Chinese listed companies — 50% of overall listings — applied for a temporary trading halt in order to protect themselves. This also contributed to the panic.
Even Chinese companies listed in other markets were affected by the crisis. The hashtag #ChinaMeltdown began to spread on international social media. US investors began selling off stocks in Chinese companies listed there even though they are not affected by the liquidity crisis in the Chinese stock market.
Just before the Chinese market plunged, there had been a surge in US-listed Chinese companies planning to go private hoping to chase the higher valuations in the Chinese market with an eventual Chinese IPO. Many will have to delay these plans.
China’s economy at ‘new normal’
The Chinese market crisis is a reflection of the over-valuation and over-leveraging of small-cap stocks, and is not comparable to what happened in the US in 1929, which reflected a fundamental crisis in the US economy. The Chinese economy has already moved to a “new normal” stage in anticipation of a slower rate of growth as it transitions from manufacturing to consumption. China’s GDP growth rate is still 7%.
Investors in emerging markets tend to overestimate growth which leads to overvaluation. In China 85% of investors are individuals, unlike in developed markets where they are institutions. The turnover rate of these Chinese investors is more than 900%, the highest in the world. The account balance of 84.1% of these investors is less than 100,000 RMB, and 10.39% have a balance between 100,000 and 500,000 RMB. Only 6% have a college degree.
Chinese investors also understand that the priority of the government is social stability; the government will step in when anything threatens that objective. This recent bull market can also be seen as a typical example of investors hijacking this sentiment.
The government knows it must rebuild investor confidence or the pessimistic sentiment could spill over into the banking sector. Some insiders believe that a significant portion of the capital that was used for margin trading actually came from the asset management products that were issued by the banks. If the banking sector is impacted, then the negative sentiment could spill over to consumers’ willingness to spend, which would then impact the overall economy. There have also been reports that some entrepreneurs have speculated in the stock market using their company’s operating capital.
A lesson in market risk
Any stock market is built on confidence and the expected value of future cash flow. The objective of the government should be to mitigate the systemic risk rather than managing the stock index. The government is over-protecting retail investors. The function of the capital market is to charge different prices or risk premium on firms relative to their risk levels. Everyone should understand the rule of the market: higher returns mean higher risk.
At the end of last week, as the market realised how determined the government was to handle the problem, some experienced investors began returning in a hunt for bargain stocks. I expect the market will gradually bounce back, though with some short-term volatility because small-cap stocks are still mostly overvalued and some investors are still highly leveraged.
The bull market spirit is still here, but hopefully both the government and retail investors will learn a valuable lesson from this crisis. The market is designed for long-term financing, not short-term speculation. Investors should respect the power of the market.
China’s stock market plunge is keeping economists awake at night.
Fifty percent of economists surveyed by CNNMoney said that stock market turmoil is now a major risk to China’s economy. This is the first time that markets have been singled out as a concern, marking a shift from earlier surveys, which showed economists were most worried about the property sector.
China stocks have been on a wild roller-coaster in recent weeks, wiping away more than $3 trillion in market value. The benchmark Shanghai Composite, for example, has dropped more than 30% from its June 12 peak. Things are so bad that roughly half of China’s 2,800 listed companies have suspended trading.
Pair extreme market volatility with sluggish economic growth — China is now facing its slowest expansion since the financial crisis — and it’s clear why experts are worried.
“We had always considered the risk of a financial crisis in China as high,” wrote David Cui, an equity strategist at Bank of America Merrill Lynch. “What has happened in the stock market has likely increased the risks considerably.”
The Chinese government has pulled out all the stops to try to stem the stock market decline — the central bank has cut interest rates to a record low, brokerages have committed to buy billions worth of stocks, and regulators have announced a de facto suspension of new IPOs.
But still, markets remain extremely volatile. All of the economists surveyed expect the central government to continue taking action to fight the slump.
In the long run, experts say they’re most concerned about the retail investors — think teenagers, electricians and cab drivers — who make up the bulk of China’s stock markets. They’re expected to take the biggest hit as markets continue their tumble.
The worry is that some households — especially in the middle class — could see their savings wiped out. As a result, consumption will likely suffer down the road, experts said. That’s bad news for China, which after decades of breakneck expansion led by exports, is now trying to shift to consumer-driven growth.
Related: Over half of China’s stocks have stopped trading
A steep market decline also limits an important financing lifeline for the corporate sector, and could dampen investment growth, according to Nomura.
Still, here’s some important context: Despite the recent stock rout, the benchmark Shanghai Composite is up roughly 9% so far this year, while the smaller Shenzhen Composite has gained 33%.
Plus, while stock investment was on the rise, only about 12% of household wealth is in the markets, according to HSBC. Foreign investors have little exposure to Chinese stocks, owning just 1.5% of total shares, according to Capital Economics.
“Impacts on the global economy will be more modest, because direct financial linkages are weaker,” said Brian Jackson, an economist with IHS.
“Wasteful investment, over indebtedness, and a weakly regulated shadow-banking system,” had to be addressed for China’s broader reform agenda to succeed, it said. The organization, however, said in an update to the report posted on its website on Friday that the section had been removed. “Section 3 on the financial sector that was previously included in this report was removed because it had not gone through the World Bank’s usual internal review and clearance procedures,” it said. World Bank officials in Beijing could not immediately be reached for comment on Sunday. The section had also noted that the Chinese state exerts strong control over a majority of commercial bank assets, “making it an outlier by international standards”. In some cases, it added, authorities were simultaneously owners, regulators and customers of banks. “Financial reform will only prove effective if it removes the distorted incentives and poor governance structures that have affected how financial resources are mobilized and allocated,” it said. “As now seen, a fundamentally reconfigured role of the state in the financial system is essential to change these incentives and structures.” China’s leaders are trying to engineer a transformation of the country’s growth model whereby consumer demand becomes the main driver rather than investment.