Thursday, May 6, 2010

Chinese economy, banks and Malaysia KL Trip

Back from a weekend trip to Malaysia in KL. 
Much improvement has to be made to attract investors to the country in terms of infrastructure, range of services, level of technology and stability of investing in the country. Even the staff at A&W fast food chain attempted to fleece me by adding extra cheese and ice cream that I did not ask for. If you were wondering, that increases my set meal cost from RM 8.50 to RM 12.30, over 44% rise in price. 

As I was telling many of my friends to be patient, China has yet again raised reserve ratios by 50bps (3rd time this year) due May 2010. Major banks and Asia indices fell over 1% on trade today. This was on top of Australia raising a super mining tax of 40% (Ouch!), that will not only increase cost or miners (Think Rio Tinto or BHP) but also makes buying more expensive (Think China).

Is this a right time to go in? I do not think so. Besides Euro nation problems, the Dubai is still being resolved slowly and if you noticed, many of Chinese firms listed in HK have started to raise money as their coffers run dry. This is also including the China sovereign wealth, Central Huijing Investment Co raising money to clear bad debts hidden over the years. Read it HERE

Some firms raising funds
  1. Property mostly debt after China restricts shares issuance for real estate firms, large supply leading to indigestion. Total loans listed here equals USD 3.15 bn in 2010 ytd.
    • 1638 HK - China Kaisa 3 year 13.25% USD 300 mil
    • 1387 HK - Renhe Commercial USD 500 mil 
    • YLL SGX - Yanlord Land 7 year 9.5% USD 300 mil 
    • 0845 HK - Glorius property postponed bond deal 
    • 2008 HK - Country Garden 7 year 11.73% USD 550 mil
    • 3383 HK - Agile property 7year 8.875% USD 650 mil
    • 3333 HK - Evergrande 5 years 13% USD 750 mil
    • 0127 HK - Chinese Estates 5 year 13% USD 750 mil 
    • 1638 HK - Henderson land 5 year 13.5% USD 350 mil bond 
  2. Financials (Basic overview HERE)
    • Refer to the table attached below 
    • Agricultural bank (4th largest, financially unstable) 
      • IPO USD 30 bn this week after a 19 bn cleanup
      • NPLs were said to be over 25% as the bank used to be a rural cooperative to provide loans to poor farmers and rural civilians 
      • SWFs, tycoons and funds rush in to get a piece of the pie. I think the supply of money has gotten out of hand and they should look clearly to the quality of the bank first rather than buying just because it is China's 4th largest bank and offers growth
    • Merchants Bank and Minsheng Bank (600016.SS) (1988.HK), China's 6th and 7th largest are working with 3rd parties to launch property funds
    • Foreigners launching Yuan denominated funds (Prax Capital) to invest in China real estate. HERE 

On Central Huijing
Now Huijing gets some RMB 70 billion in dividends each year from China's top 3 lending banks, why does it need to raise RMB 80 billion in bonds baffles me. It is said the funds will be injected into China EXIM and Sinosure to provide cushion for loan losses. The way China hides bad loans in AMCs (Asset Mgmt Cos) reminds me of US during the savings and loans crisis in the 1980-90s.
  • RMB 9.59 tr new loans (2009), about double 2008
  • Total new loans (08+09) approx RMB 14 tr or almost half of 2009 GDP! 
  • Targets RMB 7.5 tr in new loans in 2010..... 2.6 tr already issued in 1Q (34.6%)
  • NPL in 07-08 average 3-4%, that would mean RMB 280-420 bn of bad loans in coming years 

  1. Dynamics are not favoring China much to their fears, including higher commodity prices and inflation
  2. China's GDP driven economy will show weakness in their figures, it is impossible to clamp down fixed assets investment and money supply and yet show a growth in GDP which is hugely made of fixed asset investments and consumption
  3. There is too much fund raising by Chinese banks and too little demand, prices will continue to tumble  
  4. Many are expecting that rates in China will have to go up, however with reserve ratio restrictions, it may not be a needed method to control money supply in China. Currently its 17% (large banks) and 14% for others
  5. China hiked the ratio 9 times in 2007 and currently the latest hike is only the 3rd time
  6. Looking at various indicators for real estate prices and economic data such as an over 2.5% inflation rate , it is unlikely that China will stop the sleuth of restrictions and controls.

So, be patient and do nothing -that will be the most meaningful activity in the coming weeks.



Some chinese stocks are great values.

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