China Economy Forum

[LeveragedBuyout]

How do you grow without getting financing?

Productivity growth. Leverage helps, but it is not an unlimited source of growth, unlike productivity.

 

[Hypersonicmissiles]

Productivity growth. Leverage helps, but it is not an unlimited source of growth, unlike productivity.

But companies need financing for their business operation. Especially for start ups.

 

[LeveragedBuyout]

But companies need financing for their business operation. Especially for start ups.

Yes, there are two types of financing, equity and debt. Equity (which is more expensive) is the most common form of financing for start-ups, and debt becomes the primary source of funds after some history and cash flow are established. However, banks prefer to lend when they can back the loan with collateral that can be called if the loan becomes non-performing, and without collateral, banks prefer the business to which they are lending to be as large as possible (in terms of total enterprise value, revenue, cash flow, and assets). That's why, in China, banks have favored real estate financing and financing to the state-owned enterprises, which are both the largest businesses in China, and also have implicit guarantees that the government will not let them fail.

China has been tightening regulation on loans for real estate purposes in recent years to try and cool down the housing market, and prevent over-investment. Small business financing in China, as far as I am aware, has not been easy, since the banks prefer to lend to SOEs, and SOEs have vast capital requirements. Since China's equity and debt markets are still primitive, larger enterprises are unable to move their capital funding sources into the capital markets, and remain overly dependent on bank financing. That "crowds out" the smaller businesses, which tend to be self-financed (i.e. either financed from cash flow, or financed from equity injections by the owners).

 

[Edison Chen]

But companies need financing for their business operation. Especially for start ups.

Yes, start up companies always have negative investment and positive financing cash flows. But when it turn to mature stage, the financing may slow down, or come to a reasonable level, if that the operating is fine. If a company's debt ratio is high, it's difficult to attract additional financing. China can't raise too much financing right now, I guess government will let private companies in.

 

[LeveragedBuyout]

JP Morgan seems to have picked up on the same issue I did; hopefully the developed world will re-accelerate in the second half like they predict.

Economists React: China’s Manufacturing Sector Looking Good - China Real Time Report - WSJ

• 

• July 24, 2014, 2:08 PM HKT

Economists React: China’s Manufacturing Sector Looking Good

Two cleaners rest on a bench at the Bund in Shanghai on July 23, 2014.
Agence France-Presse/Getty Images
It has been a rocky year for China’s economy so far, with a pronounced slowdown early in the year that raised the prospect that the long-feared “hard landing” might finally have arrived. The government lost no time in responding, though, with a round of infrastructure spending and monetary easing that seems to have succeeded in perking up the economy – at least to judge from theHSBC “flash” manufacturing purchasing managers’ index, a survey of businesses, which hit an 18-month high of 52.0 in July. A rebound in export demand hasn’t hurt, either.

Economists weigh in (edited slightly for style):

Today’s PMI reading suggests that conditions in the manufacturing sector have continued to improve going into the third quarter on the back of targeted support measures and warming external demand. That said, subdued activity in the property sector is likely to remain a drag on growth this year…Concerns about growing credit risks should prevent policymakers from a launching broad stimulus that could lead to a significant rebound in credit growth. – Julian Evans-Pritchard, Capital Economics

The flash release of the July PMI shows China’s export sector is acting as an underappreciated tailwind to growth in 2014. While China’s economy is less dependent on exports in 2014 than it was in 2008, its performance is still closely tied to the global business cycle. With 2014 shaping up to be a good year for the U.S. and British labor markets, and an OK one for Germany’s, it was only a matter of time before stronger demand in China’s advanced economy export markets passed through to stronger manufacturing output in China. – Bill Adams, PNC Financial Services

HSBC’s PMI reading came in higher than expected, mainly due to targeted easing for small and medium-sized enterprises and supportive policies kicked off since early in the second quarter. It is likely orders from the government’s fine-tuning measures have already been passed to smaller sized enterprises from large state-owned firms… But we are still cautious on the pace of recovery, as commodity prices and electricity consumption growth were still weak, which suggests the demand recovery is still fragile. – Fan Zhang, CIMB

The breakdown of the flash PMI points to a good growth momentum in the coming months. Both new orders and new export orders are above 50 and are rising and quantity of purchases increased, while stocks of finished goods decreased. So we can say that there is some destocking at the moment. Note that the PMI also reflects sentiment. Due perhaps to the escalation of supportive policies from Beijing, sentiment in the economy and financial markets have been noticeably improved. – Ting Lu, Bank of America Merrill Lynch

The significant expansion in fiscal spending and credit growth in May and June, as well as the recent accelerated pace of relaxation of property restrictions by local governments, appear to have boosted near-term sentiments in the economy. Looking into the second half of the year…our global team expects a solid pickup in the advanced economies’ growth, which will provide support for China’s export sector in the coming months. – Haibin Zhu, J.P. Morgan

 

[dlclong]

That's even better news. I see Yang Huiyan is from Guangdong while Zong Fuli is from Hangzhou. It's even better to see that development is all-encompassing and neither age nor location is a big barrier (If we were to take factors like age and location).

Yang Huiyan and Zong Fuli all succeed their father's company，From child began to accept elite education

 

[mughal arslan shah mirza]

Yang Huiyan and Zong Fuli all succeed their father's company，From child began to accept elite education

Yeah. I read about that. It seems like they didn't leave any opportunity go to waste
Though I wouldn't be surprised that there are MANY stories in China where the people 'made it ' despite their humble backgrounds.

 

[Edison Chen]

The economic pulse on the mainland is clearly quickening, judging by the three metrics Premier Li Keqiang uses as his key reference points for the health and intensity of the economy – industrial production, electricity consumption and railway freight traffic. Economists at Nomura highlight the strong correlation that electricity consumption and rail freight have with industrial production at 0.64 and 0.66, respectively. The implication from industrial production’s higher-thanconsensus bounce last month is that the bottom of the cycle has definitively passed and that growth momentum is building. For Nomura, that should translate into GDP growth of 7.5 per cent in the current quarter and 7.6 per cent next.

Chart of the day: Li Keqiang Index turns higher | South China Morning Post

 

[Edison Chen]

Australia close to currency clearing deal with China -RBA's Lowe| Reuters

Philip Lowe: Australia's RMB policies and future direction

I would like to thank Michelle Wright for assistance in the preparation of these remarks.

I would like to thank David Olsson and the RMB Working Group for organising today's Roundtable. It is very encouraging to see the ongoing interest in the topic of RMB internationalisation from both government and business leaders. The Reserve Bank is a strong supporter of the work that is going on and I am very pleased to be able to participate.

For anyone interested in international trade or global finance, understanding the issues we are talking about this morning should be very high on their agenda. As I have said before, the internationalisation of the Renminbi (RMB) and the accompanying process of capital account liberalisation in China could well turn out to be one of the seismic events in global capital markets over the coming years. 1Ultimately, this process could see Chinese citizens be able to hold internationally diversified portfolios, just as the citizens of many other countries are already able to do. It could also see citizens from other countries able to buy and sell Chinese financial and other assets with far fewer restrictions than are currently in place. And it could see the Chinese currency become one of the world's most actively traded. If these things do come to pass, then they would reshape the nature of global capital flows and the international financial system, just as China's entry into the global trading system reshaped global trade and production.

As Australians, we have more than a passing interest in all of this. China is our largest trading partner and our financial linkages with China, while still relatively small, are growing. And by virtue of being a small open economy with an already liberalised capital account, our markets will be affected by changes in global capital flows. So understanding what is going on here is important. This is true not just for those involved directly in the financial sector, but for our society more broadly.

I have had the privilege of participating in the first two Australia-Hong Kong RMB Dialogues, the first in Sydney last year and the second in Hong Kong quite recently. From participating in these dialogues my sense is that we are making progress and David Gruen in his remarks has outlined some of the examples. More businesses are genuinely interested in exploring the advantages of having trade invoiced in RMB. The financial infrastructure that supports this trading is gradually being put in place. And some of the stumbling blocks and misperceptions are being eroded.

There is, though, much further to travel on this journey. Currently, less than 1 per cent of Australia's merchandise trade with China is invoiced in RMB. For China, around 12 per cent of total merchandise trade in 2013 was invoiced in RMB, although we estimate the number was around 3 to 5 per cent if trade with Hong Kong is excluded. These figures suggest that there remains significant potential for growth in RMB trade invoicing, not only by Australian firms, but by firms in other countries as well.

Australia's own experience with liberalisation is that the growth of trade makes financial liberalisation easier. As financial markets develop to support trade relationships, those same markets can, in time, support deeper financial relationships. Trade helps deepen financial markets, and deeper financial markets make it easier to liberalise. In the end, though, how long this whole journey takes in China is largely dependent upon the pace of reform by the Chinese authorities.

It is, of course, also dependent upon the speed with which the financial sector is able to respond to any new opportunities. In part, the development of the appropriate markets depends on commercial decisions made by financial institutions. The Reserve Bank is seeking to play a positive role in this area, partly through helping create a constructive environment in which these decisions can be made. Given this, I would like to spend a few minutes outlining the various elements of our work in this area.

First, we have sought simply to better understand how the RMB markets operate. In particular we have sought to understand: the nature of the existing arrangements and products; any impediments to the development of an RMB market in Australia; and how the RMB market sits within the broader financial system. Our representative office in Beijing has been helpful here as have the frequent trips by RBA staff to China. We have also worked closely with the financial sector in Australia, including with the RMB Working Group and have been involved in two separate surveys of corporates' attitudes toward the use of RMB. 2 These efforts have helped us develop a deeper understanding of the issues, as well as understanding in the broader financial community. The joint work has also assisted in providing a forum to support and to coordinate industry-led discussions and initiatives.

Second, the RBA has invested some of its foreign currency reserves in RMB. First and foremost, this portfolio shift reflects the growing importance of China in the global economy and the broadening financial relationship between Australia and China. But it has also allowed us to deepen our own understanding of developments in Chinese financial markets and the RMB. Currently, around 3 per cent of our net foreign reserves are invested in RMB.

Third, is the bilateral local currency swap agreement between the RBA and the People's Bank of China (PBC). This swap, which was signed in 2012, allows the two central banks to exchange their local currencies for mutually agreed purposes. The key benefit of the swap agreement is to provide confidence to the Australian market that RMB liquidity will be available through a "backstop" channel in the event of some disruption to the market for RMB. The swap is not meant to provide a "cheap" source of RMB funding to the Australian market in normal times. Its existence, though, should be helpful for market development, as it provides market participants with greater confidence that RMB will be available in Australia during times of dislocation. Since the swap agreement was signed there has not been a need to activate it, although it could be used should it be required.

Fourth, the RBA is currently working with the PBC on future RMB clearing and settlement arrangements, in particular the establishment of an "official RMB clearing bank" in Australia. In keeping with the process that has recently been followed in a number of other jurisdictions - including London, Frankfurt, Paris, Luxembourg and Seoul - this would involve the signing of a Memorandum of Understanding between the RBA and the PBC, and the designation of an official clearing bank in Australia. It is important to note that the RBA would not expect to play a significant role in choosing which particular bank would be designated - this is, quite rightly, largely a matter for the Chinese authorities. In terms of timing, we are hopeful that an official RMB clearing bank could be designated over the coming months.

The concept of an official RMB clearing bank is one that is sometimes open to some misunderstanding, so I would like to spend a few moments setting out how these institutions operate. In essence, their key function is to facilitate cross-border payments and receipts of RMB for trade-related purposes on behalf of other financial institutions in the local market.

Of course, Australian importers and exporters are already able to make and receive cross-border RMB payments through a number of existing channels. For example, Australian-based banks can facilitate cross-border RMB trade transactions through correspondent banking relationships with banks in mainland China, or through RMB clearing "services" that are offered by Australian-based Chinese banks via their mainland Chinese Head Offices. Similarly, these transactions can also be effected through other offshore RMB centres, such as Hong Kong.

In fact, the differences between an official RMB clearing bank and the channels that are already available are quite subtle, though still important. In essence, official RMB clearing banks are afforded more direct access to China's onshore RMB and foreign exchange markets than other offshore institutions. More specifically, official clearing banks have direct access to China's interbank RMB payments system and receive a quota to transact in China's onshore foreign exchange market. These changes also entail more direct access to RMB liquidity from the PBC.

While an official RMB clearing bank would not directly increase the range or type of RMB transactions that are permitted to take place between Chinese and Australian entities, it would improve the efficiency of cross-border RMB transactions, for example by potentially reducing payment delays and/or reducing transaction costs. And, over time, the presence of an official clearing bank could encourage local financial institutions to offer a broader range of RMB products to the local market than is currently available.

Given the way in which the Chinese authorities have chosen to liberalise trading in the RMB, these clearing banks are playing an important practical and symbolic role. Indeed, the establishment of a clearing bank in Australia would help ensure that we are well positioned to participate in the next stages in the process of RMB internationalisation. Ultimately, though, if China does follow the general path travelled by a number of other countries, these clearing banks are likely to become less significant. In other currencies, alternative arrangements exist for the clearing of cross-border flows, with financial institutions managing the liquidity and risk issues without access to an official clearing bank. If this eventually turns out to be the case for the Chinese currency as well, then there is likely to be a reduced need for these official clearing banks. In the meantime, they are an important stepping stone on the path to a more internationally integrated Chinese currency.

Finally, a fifth step that we hope to take soon is to obtain a quota for Australian-based financial institutions to invest in mainland China under the Renminbi Qualified Foreign Institutional Investors (or RQFII) scheme. Following the granting of a RQFII quota to a specific jurisdiction, financial institutions operating within that jurisdiction can apply to the Chinese authorities to obtain an individual investment quota. Approved institutions can then invest their own quota in selected mainland Chinese bonds and equities using RMB obtained in the offshore market. In this way, the RQFII scheme can be thought of as representing both a partial relaxation of controls on inward portfolio investment to mainland China and as a means of developing the offshore RMB market. 3 An RQFII quota would therefore represent an important next step in facilitating cross-border RMB-denominated investment transactions between our two economies. And, as Australia has a relatively large and sophisticated private funds management sector, there is significant potential for growth in this area.

So, in summary, a lot has been happening, both in the public sector and the private sector. I regard it as very much in our collective interest to continue this work. The changes that could occur in the Chinese financial system over the coming years have the potential to be felt around the world. To benefit from these changes, we need to understand them and be prepared for them.

Much of the work that we have been doing has been aimed at identifying and reducing potential impediments to the development of RMB business here in Australia. But once those impediments have been removed - and we are moving closer to that point - the development of the market is very much up to the private sector. Ultimately, in order for the RMB market in Australia to flourish, Australian corporates must be able to identify a clear business case for paying, receiving, lending, borrowing and investing in RMB. Over time, I think this will happen, but there is more work to be done.

Thank you.

 

[Edison Chen]

China Railway Construction Corp taps demand for hybrid debt securities in US$500m issue

State-controlled China Railway Construction Corp is tapping into new-found investor enthusiasm for hybrid debt securities that will allow it to raise new debt capital, yet have it treated as equity for accounting purposes.

Issuing a perpetual bond that it can repay in year five actually decreases the company's debt gearing and leaves earnings per share for equity investors undiluted.

Bankers call this the magic of hybrids. For investors, the question is whether the accounting tricks in the structure make it worth taking a bet on.

The deal - lead-managed by investment banks Citi, DBS, BNP Paribas, HSBC and UBS - is expected to raise US$500 million and pay a fixed coupon of 4.25 per cent.

Rating agencies often view perpetual bonds as equity. That was not the case for the CRCC offer, which was treated entirely as debt by the agencies.

The bonds, rated A3 by Moody's Investors Service, will see the coupon rise to US treasuries plus 5 per cent if they are not called - or repaid - in year five. That step-up in interest payments is punitive enough to effectively make the deal a five-year bond.

"The step-up means that there is a serious incentive to call it in year five, and the senior ranking means that is gives no protection for existing investors," said Thomas Jacquot, a Sydney-based senior director of Standard & Poor's, explaining why the agency viewed the instrument as debt.

Gordon Ip, a fund manager with Value Partners, said he was buying the deal. He liked the bond's senior ranking, the issuer's state-owned-enterprise status and, most of all, the yield.

The indicated fixed rate of 4.25 per cent is a big pickup over the current yield paid on a 2023 bond from the issuer of 3.63 per cent. Both bonds are senior securities. If one believes the perpetual bond will be called at year five, that deal pays more yield for taking a shorter risk - a clear bargain.

The issuer has the option to defer dividends on the perpetual bond - a negative for investors - but any income that is deferred is cumulative. It must be paid out eventually, with interest, making any deferral unlikely.

Many more Hong Kong and mainland issuers are examining the viability of the perpetual bond structures. Use of perpetuals rose 4½ times last year from 2012, according to Thomson Reuters.

Many issuers view the instrument as cheap equity, or financing that does not dilute ownership control, or earnings per share, and does not violate covenants on existing debt.

Investors like the increased income. Perpetual bonds are popular with private banking clients who are attracted to high headline yield figures.

Jacquot said it was not unusual for private banks to take 40 to 60 per cent of a perpetual bond offer in Asia.

The CRCC offer came with a small discount for high-net-worth investors, a tell-tale sign they were targeted in the distribution.

However, the structure does tend to divide investors. Some are wary of the instruments' generally weaker protection and greater price volatility.

Jamie Grant, the head of Asia fixed income at First State Investments, said that when Asian credit markets were whacked a year ago by comments from the US Federal Reserve about ending quantitative easing, perpetual bonds in Asia were among the worst hit, declining by as much as 20 to 30 per cent.

"Perpetuals are among the most volatile bonds," Grant said.

CRC taps demand for hybrid debt securities in US$500m issue | South China Morning Post

 

[LeveragedBuyout]

China Railway Construction Corp taps demand for hybrid debt securities in US$500m issue

State-controlled China Railway Construction Corp is tapping into new-found investor enthusiasm for hybrid debt securities that will allow it to raise new debt capital, yet have it treated as equity for accounting purposes.

Issuing a perpetual bond that it can repay in year five actually decreases the company's debt gearing and leaves earnings per share for equity investors undiluted.

Bankers call this the magic of hybrids. For investors, the question is whether the accounting tricks in the structure make it worth taking a bet on.

The deal - lead-managed by investment banks Citi, DBS, BNP Paribas, HSBC and UBS - is expected to raise US$500 million and pay a fixed coupon of 4.25 per cent.

Rating agencies often view perpetual bonds as equity. That was not the case for the CRCC offer, which was treated entirely as debt by the agencies.

The bonds, rated A3 by Moody's Investors Service, will see the coupon rise to US treasuries plus 5 per cent if they are not called - or repaid - in year five. That step-up in interest payments is punitive enough to effectively make the deal a five-year bond.

"The step-up means that there is a serious incentive to call it in year five, and the senior ranking means that is gives no protection for existing investors," said Thomas Jacquot, a Sydney-based senior director of Standard & Poor's, explaining why the agency viewed the instrument as debt.

Gordon Ip, a fund manager with Value Partners, said he was buying the deal. He liked the bond's senior ranking, the issuer's state-owned-enterprise status and, most of all, the yield.

The indicated fixed rate of 4.25 per cent is a big pickup over the current yield paid on a 2023 bond from the issuer of 3.63 per cent. Both bonds are senior securities. If one believes the perpetual bond will be called at year five, that deal pays more yield for taking a shorter risk - a clear bargain.

The issuer has the option to defer dividends on the perpetual bond - a negative for investors - but any income that is deferred is cumulative. It must be paid out eventually, with interest, making any deferral unlikely.

Many more Hong Kong and mainland issuers are examining the viability of the perpetual bond structures. Use of perpetuals rose 4½ times last year from 2012, according to Thomson Reuters.

Many issuers view the instrument as cheap equity, or financing that does not dilute ownership control, or earnings per share, and does not violate covenants on existing debt.

Investors like the increased income. Perpetual bonds are popular with private banking clients who are attracted to high headline yield figures.

Jacquot said it was not unusual for private banks to take 40 to 60 per cent of a perpetual bond offer in Asia.

The CRCC offer came with a small discount for high-net-worth investors, a tell-tale sign they were targeted in the distribution.

However, the structure does tend to divide investors. Some are wary of the instruments' generally weaker protection and greater price volatility.

Jamie Grant, the head of Asia fixed income at First State Investments, said that when Asian credit markets were whacked a year ago by comments from the US Federal Reserve about ending quantitative easing, perpetual bonds in Asia were among the worst hit, declining by as much as 20 to 30 per cent.

"Perpetuals are among the most volatile bonds," Grant said.

CRC taps demand for hybrid debt securities in US$500m issue | South China Morning Post

The unstated question: with 2023 bonds paying 3.63%, why did the issuer need to go hybrid and raise capital at 4.25-5.00%? Let's see what the demand looks like, and what the final yield is when the issue is priced.

 

[Edison Chen]

The unstated question: with 2023 bonds paying 3.63%, why did the issuer need to go hybrid and raise capital at 4.25-5.00%? Let's see what the demand looks like, and what the final yield is when the issue is priced.

I don't quite understand this, what is a 2023 bond?

 

[LeveragedBuyout]

I don't quite understand this, what is a 2023 bond?

Bonds issued by the company that mature in 2023 (9 years from now), which yield only 3.63%. The new bonds, which effectively have 5 year maturities, have a 4.25% yield. That would indicate that the market expects a sharp increase in risk over the short-term. In addition, companies don't usually issue hybrid securities unless they need additional benefits to entice investors to purchase. In combination, it's not a great sign of financial strength for the company.

 

[cirr]

China H1 information consumption surges 20%

(Xinhua) Updated: 2014-07-24 17:47

BEIJING - Consumption of information products and services in China surged 20 percent in the first half of 2014 compared to the same period in 2013, according to a Chinese official.

Information consumption topped 1.35 trillion yuan ($218 billion) in the January-June period, up 20 percent from a year earlier, Zhang Feng, chief engineer at the Ministry of Industry and Information Technology, told a press conference on Thursday.

Nearly 200 million smartphones were shipped between the start of January and the end of June, accounting for 87 percent of total mobile phone output, Zhang said. During the period, e-commerce transactions expanded 26.7 percent year on year, while online sales grew by one third.

Zhang also noted that more mobile internet applications are now serving financial, transportation and medical purposes rather than providing entertainment such as music and games.

Mobile data traffic rose 52.1 percent year on year January-June while revenue generated on that rose 46.4 percent, he said.

Regarding the booming 4G business in China, Zhang said China Telecom and China Unicom are experimenting with mixed-mode networks in 16 Chinese cities and more commercial 4G licenses can be expected.

China's 4G users topped 13.97 million by the end of June, seven months after the issuance of 4G licenses to China Mobile, China Telecom and China Unicom. The country had 471 million 3G users in June.

Information products and services refers to IT hardware and software concerned with spreading information. Smartphones are a major part of this field.

China H1 information consumption surges 20% - Business - Chinadaily.com.cn

 

[BoQ77]

MIPS and ARM core low-power CPU, BeiJing did the right thing !

How many computer used in China now, mainly which OS and Microprocessor used in those?