Sunday, May 17, 2009

China: Bad News; Good News

Lets have the bad news first: the Whipper’s Effect of the financial tsunami arrives China.

According to May 16, 2009 issue of Shanghai Daily, the following headlines are noteworthy:

1. Sharp Decline in Premium Growth
A total amount of USD61billion in premiums were collected between January and April, a rise of 9 percent year on year. Nevertheless, the growth rate was a dramatic fall from the year-on-year surge of 49.8 percent in the first four months last year. The above news is released by China Insurance Regulatory Commission. Amidst such fall, risk control and stress tests are still the current focus of the insurance industry, instead of enhancing growth.

2. Banks Urged Not to Focus on ‘Blind’ Buildup
Despite the current difficult situation, China Banking Regulatory Commission, said in the Lujiazui Forum 2009, that banks should not simply blindly build up its loan facilities disregard to the risk control. Big does not mean safe. Although it also emphasizes ‘small is beautiful’, the essence is still on ‘risk control’. Also, so far China has already extended a combined 5.17trillion RMB in new RMB-denominated loans in the first four months of the year, far exceeding the original amount for the entire year (at 4trillion RMB). Despite such efforts, the improvement is mainly reflected on the rebounding stock and property market - and limited to certain segments only. On the other hand, companies are still hard to get loan.

3. China’s FDI Declines by the Most in Months
Foreign Direct Investment has slumped 22.5% to USD5.89billion last month from a year earlier, compared with a 9.5% decline in March and a 15.8% drop in February, the ministry of commerce said yesterday in Beijing. Foreign spending fell 21 percent to USD27.67 billion, as the high base in the same month last year when a significant amount of money reportedly flowed into the market, seeking to profit from the appreciation of the RMB. Also for the same period, 6,241 foreign companies registered in China, declining 34.2% from a year earlier. In April, the country recorded a 33.6% drop in new registration by foreign firms to 1,687. China began losing its competitive edge to attract FDI with its climbing labour costs, the appreciation of the RMB and higher corporate income tax (25%).

These 3 news share the same essence: the source of money, the fuel of economy. Insurance companies, banks, and FDI are 3 important intermediates to distribute fuel to the economy, particularly China has been used to FDI to fuel not only money growth but also paradigm transfer. Now, it is weakening. The SOB (State-Owned-Bank) has been another tool for the central government to implement its microscopic controls. Now it is also weakening - or strengthening in the "wrong" direction, i.e. stock and property market. Insurance company is not as important as the source of capital as the other two but it provides services for risk control. Now it is not weakening but weakened - a reflection of the decline of business activities. The 3 goddesses of destiny: climbing labour cost, appreciation of RMB, and high corporate tax will further seal the fate of business activities of China, although fortunately they are still at some distance away in spite of their fast-running chariots.

Ok, enough bad news, lets have an neutral one:

1. WGC Eyes Launch of Gold ETF Trading + Yellow (Gold) Hue to Take up 3% of Foreign Reserves
The chairman of the China Gold Association and president of China National Gold Group Corp answered my previous question about the rather sudden increase of 454 tonnes of Gold in China’s gold reserve that was not reflected on the World Gold Council Balance on March. It is done by domestic purchases and the refining of scrap gold. Yet China is still looking for a boost of gold’s partition from the current 2% of foreign reserves to 3%. Combining with the news that WGC is working on the launches of Gold ETF in China mainland, gold price will be affected by one more important factor – the lust of gold by mainland Chinese.

The good side is: huge demand on gold from China; the bad side is: sufficient supply by China domestically. Result is still unknown - at least, gold price has never really fluctuated due to the 454 tonnes of increase in China's gold reserve. Another factor worths notice: unlike iron, copper, aluminimum, and other similar commodities, gold will be owned but not really "consumed". Owners of gold, central banks, ETFs, investors and jewellaries owners, quantity wise will never experience "depletion". The lust will cause over-supply, and after the hyper-inflation period (if any), gold will enter another secular bear market. It is fine to purchase at every adjustment - but remember to sell at every peak or at least decrease the portion, and wait for another opportunity to buy.

Time for some good news:

1. Despite my suspects on the survival of electric car industry, it is apparent that China government has been deterministic on its development. Staring from next year to the end of 2011, the municipal government plans to offer up to a 20% one-time subsidy to people who buy new-technology vehicles that save 15% or more on fuel compared with conventionally powered cars and trucks. They will also get a break on some road taxes, with easier registration and an increase in battery-charing infrastructure. Maximum compensation for a passenger car will be 20,000 yuan and the limit for commercial vehicles will be 400,000yuan. Gas-electric hybrid cars now can cost more than 250,000yuan. By 2011, Shanghai aims for new-energy vehicles to account for 5 percent of its total vehicle output, with an industrial scale of 10billion yuan and a fleet of more than 10,000vehicles in trial operation. Another 3 billion yuan will be allocated within 3 years to invest in programs for the industrialization of these vehicles.

2. Another developing sector is the bio-medical sector which also receives policy supports.

So, pay attention beyond the electric car providers: infrastructure providers, part providers, and related service providers will be target. I will dig deeper and share my observations in another article.

In the global scale, economy is still bad. Eurozone GDP shrinks by 2.5%. Temasek offloads its BOA shares. Panasonic suffers 7-year hitch: sales were down 14.4% to 7.77trillion yen, and operating profit tumbled 86% to 72.9billion yen. It still forecasts a net loss of 195billion yen on sales of 7trillion yen for the 12 months through march 2010. US video game sales hurt by lack of hits.

In conclusion, one can discover that the global slowdown of economy starts to hit China and despite a growth of 6-7% in the Q1 of 2009, the actual pacing is nothing optimistic. Considering the unemployment issue has just started, China’s overall outlook may not be as good as many people have projected. Nevertheless, China’s policy can help boosting certain specific industries, environmental related technology is one, bio-medical industry is another, plus all the infrastructures required to support these industries. While most speculators/investors have already made propaganda on the above industries, the supporting infrastructures, which are more crucial and demanded to start beyond the mass production of the above technologies, are still currently comparatively low-profile. Attention should be paid to them for better risk-adjusted return.

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