Doom and Gloom of China's Economy

Armand2REP

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Chinese corporate earnings have been destroyed

27 August, 2012

The on-going non-stop weakness in Chinese equities have been a recurring theme here.

We have noted that, first of all, there is nothing particularly out of ordinary regarding the poor performances of equities if one compared Chinese equities with other stock market bubbles.

We have also noted that corporate profits have been quite weak. Profit warnings filed with Hong Kong stock exchange, for instance, reached record high for the first half earnings season.

The chart below from Goldman Sachs illustrates the point perfectly. It shows that for A-share companies (CSI 300) which have reported their second quarter earnings, earnings growth on a year-on-year basis for second quarter of 2012 is now hugely negative if we exclude the financials. Meanwhile, profits for MSCI China in the first half increased by a mere 1% yoy, or –5% yoy when financials are excluded.



Source: Goldman Sachs

Consistent with our view that over-investment eventually leads to low return on investment and poor corporate profitability, this is one of the clearest figures which illustrates the point. With poor earnings growth, it is becoming even less surprising that Chinese equities have become among the worst performers.

Chinese corporate earnings have been destroyed
 

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China Retailers Lose Steam, Deepening Wen's Challenges
By Bloomberg News - Aug 29, 2012


China's retailers from clothing to computers are reporting weaker sales growth, undermining Premier Wen Jiabao's goal of relying more on consumer spending for expansion as the economy cools.

Passenger-vehicle sales trailed analysts' estimates in July. Sportswear seller Li Ning Co. shut 1,200 stores in the first half and department-store chain Parkson Retail Group Ltd. (3368)'s same-store sales rose at less than a quarter the pace of a year earlier. Gome Electrical Appliances Holding Ltd. (493) said it would report a first-half loss on lower sales.

The reports show an extra drag on the second-largest economy after export growth almost stalled in July and factory output missed forecasts. The year's fastest decline in industrial companies' earnings and a stock market at a three- year low mean income gains may slow, giving consumers less money to spend and boosting odds Wen will add stimulus.

"The pressure on retail sales is growing bigger and bigger," said Shen Jianguang, Hong Kong-based chief Asia economist at Mizuho Securities Asia Ltd. "When exports are fragile and investment is weak, if companies started to reduce their production or workforce, how can it be possible for consumer spending to stay strong?"

Retail sales missed economists' forecasts in three of the last four months and Mizuho said they will stay weak. Sales increased 13.1 percent in July from a year earlier, the National Bureau of Statistics said Aug. 9, compared with the median 13.5 percent estimate of 32 analysts surveyed by Bloomberg News.

Government Spending

The official data include government purchases and aren't adjusted for inflation or broken down by consumer or government spending. Fiscal spending is rising at a faster clip than retail sales, up 37 percent in July from a year earlier, according to the Ministry of Finance. After adjusting for prices, retail sales rose 12.2 percent in July and 12.1 percent in June, the NBS said.

"Consumers have generally become more conservative in their spending, especially on certain higher-end discretionary products," Natural Beauty Bio-Technology Ltd., which sells skin-care items in China, said in an Aug. 16 filing with the Hong Kong stock exchange.

Corporate profits and stock markets may be keys to the direction of consumer spending. China's industrial profits fell in July by the most this year, an Aug. 27 government report showed. A record number of Hong Kong-listed companies since the start of June have predicted lower profit or a loss for a specific period, based on data compiled by Bloomberg News.

The Shanghai Composite Index (SHCOMP) fell Aug. 27 to the lowest since February 2009. It rose 0.8 percent yesterday.

Asian Slowdown

Policy makers across Asia may need to consider more stimulus as Europe's debt crisis hits exports and confidence. South Korea's current-account surplus rose to a record in July as imports declined, a government report showed today.

In the U.S., the Commerce Department's first revision to second-quarter gross domestic product may show a gain of 1.7 percent compared with an initially reported 1.5 percent increase, according to the Bloomberg survey median. In the first three months of the year, the economy expanded 2 percent.

The Federal Reserve releases its Beige Book survey of economic conditions in 12 U.S. districts, two weeks ahead of the Sept. 12-13 policy meeting of the Federal Open Market Committee.

In Europe, data on German inflation and Italian retail sales are due, while Brazil's central bank may be poised to cut interest rates for a ninth straight meeting.

Wage Headwinds

"Consumer spending is decided critically by income, and as we can see, China's industrial profits are falling at a faster speed in July, which means more headwinds for employee compensation, wages and bonuses," said Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong. "For non- wage income such as investment income from property and stock markets, you don't have to be an expert to tell that most people are actually losing money, so overall consumer disposable income is actually very weak."

Retail sales growth may slow another one or two months before a possible rebound next quarter, Zhang said.

Wen signaled in March that leaders are determined to cut reliance on exports and capital spending in favor of consumption, saying in a speech to legislators that "expanding domestic demand, particularly consumer demand, which is essential to ensuring China's long-term, steady, and robust economic development, is the focus of our economic work this year."

Wang Tao, China economist at UBS AG in Hong Kong, said in a report yesterday that "if protecting growth is a more important short-term goal, rebalancing will have to wait."

Stimulus Efforts

The People's Bank of China cut interest rates in June and July for the first time since 2008 and has lowered banks' reserve requirements three times starting in November. Authorities have accelerated approval of projects and local governments have announced trillions of yuan of investment- spending goals in the next few years.

Shares of Parkson, based in Beijing with shares listed in Hong Kong, fell 6.5 percent on Aug. 27, the most since October, following the Aug. 24 report of slowing sales. Barclays Plc analysts cut their rating on the company to "underweight" from "overweight" and said earnings in the next 12 months are likely to "remain lackluster."

At Parkson's seven-floor Beijing store located across the street from the central bank's headquarters, Li Ruidong said yesterday that he's cut back on shopping there and prefers low- end malls to Parkson, whose luxury brands include Armani, Cartier and Hermes.

Catching Up

"My salary can't catch up with the rise in prices, and I have a daughter to feed," said Li, 39, a bank employee.

Zhang Hong, a 42-year-old housewife who lives near the store, said she likes to try clothes on at Parkson, then purchase the items online. "I only buy coffee and eat McDonald's here," Zhang said.

Hengdeli Holdings Ltd. (3389) of Hong Kong, the retail partner of Swatch Group AG in China, said last week it expects sales growth to slow in the second half as shoppers curb spending on luxury watches.

Consumer spending may still contribute more to expansion than other parts of the economy. Compared with volatility in exports and investment, consumption is still a "stable growth engine," said Zhu Haibin, the chief China economist with JPMorgan Chase & Co. in Hong Kong.

Some companies are counting on the government to aid revenue. Trinity Ltd., the high-end menswear retailer that sells Gieves & Hawkes and Cerruti in China, expects sales to accelerate next year as authorities take steps to boost growth, Managing Director Sunny Wong said Aug. 23. Parkson said China has room to "further adjust its macroeconomic policies."

At the same time, "consumer confidence has weakened as the overall economic outlook is uncertain," Zhu said. "The biggest problem at present is weak domestic demand -- if policy efforts can boost corporate sector investment and profitability, consumption may come naturally."

--Zhou Xin. With assistance from Raymond Liu and Zheng Lifei in Beijing. Editors: Scott Lanman, Paul Panckhurst


http://www.bloomberg.com/news/2012-08-28/china-retailers-lose-steam-deepening-wen-s-challenges.html
 

Armand2REP

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China retail grows 13% yet retailers post record losses... interesting. :rolleyes:
 

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Exclusive: China's fraud-hit Suntech strikes more trouble in Italy

(Reuters) - An Italian court has filed criminal charges against an investment fund controlled by China's Suntech Power Holdings, the world's largest maker of solar panels, accusing it of illegally building solar farms to milk state subsidies.

The charges, together with other legal actions still being prepared against the fund, could eventually result in 80 million euros' ($100 million) worth of subsidy-backed solar farms being dismantled, an Italian prosecutor said, extending the problems of Suntech's Global Solar Fund (GSF), which invests in European solar power projects.

The charges and pending litigation have not been disclosed by U.S.-listed Suntech (STP.N), whose problems in Italy appear to go well beyond the limited statements it has so far made in official filings.

Suntech has lost more than 40 percent of its market value since July 30, and is being sued by several U.S. law firms on behalf of shareholders, after revealing that a GSF shareholder and executive, Javier Romero, had used $700 million in fake German bonds to help guarantee some of the fund's financing.

The class-action lawsuits say Suntech, which owns 80 percent of the fund, failed to properly disclose the financial workings of GSF and to monitor its business practices.

Exclusive: China's fraud-hit Suntech strikes more trouble in Italy | Reuters

You think EU sanctions are coming on Chinese solar? I do! :scared2:
 

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Declining cotton demand leaves rising inventories
Updated: 2012-08-30

A survey by the China Cotton Association in July covering more than 100 textile companies found that 30 percent of the country's largest cotton mills had imposed limits on production, and more than half of the small mills had suspended production altogether.

The situation was blamed on high domestic cotton prices and uncertainties in both domestic and international markets, the association said.

Zhang Hongxia, chairman of Weiqiao Textile Co, China's largest cotton-textile maker, said in a recent interview with Bloomberg that the economic slowdown in China will curtail its cotton consumption by as much as 11 percent, to 8 million metric tons this year, compared with 9 million tons in 2011.

"The Chinese economy is only at the beginning of a harsh winter," she said.

In the meantime, worrying signs for the cotton industry are beginning to show across the country.

At the port of Qingdao in Shandong province, for instance, more than 30 warehouses are reported to be piled high with mountains of cotton stock, estimated at more than 500,000 tons, according to local media.

Some of the stock dates back more than a year, and fluctuating cotton prices have caused some traders millions of dollars in lost business, according to the reports.

Cotton farmers are also concerned that this year's cotton price will remain too low.

Tang Yongzhu, 55, is a farmer in Shihezi, a county in Xinjiang Uygur autonomous region, China's largest cotton-producing area. He owns 4 hectares of cotton fields, the only income source for his family.

"With plenty of sunny days so far, I'm expecting a good cotton harvest this year," he told China Daily.
"But I'm not optimistic about what price I'll get for it."

Declining cotton demand leaves rising inventories|Industries|chinadaily.com.cn
 

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China's rail cargo volume declined 8.2% YoY in July

One of the preferred gauges of economic activities by our dear vice premier Li Keqiang has just turned really ugly.

Rail cargo volume growth, as we noted last month, turned negative for the first time since the recovery in June. The latest number for July is getting even more ugly.

Cargo volume transported by railways amounted to 305 million tonnes for July 2012, or 8.2% below the same month a year ago according to figures from the National Bureau of Statistics. Rail cargo volume growth for July has worsen from –3.1% yoy in June, and it was the biggest decline since March 2009. Meanwhile, other mode of transportation which do not have tight correlation with GDP growth continue to grow randomly, from 13.2% yoy growth of highways to –3.4% yoy of aviation.

The chart below shows mainly rail cargo volume year-on-year change and GDP growth. As you can see, it has just turned even uglier in July.



This confirms other indicators we saw for July and August so far that economic activities do not appear to have finally found the bottom.

China’s rail cargo volume declined further in July
 

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China's Growing Economic Crisis
By William Pesek Aug 31, 2012
China's Growing Economic Crisis - Bloomberg


Policy makers around the world have long envied China's ability to get big things done. A huge 4 trillion-yuan ($630 billion) stimulus plan as the global economy cratered in 2008? No problem. Marshaling banks to lend trillions more? Check. Enacting sweeping regulatory changes at a moment's notice? You bet.

Ahhh, the good old days. Now, a once-in-a-decade leadership shift is getting in the way of the stimulus-happy policies to which investors became accustomed. The nimbleness that helped China steer around the worst of the global crisis is confronting political paralysis of the kind more often seen in Japan, Europe and the U.S. The upshot is that China's 7.6 percent growth rate may fall more in the next 12 months than anyone expects.

It's not that Wen Jiabao doesn't get the extent to which the supposedly unstoppable China has hit a wall. Just as in 2009, the premier is visiting key industrial cities such as Guangdong and Zhejiang. Wen is facing dour looks from manufacturers surrounded by mounting piles of unsold goods, a rare experience for the main engine of China's economic rise.

Factory warehouses are cluttered with excess stock, store shelves are filled beyond capacity, and dealerships are choked with cars that used to speed from showroom to road. And yet Wen's team in Beijing has been eerily silent about how it plans to revive things. That may be because the short answer is, it doesn't.

Obvious Ways

One problem is that China has run out of obvious ways to kick-start its $7.3 trillion economy. It was easy in 2008: Pump tens of billions of dollars into a sweeping stimulus project and 10 percent growth followed. China's success gave markets the impression that its leaders could wave some magic wand and growth would be the result.

Magic is in short supply now. Local governments are cash- strapped and awash in debts that could turn bad. The euro zone seems locked into permanent-crisis mode while the U.S. is bogged down with debt, economic stagnation and political paralysis. China proved it can live for a few years without U.S. and European customers, but not forever.

The bigger topic is politics amid this year's leadership shift. Instead of tackling the issues of growth and economic reform, officials are punting on big decisions. As such, we are now officially living in the "G-Zero" era that Ian Bremmer, the president of Eurasia Group in New York, described in his new book

"Every Nation for Itself."

At one time the weaker links within the Group of Seven nations were supported by the others. Those days are gone and now that China is sputtering, the G-Zero reality is upon us and manifesting itself in disturbing ways.

Take Asia's surge of nationalism. Political scientists have loads of theories about why China, Japan and South Korea are suddenly at loggerheads: bad blood over World War II, energy needs, designs on controlling the Asian seas, the power vacuum left as the U.S. focused on two intractable wars. One theory that deserves more attention is how these countries deflect the blame for troubles at home.

In Japan, Prime Minister Yoshihiko Noda is spectacularly unpopular after raising taxes and restarting nuclear reactors that were shuttered following last year's earthquake. Playing up territorial disputes allows him to change the subject and throw a bone to Japan's influential right-wingers. In Seoul, President Lee Myung Bak has been embarrassed by corruption charges against his family. Fanning popular anger about South Korea's status in Asia has shifted the national dialog.

The same strategy prevails in China. Unwelcome headlines focus on the widening gap between rich and poor, the Bo Xilai scandal, and charges that China fudges economic and pollution statistics. Turning the public's attention to China's former colonizers has been a political winner.

Asia's Loss

The loser in all this is economic cooperation in Asia. (MXAP) Also on the losing side is vital economic change in China. Over the last decade, Wen and President Hu Jintao produced rapid expansion, but few of the structural reforms China needs for balanced growth in the decades ahead. State-owned enterprises and banks are more dominant than ever, producing huge misallocations of resources and priorities. Meanwhile, no effort has been made to build a market that promotes domestic consumption.

Rather than retool the economy, China is content to rely on the old fast-growth, export-driven model. The trouble is, the Wen-Hu era lulled markets into counting on the constant injections of stimulus spending that gave China a unique, yet unsustainable, foundation. If China isn't a gigantic bubble economy, it's one made up of many smaller bubbles -- property, stocks, exports. These are the result of spending-induced growth and imbalances that might breed trouble down the road, including inflation and a bad-loan crisis.

Traders looking for another dose of stimulus are expressing their disappointment that none seems forthcoming. The Shanghai Composite Index (SHCOMP) is down 13 percent so far this quarter. Those declines may accelerate as China's leadership transition distracts lame-duck officials from giving markets their fix. The same goes for a world economy more devoid of growth engines than ever.


(William Pesek is a Bloomberg View columnist. The opinions expressed are his own.)
 

Armand2REP

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Chinese companies struggle as they wait to get paid
Staff Reporter 2012-09-02

The financial health of Chinese industries is getting worse, with the situation being particular alarming in the machinery, coal and steel sectors, a report by the Chinese Ministry of Industry and Information Technology said Wednesday.

According to the report, large sums of money are owed by clients to the machinery industry, given slowing external demand.

Money owed between January and February to machinery makers totaled 2.2 trillion yuan (US$346.6 billion), but grew to 2.49 trillion yuan (US$392 billion) in June.

That represented a 17.29% increase from last year, higher than the revenue growth rate of 9.44%.

Significantly, manufacturers of heavy machinery and engineering machinery are finding it difficult to get paid by their clients. In one case, a machinery manufacturer had supplied equipment for a major government project and was still waiting to be paid.

Circumstances in the coal industry are not optimistic either. Costs for major producers rose 31% in the first half of this year compared to same period of last year. By the end of July, 194.8 billion yuan (US$30.6 billion) was owed to 90 major coal miners by their clients, an increase of 48.7% from last year.

Accounts receivable in the steel industry amounted to 116 billion yuan (US$18.2 billion) by the end of June, up 20% from last year.

An industry source told Xinhua's Economic Information Daily that if the economy remains weak and the credit supply continued to be constrained, it could take longer for steel firms to retrieve the money owed to them.

The nonferrous metals industry and makers of power generators have also reported difficulty in recovering payments.

Chinese companies struggle as they wait to get paid|Economy|News|WantChinaTimes.com
 

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'Zombie Firms' a Growing Risk for China
29 Aug 2012
By: Ansuya Harjani
Assistant Producer, CNBC Asia


China is at risk of nurturing "zombie companies" as the economy continues to slow and banks are compelled to continue funding failing businesses, warns independent economist and former Morgan Stanley's Chief Asia-Pacific Economist Andy Xie.

In a bid to counter slowing growth, Xie says local governments across China are pressuring lenders to keep businesses funded, regardless of profitability, perpetuating the so-called "zombie firms." These are companies which are on the brink, but continue to operate with state support.

"The Chinese banking system doesn't pull money out of businesses that are failing. A lot of businesses in China are going to be zombies," Xie, a well-known China bear, said on CNBC Asia's "The Call" on Wednesday. "This is an Asian thing because they (banks) don't enforce credit agreements."

The trend could become more pronounced as the country's slowdown sends ripples across the corporate sector. Already, the current earnings season is shaping up to be arguably the worst in history, with major firms in sectors ranging from banks to airlines posting double-digit profit declines.

Xie says the zombie phenomenon is especially prevalent in the real estate and financial sectors, where local governments have been known to actively lend financial support.

While putting companies on life support can preempt disruptive bankruptcies, Xie says it comes at the expense of economic stagnation.

In an article written for a Chinese news publication earlier this year, Xie noted that "China will probably avoid widespread business bankruptcies – normally deemed necessary for cleansing balance sheets and consolidating supply — by forcing banks to prop up unprofitable businesses. (However), this will act to suppress the economic growth rate."

The slowdown will in turn prevent a recovery in earnings and continue to drag on China's stock market. The benchmark Shanghai Composite is the worst performing index in Asia this year, down 6 percent.

"Chinese companies have a problem – they are pretty leveraged and have fixed costs. So when their economy slows down their earnings tend to go down dramatically," Xie said. "That's a problem dogging Chinese stock market for a long time (now)."


'Zombie Firms' a Growing Risk for China, Says Andy Xie - CNBC
 

Armand2REP

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Chinese Steel Industry over $400 billion in Debt

By the end of last year, China's steel industry had a total debt burden of $400 billion - around the size of South Africa's economy. Some of China's leading mills alone owe 200-300 billion yuan ($32-$47 billion), according to the China Iron and Steel Association.

The aggressive tack by China's lenders, many of which are state-controlled, comes as pressure builds inside a stretched financial system. Results at China's big banks show profit growth is at its weakest since the global financial crisis, while bad loans rose for a third straight quarter to $456.5 billion by June, the China Banking Regulatory Commission said this month.

Steel traders are unlikely to be helping the bad loan issue, with Shanghai steel futures having almost halved from their 2009 highs to below $540 a metric ton (1.1023 ton).

As the steel market turned - a victim of crippling over-capacity, heavy debt and sliding prices - alarm bells sounded among banks and regulators about the risk of lending to the industry. In June, after months of cajoling, banks were ordered to clamp down on new lending to steel traders.

Insight: China's steel traders expose banks' bad debts | Reuters
 

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Foreign Real Estate Firms Withdrawing From China


The continued sale of property by foreign real estate agencies could spell disaster for China's real estate market (Xinhua)

Tishman Speyer, a US-based real estate agency, is again planning to sell its other properties in China, this time two pieces of land in New Jiangwan city of the country's eastern municipality of Shanghai.

The two lands, being sold for commercial purposes, are worth 1.6 billion yuan (US$252 million) and 3.2 billion yuan (US$505 million), respectively, according to China National Radio.

The move could be a sign that many foreign real estate companies have been withdrawing from China due to the current cooling systems still in place by the government, analysts said.

Some analysts said that the move was bad news for China's property market, along with the transference and discounted sales of land, while others said the move was related to the uncertainty of the global economy, which has pushed foreign real estate companies to down-size their businesses.

The withdrawal of foreign property companies could contribute to halting the 10-year housing price highs in the Chinese real estate market. Reasonable prices for houses could start emerging soon.

No 1 US real estate firm continues selling lands in China|Markets|Business|WantChinaTimes.com
 

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Crisis Hits Chinese Shipbuilders

Dongfang Shipbuilding in Wenzhou in eastern China's Zhejiang province was delisted from the London Stock Exchange on June 8, less than ten months after it went public on Aug. 18 last year, reports China Economic Weekly in Beijing.

The weekly quoted a trade office in Wenzhou as saying Dongfang has been sued by several banks in the city for defaulting on loan repayments.

At the same time, Rongsheng Heavy Industries, touted to be the sixth-largest shipbuilder in the world, reported a 37% decline in its revenue to 5.5 billion yuan (US$876.3 million) in the first half of this year.

Together with reports that its chairman Zhang Zhirong was being probed by US Security Exchange Commission for alleged insider trading, this news drove down Rongsheng's stock prices sharply on the Hong Kong Stock Exchange, on which the company listed in 2010.

The experience of these two companies and the closures of several Chinese shipbuilders since October point to a crisis gripping the Chinese shipbuilding industry.

Previous news reports have said that none of the top ten Chinese shipbuilders, with the exception of Waigaoqiao Shipbuilding, China Shipbuilding Industry and Guangzhou Shipyard, had received orders since the beginning of this year.

Lin Deyou, chairman of the Hai Zhongzhou shipyard in Jiangsu province, told China Economic Weekly that domestic shipbuilders could be divided into three types — the first were state-owned shipbuilders that survived on orders from the navy and received credit easily from banks. The second were large private shipbuilders that enjoy a strong global reputation and receive overseas orders, while the third is made up of small, private shipbuilding companies, many of which are on the brink of collapse.

The current crisis is not only due to the scarcity of orders but also due to plunging prices, said Lin. The price of a bulk freight ship of 35,000 tons had fallen from 280 million yuan (US$44.15 million) before 2008, to 180 million yuan (US$28.4 million) in 2008, and to 130 million yuan (US$20.5 million) in 2009.

The industry is partly responsible for its own plight because of the indiscriminate expansion it undertook in 2006 and 2007, when the country's economy was growing rapidly. When the 2008 global financial crisis took hold, worldwide orders for new ships shrunk, hurting these shipbuilders.

According to statistics released by the Ministry of Industry and Information Technology, China's shipbuilders received combined orders for 10.74 million tons of ships in the first six months of this year, only half of what they received in the same period last year.

Sinking demand hits China's shipbuilders|Markets|Business|WantChinaTimes.com
 

Ray

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Mainland faces rising pile of bad loans

BEIJING -- Chinese banks are seeing a rising pile of bad loans, the latest scare from the world's No. 2 economy, which is reeling from a shrinking manufacturing sector, collapsing exports and sliding corporate profits.
Smaller commercial banks are starting to report spikes of as much as 82 percent in their overdue loans in the first six months of this year, as cash-strapped companies delay repayments.

Last week, seven out of the 16 listed big banks said their nonperforming loans' ratios had risen in the same period.

"Experience has taught us that a bad loan crisis usually comes three years after a period of abnormal credit surge," Wei Guoxiong, head of chief risk management at ICBC, one of China's big four banks, said yesterday. He was referring to increased lending in response to the global financial crisis in 2009. "There will be a notable rise in bad loans in the banking sector this year."

The bad loans signal the trouble that lurks beneath what appeared to be otherwise benign first-half results of Chinese lenders, which the central government is relying on to extend credit needed to kick-start new stimulus projects and private investment.

But Beijing looks increasingly constrained in how it can ease policy to fight the worst slowdown in three years.

It cannot aggressively boost growth as it needs to avoid the asset bubbles and over-capacity problems spawned by the lending spree during the 2009 crisis.

The effects of that credit binge are now overshadowing the state-owned giants as they grapple with political pressure to lend more, even at higher risk.

State media like Xinhua have sought to calm concerns by reporting that the ratio of nonperforming loans to total loans for banking sector in the first half of this year is largely below 1 percent, low by international standards.

But the deepening slowdown in the manufacturing sector may mean that more overdue loans and defaults will surface in the next few months.

"The deterioration trend is just beginning," warned Hu Bin, senior analyst at international ratings agency Moody's.

The quality of banks' loan assets is worsening amid slowing domestic and overseas demand that have affected the manufacturing sector, small and medium-sized enterprises (SMEs) and exporters in coastal areas. And "we also see persistent credit tightening in the real estate sector and a slowdown of land-sale revenue for local governments as factors that will further erode banks' asset quality."

Indeed, local governments are seen as a risk area. While they are expected to finance the bulk of new investment projects to boost growth, they are struggling with debt from the previous round of stimulus.

Local governments' financing vehicles owe China's big four state banks outstanding debts of 2.6 trillion yuan (S$511 billion) at the end of June, the official Economic Information Daily said yesterday. This is a jump of 500 billion yuan from last year end.

Meanwhile, banks with exposure to SMEs in entrepreneurial hubs like Wenzhou, a city in eastern China, face growing risks.

More than 10 percent of members of the Wenzhou SME association have gone belly-up, while another 20 percent are struggling, according to association chairman Zhou Dewen

Mainland faces rising pile of bad loans - The China Post
 

Armand2REP

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Chinese banks will never report the true NPL level, but a 30% rise in loans 3 months overdue tells the real story.
 

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China Gets Worst Ranking in Global Poll Since 2010
By Rich Miller - Sep 7, 2012
Bloomberg


Global investors are losing faith in China, giving the country's markets their worst rating in more than two years in the latest Bloomberg poll.

About a quarter of those surveyed say they expect Chinese markets to be among the worst performers over the next year. That's the highest negative reading that the country has received in the quarterly Bloomberg Global Poll since January 2010 and was second only to the 45 percent rating that the European Union received in the Sept. 4 survey.

China "will suffer disproportionately from a global slowdown in growth," said Benjamin Dunn, a poll participant and chief operating officer in Crested Butte,
Colorado, for portfolio management company Alpha Theory, in an e-mail. It "will be unable to prevent a hard landing" of its economy.

The U.S. again came out on top in the poll of 847 investors, analysts and traders who are Bloomberg subscribers: 46 percent say its markets will be among those offering the best returns over the next year, the same as in the previous survey in May. Close to three-quarters expect the Federal Reserve to act next week to support the economy, either by extending its pledge of low interest rates, buying bonds, or by doing both.

Commodities in general and gold in particular gained favor with investors in the poll. Eighteen percent of those surveyed expect commodities to offer the highest returns over the next year. That's up from 13 percent in May and was second only to stocks, which won the backing of a third of investors. Gold came in third, with 16 percent, up from 11 percent in May.

Commodity Prices

"Monetary easing by global central banks will push commodity prices higher," Anuraj Benara, a poll respondent and senior manager of institutional equity sales for SMC Global Securities in Mumbai, India, said in an e-mail.

Some investors also are turning bullish on crisis-racked Europe, though a greater percentage remains bearish. More than one in five picked EU markets as among those that will offer the best returns over the next year. That's the highest reading for the region since the poll began in 2009 and was second only to the U.S. in the latest survey, which was taken before the European Central Bank decided yesterday on an unlimited bond- purchase program. Brazil was third and China fourth in the poll.

China was a favorite of global investors in the wake of 2008-09 financial crisis, as stepped-up government spending and interest rate cuts powered the economy to a year-over-year growth rate of 11.9 percent in the first quarter of 2010.

Enthusiasm Waned

Investor enthusiasm for the country has since waned as growth has slackened, first in reaction to government efforts to contain inflation and puncture a property price bubble, and more recently due to a slowdown in Europe. Gross domestic product rose 7.6 percent last quarter from a year earlier, the slowest pace in three years.

More than three of five poll respondents described the Chinese economy as deteriorating, up from less than one in three in May. One-third rated the risk of a hard landing as high, up from 23 percent in May. Another 44 percent saw it as a "medium threat."

Outgoing Communist Party chief Hu Jintao has held back on steps to spur the slowing economy, raising the risk that the country will miss its 7.5 percent growth target for this year.

"The changing of the political guard in China has slowed the government's stimulus response," Kim Caughey Forrest, senior equity analyst for Fort Pitt Capital Group in Pittsburgh, who took part in the poll, said in an e-mail. "It's pretty clear that current leadership is not going to start new programs, so the lag
time is even longer on any stimulus."

Standing Suffered

Hu's standing with investors has suffered ahead of the leadership change later this year. Two in five voiced pessimism about the impact of his policies on the investment climate in the country. That's up from less than one in three in May and is the highest negative reading since the poll began asking that question two years ago.

"The political environment in China is more favorable to hiding real problems" such as the growing level of non- performing bank loans, said Kevin Guezo, who oversees foreign exchange and interest rate derivative sales at Credit Mutuel Arkea, a French cooperative bank in Lyon, France. Guezo took part in the poll and shared his views in an e-mail.

Investors also have turned more pessimistic about the global economy. About half described it as deteriorating, compared with 37 percent who said that in the last poll. Those in the U.S. were the most downbeat.

Investor Assessments

The poll also reflects an erosion in investor assessments of the U.S. economy, with 22 percent saying the economy is deteriorating, compared with 18 percent who said that in May.

Federal Reserve Chairman Ben S. Bernanke is expected to take further steps to promote growth at the central bank's meeting on Sept. 12-13, according to the poll. More than one in three of those surveyed look for another round of quantitative easing, or bond buying, from the central bank.

Bernanke has made "it patently clear that the Fed will take any action it feels it needs to to try and address its mandate -- full employment and stable prices," Forrest said. "Given the economy has probably slowed, from all the signs we observe in government and company data, we think he" will go ahead with QE.

The Fed, which cut its target for the federal funds rate to zero to 0.25 percent in December 2008, has said it expects to keep the overnight interbank lending rate "exceptionally low" at least through late 2014. A majority of investors polled do not see the Fed raising rates before 2015, with 16 percent saying an increase won't come until 2016 or later.

Housing Market

The low rates have helped the housing market. The S&P/Case- Shiller index of home prices in 20 cities climbed in June from a year earlier, the first gain since September 2010, according to a report from the group last month.

Forty-six percent of investors surveyed expect U.S. house prices to increase further in the next six months. Only 14 percent see them falling.
Investor enthusiasm for stocks ebbed in the latest survey. Thirty-seven percent say they plan to increase their holdings of equities in the next six months, down from 40 percent in May and the lowest since that question was first asked in 2010.

The increased caution is most evident when it comes to Asian markets. One third forecast that the MSCI Asia Pacific Index will be higher six months from now -- the least bullish reading in almost two years. The stock gauge rose 0.1 percent yesterday to 115.94 after falling on Wednesday to its lowest level since July 27.

Gold Attractive

An increasing number of investors are attracted to gold, according to the poll. A majority expect gold prices to be higher in six months' time, while about one in three intends to increase their holdings of the yellow metal.

Gold prices rose to the highest since March yesterday after the ECB's bond-purchase decision. Futures for December delivery gained 0.7 percent to settle at $1,705.60 an ounce at 1:45 p.m. on the Comex in New York.

Oil is also gaining favor among investors, according to the poll. One in five plan to increase their exposure to oil in their portfolios over the next six months, up from 14 percent in May.

More than two in five see prices rising over that time frame, roughly double the amount who project them falling. Crude oil for October delivery advanced 17 cents to settle at $95.53 a barrel on the New York Mercantile Exchange yesterday.

Twenty percent rate the risk of a Middle East war as high, up from 15 percent in May.

As has been the case since October 2009, bonds were picked as the asset class projected to have the worst returns over the next year.

The Bloomberg Global Poll was conducted by Selzer & Co., a Des Moines, Iowa-based firm. The poll has a margin of error of plus or minus 3.4 percentage points.


China Gets Worst Ranking in Global Poll Since 2010 - Bloomberg
 

sob

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Chinese economy going bust is the last thing the world economy needs at this moment. With the Eurozone stumbling from one trouble to another, and the lesser said about the Japanese economy, we will be in deep shit if the Chinese economy goes down the drain.
 

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Downturn in China spreads to key sectors

Paul J Davies
Financial Times


Hong Kong: China's downturn is spreading to the sectors and companies that were expected to withstand the slowdown and drive growth in the region.
Financial Times analysis shows that a third of publicly listed Chinese companies suffered cash outflows in the quarter to the end of June as the combined effect of the slowdown in exports, a build-up in stocks and tightening local government finances begins to bite.

Cash balances at one in 25 of 1,700 companies analysed by the FT using data from S&P Capital IQ have turned negative in the past two quarters.
For a further 6 per cent of companies that normally report an outflow, the outflows were worse than last year.

The results highlight that even the companies that are expected to help rebalance China away from an investment-driven economy – such as consumer and retail businesses, healthcare, pharmaceuticals and electronics companies – are being affected by the slowdown, along with construction, real estate, industrial machinery and chemicals.

Increasing numbers of hedge funds and analysts are looking closely at cash flow data as sustained poor cash flows would have a big impact on companies' ability to service their debt and hence on the health of China's banking sector.

There are some signs that the cash crunch has already been felt by banks during the first half of the year.

While non-performing loans grew by just 1 per cent across the sector, overdue loans leapt by 29 per cent, according to Mike Werner of Bernstein Research in Hong Kong.

Among the 574 companies with negative cash flow from operating activities in the FT analysis, the results of 175 – or 30 per cent – appeared to be non-seasonal because patterns over the past two quarters were completely different from those seen in the periods a year before.

Another 18 per cent showed some seasonal similarity with last year, but their results were worse over the first half of this year. Sixty-nine of the 574 had negative cash flow for both of the past two quarters.
 

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