Not to worry about capital flight - Sara Hsu

Sara Hsu

About US$142 billion in capital left China in April and June, triggering off some concerns. But according to financial analyst Sara Hsu writes in the Diplomat, here there is no reason to worry. China is encouraging outbound investment programs, and then it is hardly a concern when capital actually leaves the country.

Sara Hsu:

Cross-border capital outflows are also being liberalized to some extent as part of China’s financial reform agenda. Financial funds can move out of China under the Qualified Domestic Institutional Investor scheme, the Qualified Domestic Individual Investor scheme, which is in the trial phase, and soon under the Qualified Domestic Retail Investor program. Foreign direct investment abroad is also growing rapidly as China seeks to build the One Belt, One Road program and continues overseas investment for the purposes of gaining resources, technology, and know-how. Capital controls continue to guard to some extent against excessive financial and direct capital outflows from China. 

If capital flight were indeed taking place, chances are that this would also be reflected in “hot money” flows out of the country, since the capital account is not fully open. Some of the funds may be moved through remittance companies, which are visible, or through other means such as underground money houses, which are invisible in the capital or financial accounts, and viewable only in the errors and omissions category of the balance of payments. Net errors and omissions have been relatively large and negative from Q3 2014 through Q1 2015; Q2 2015 data is as of yet unavailable. Q1 2015 saw unaccounted-for outflows that weighed in at about $66 billion. This does not mean that hot money outflows are definitely occurring, but that this is a possibility. 

Still, it appears that the scale of capital outflows, legitimate or illegitimate, do not present a real threat to financial stability. What is more, some volatility in the capital account can help Chinese officials to prepare the economy for greater shocks given further capital account liberalization. At present, the level of control over capital flows is relatively strong and China-watchers need not lose sleep over potential capital flight.

More in the Diplomat.

Sara Hsu is a speaker at the China Speakers Bureau. Do you need her at your meeting or conference? Do get in touch or fill in our speakers´ request form.

Are you looking for more experts on China´s outbound investments? Do check our latest list here.  

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Can China´s financial systems become more inclusive? - Sara Hsu

Sara Hsu

China announced in 2013  reforms of its financial systems so that rural areas and smaller companies, always denied access to capital, get more access. But the results are very mixed, writes financial analyst Sara Hsu in the Diplomat.

Sara Hsu:

Extending loans to SMEs and micro-enterprises has also been an important policy item. SME financing has been intermittently prioritized by the central government in recent years. Measures to improve SME funding include the establishment of microcredit companies, creation of credit guarantee companies to guarantee SME loans, planning of a national social credit system to provide credit scoring, and targeted lending by the Ministry of Finance. Micro-credit institutions have catered to SMEs, micro-enterprises, and other rural borrowers since 2008. Credit guarantee companies have guaranteed SME loans to increase bank lending to these firms, with some success. A social credit system will be introduced in 2017 to ensure that individuals and institutions can be rated based on available credit data. Ministry of Finance lending has targeted SMEs that fall into specified policy categories. As part of the recent attempt to roll out the inclusive finance policy, banks have been further encouraged to lend to SMEs. In addition, bank loans to SMEs will be securitizable to control risk and increase funding flows to this underserved sector. 

Despite these measures, a dearth of funding persists for poor, rural borrowers, as it does for SMEs and micro-enterprises. It is not clear that the recent push to make finance truly inclusive is a break with past policies that have had limited success. For one, banks often try to refrain from lending to underfunded groups since they are higher credit risks. Venture capital and private equity investors may be reluctant to invest in rural areas due to the lack of human capital and to insufficient innovation found in these areas. While some of the policies that have been or are being carried out are certainly beneficial, including the rollout of the social credit system, tax breaks for rural lending, and securitizing SME loans, these may not represent the whole answer to the inclusive finance problem.

More in the Diplomat

Sara Hsu is a speaker at the China Speakers Bureau. Do you need her at your meeting or conference? Do get in touch or fill in our speakers´ request form.

Are you looking for more financial analysts at the China Speakers Bureau? Do check out this list.  

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China´s emerging outbound financial investments - Sara Hsu

+Sara Hsu 

China´s financial outbound investment is tiny, compared to other capital streams. But financial analyst Sara Hsu expects a boost, following real estate and manufacturing, she writes in the Diplomat. Also here, fast growth is high on the political agenda.

Sara Hsu:

Outbound financial investment, while minimal today, is also on the table. The Asia Financial Risk Think Tank based in Hong Kong SAR, for example, is in the process of documenting ways in which China may consider outbound foreign financial investment. Strict capital controls continue to block outbound foreign financial investment, but the potential for the development of foreign financial investment is vast, and China’s institutional and retail investors alike can benefit from diversifying assets abroad. Allowing capital outflows for the purpose of financial investment is currently under discussion. Precedents for outbound financial investment from China are few, but include China’s sovereign wealth funds. The China Investment Corporation (CIC) has been most visible in this area, investing in a number of foreign assets. Controlled by the Ministry of Finance, CIC is registered as an independent non-bank state-owned enterprise, unlike other sovereign wealth funds. Although a recent audit revealed losses due to investment in firms such as Blackstone and Morgan Stanley, CIC has learned from its experience and continues to obtain returns abroad. An aggressive strategy implemented in the early years of its operation has been modified to a more moderate strategy based on investment in equities and other assets rather than high-yield assets purchased via absolute return vehicles such as hedge funds. 

The CIC case may increase the incentive to first open overseas financial investment to state-owned banks rather than non-bank state-owned enterprises, as state-owned banks may undergo emergency liquidity injections where necessary. State-owned banks are under the purview of the People’s Bank of China. In addition, the CIC case illustrates the danger in taking an aggressive financial position, particularly given low levels of experience in investing abroad. It also shines a light on the need to ensure adequate management and accounting procedures. 

Consideration of outbound financial investment comes at a time when China’s leadership is attempting to further marketize its financial sector, enhancing returns and other market signals. Overseas financial investment is a wide open field that has the potential to provide risk diversification and returns to institutional and retail investors, if managed properly. Like overseas direct investment, overseas financial investment may play an important role in providing China with much-needed resources (in the latter case, financial) to expand economic growth.

More in the Diplomat.

Sara Hsu is a speaker at the China Speakers Bureau. Do you need her at your meeting or conference? Do get in touch or fill in our speakers´ request form.

Are you interested in more expects on China´s outbound investments at the China Speakers Bureau? Do check our recently updated list.  

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The interaction between political and financial elites - Victor Shih

Victor Shih

Scholar Victor Shih is interviewed by the China Daily, on how he analyzed the links between different factions in China´s politics. A dive into China´s capital markets since 2009, achieved Victor Shih high praise as one of the first to document China´s serious debts.

The China Daily:

The book is considered by some the first in academia to develop a framework with which to analyze how elite politics affect monetary and banking policies. 

Scholars review this book as a clear, well-researched explanation of the dynamic driving China's reforms. 

"It is both a fascinating portrait of elite politics in China and a rigorous test of an analytical model," said Bruce Dickson, political science professor and director of Asian studies at George Washington University. "Most scholars are good at one approach or the other. Shih shows he is equally gifted at both." 

Shih began his study of China's capital markets in 2009. His findings on China's local government debt were published in China Economic Review in 2010, creating a stir in the US and China. He noted in the thesis that combining the findings of the National Audit Office (NAO), the China Banking Regulatory Commission (CBRC) and the People's Bank of China, the total official estimates of local governmental debt is much higher than the National Audit Office (NAO) said in its report. 

"My estimate was entirely based on official numbers that the government announced to the public online," Shih said. 

His study suggested that Chinese government must have the resolve to stop local-level leveraging before risks in the financial system steam out of control. 

"I noticed that in recent years the Chinese government has taken many efforts to control the total amount of local debts," said Shih. "I also noticed that the Chinese government tends to be more transparent about the financial figures." 

Shih said now People's Bank of China published the total debts of the entire country and he's able to observe the whole situation in China. "My intention is to answer such a question - how China's total debts affect China's rapidly growing economics?" 

China has significant ability to control the economic fluctuations. 

Shih argued that "China needs to bring some financial risk to some degree. "In financial markets, there have to be some failures," Shih said. "If your bonds are bad ones, your company shuts down. So people won't count on the government all the time as the final straw for bad business. Any market has risks. 

"The only thing I see purely possibly run by a market economy is the so-called underground banking system, which is illegal in China." 

Shih believes that the Chinese government will make more of an effort to balance the economy. 

"Slowing down a bit is not bad, and sometimes needed," Shih said.

More in the China Daily.

Victor Shih is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´request form.

Are you looking for more financial experts at the China Speakers Bureau. Do check out our recently updated list.

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Trust industry is not yet off the hook - Sara Hsu

+Sara Hsu 

Dire predictions for the trust industry have not materialized, because of smart interventions by China´s financial authorities. But that does not mean the industry is off the hook, writes financial analyst Sara Hsu in The Diplomat. Danger from the property market will remain till the end of 2014.

Sara Hsu:

China’s property market reflects a general downturn and restructuring, as fixed asset investment has reached its peak. The state economic plan is set on turning away from an investment-fueled economy to a consumption-led economy. However, the economy must first survive the deflation of the property bubble. The first shoe to drop was the March failure of Zhejiang Xingrun Properties, with RMB 3.5 billion in debt. Then, new home prices fell for the first time in about two years in May as demand in many regions of the country slackened. Some developers are now saddled with empty apartment buildings and the number of developers facing financing problems is on the rise, with small and medium sized firms already strongly affected.

A cooling property market will have repercussions for the trust industry. The question is, to what extent? Ten percent of the trust industry (accounted for by real estate loans) amounts to more than RMB 1 trillion. Suppose that a large proportion of these loans stop performing – say, 60 percent. That is about RMB 600 billion, almost equivalent to the amount of overdue loans by year end 2013 announced by China’s top ten banks two days ago. Banks’ overdue loans are expected to be supported by the Chinese government through implicit financial assistance (liquidity injections where needed) and, for the top four banks, removal of non-performing loans to asset management companies. Trust companies, by contrast, do not enjoy state support, explicit or implicit. The liable parties are the trust product holders themselves who may be left holding the bag if trust companies cannot deliver on property-based trust product payments.

What this indicates is that the trust industry is one to keep an eye on at least through the end of 2014, as additional real estate trust products come due and the property market and real economy continue to suffer. About RMB 5.3 trillion in trust products will mature in 2014, and how these debts are settled will have a lasting impact on China’s financial landscape.

More in The Diplomat.

Sara Hsu is a speaker at the China Speakers Bureau. Do you need her at your meeting or conference? Do get in touch or fill in our speakers´ request form.

Are you interested in more expert speakers on finance at the China Speakers Bureau. Here is a recent list.  

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Cautiously positive about China´s financial reforms - Sara Hsu

+Sara Hsu 

Financial analysts Sara Hsu has been predicting doomsday scenario´s for China´s financial stability in the past. But the announced financial reforms have made her carefully optimistic about the direction the country is taking, she writes in the China Brief.

Sara Hsu:

Thus far, the reforms that have been carried out have not had a significant impact on the business community, which has been more focused on events like the U.S. Federal Reserve’s tapering policy and the recent exchange rate depreciation of the RMB against the dollar. The reduction of uncertainty through the announcements of increased financial reform has on average bolstered global stock markets, while expectations on the ground regarding the reform process have been mixed. Some business analysts predict potentially strong and negative short-term impacts of financial reforms, particularly if the reforms are implemented rapidly and create clear losers, with long-term benefits of marketization. Others view the reforms as generally positive in terms of promoting productivity and efficiency among firms. At this point, however, there is no clear, unified reaction to these reforms within the business community.

China has some very large reforms on the agenda that address the very nature of its financial system, correcting fundamental distortions and increasing the presence of market forces. These reforms will affect many aspects of the Chinese financial and real economy, and, although they are positive moves toward more efficient allocation of capital, will have to be watched carefully for unexpected adverse effects. A focus on institutionalizing transparency and reducing related policy biases are essential to the success of these reform processes. Increased rebalancing of the economy toward new sources of profitability, such as consumption-related industries, can result in economic growth that will create an opportunity to reduce government intervention in the economy—but not a guarantee that state enterprises will not find ways to maintain their current standing.

Much is riding on the success of the Xi-Li administration’s reforms. Many elements of this ambitious agenda have been slated for implementation in the coming months, yet, due to the complexity of realizing all of these changes, analysts wait with bated breath to measure their success. One can only hope that technocrats in Beijing are agile enough to respond to unforeseen consequences of their plan.

More in the China Brief.

Sara Hsu is a speaker at the China Speakers Bureau. Do you need her at your meeting or conference? Do get in touch or fill in our speakers´ request form.

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Why the issue of shadow banking is fading away - Sara Hsu

Sara Hsu

Shadow banking was one of those China issues that kept financial people awake at night. But after a decade of studying shadow banking, Sara Hsu argues in Triple Crisis that the issue has been cut up in manageable parts, and will fade away by 2015.

Sara Hsu:

Financial reforms, many of which are expected to begin this year, will also reduce the size of the shadow banking sector. Elimination of deposit rate ceilings, coupled with deposit insurance, will allow depositors to earn more interest on and have more confidence in their bank deposits, and will likely act as a deterrent to demand for higher yielding but riskier shadow banking products. A more market-based system will allow traditional financial channels to compete with shadowy finance.

Finally, as a crisis of economic confidence is provoked—and we have already seen signs of this in the real estate sector—consumers will look to keep their assets safe. They will put their money in bank deposits, keep it in real estate (although they will likely not buy more housing), lend money to their friends for real business transactions, and buy gold or jade jewelry. It is highly unlikely that they will continue to purchase wealth management and trust products that have already shown indications of deterioration, and even less likely that they will lend to companies that already have scarred images, such as credit guarantee companies. The “animal spirits” that played such a large role in creating the shadow banking boom are reversing, and can be depended on to greatly reduce the size of the sector in the coming bust.

I predict, then, that by this time in 2015, shadow banking in China as we know it will be something else, and this buzzword will no longer abound on the mouths of babes. Trust companies will be freshly disciplined and the myriad types of shadow banking entities that exist today will be fewer in number. The financial sector will continue to contain the formal banking sector and many non-bank financial institutions, but the latter will soon be forced to become braver, and less shadowy, than they have been at their commanding height. What a difference a year may make.

More in Triple Crisis.

Sara Hsu is a speaker at the China Speakers Bureau. Do you need her at your meeting or conference? Do get in touch or fill in our speakers´request form.

Are you a media representative and you want to talk to one of our speakers? Do drop us a line.

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What are the risks of shadow banking? - Sara Hsu

Sara Hsu

Financial analysts look at the financial risks of shadow banking from both extremes, some signal a looming collapse of China´s financial system, others claim there is not much to fear. For TripleCrisis shadow banking expert Sara Hsu explores the different kinds of financial products and their risks.

Sara Hsu:

In sum, the riskiest shadow banking sectors are the trust and wealth management product markets. These are mainly risky based on the integrity of the underlying loans. Many of these loans were extended through a process of adverse selection, with high risk borrowers like local government financing vehicles showing a willingness to pay high interest rates because they have no other choice. The adverse selection issue will play out in the trust and WMP industries, while shadow banking sectors that have lent to more creditworthy customers (as in the entrusted loan sector) or priced in risk (as in the corporate bond sector) will be shielded to some extent from this fallout.

More in TripleCrisis.

Sara Hsu is a speaker at the China Speakers Bureau. Do you need her at your meeting or conference? Do get in touch or fill in our speakers´request form.

Are you a media representative and do you want to talk to one of our speakers? Do get in touch.

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