Wealth management tools circumvented banking restrictions - Arthur Kroeber

Arthur Kroeber

While China´s financial regulators have tried to prevent previous market panics, smaller banks have behind their backs been expanding credit lines to wealthy clients, says economist Arthur Kroeber, author of China's Economy: What Everyone Needs to Know®  to Dow Jones. The regulators now try to rein in those tools.

Dow Jones:

The growth of the sector has put regulators in a tricky situation. On the one hand, the credit generated by the products has helped some struggling companies get by. On the other hand, the growth of essentially off-balance sheet lending masks the extent of problematic loans in China's banking system. 

"A part of what is going on right now in China is that the banks, particularly the smaller banks, have expanded their balance sheets very rapidly, and the regulators are worried about this," said Arthur Kroeber, a partner at the China- focused Gavekal Dragonomics research firm. 

The document appears to target the risks related to wealth-management products that invest in stocks and other riskier assets, more than ones that concentrate on more-traditional assets such as loans to companies.

Arthur Kroeber 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.

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After the hype: China has not been bleeding capital - Arthur Kroeber

Arthur Kroeber

The supposed capital flight from China has been keeping international financial markets more than busy. A hype, concludes economist Arthur Kroeber and author of China's Economy: What Everyone Needs to Know® after looking at the figures in China File.

Arthur Kroeber:

Even when China was losing reserves, stories about “capital flight” were grossly exaggerated. When a country experiences true capital flight—as Cyprus and Greece have in recent years—it shows up as a decline in bank deposits, as households pull their money out of domestic banks and send it abroad. In China, household bank deposits today are a healthy RMB 21.5 trillion, up 16 percent from a year ago. The vast majority of reserve losses reflected Chinese companies paying down foreign-currency debts, making real-economy investments abroad, or simply shifting cash into dollar accounts inside Chinese banks. 

The one truly important international impact of the weaker renminbi is that Chinese private companies have accelerated the pace of their investments abroad: outbound direct investment by Chinese firms in the first half of 2016 already exceeds the total for all of 2015. But even here the currency plays only a supporting role. The most important factor is that many Chinese companies are now mature enough to want to expand internationally—just as Japanese firms did starting in the 1970s. Second, China’s economy is slowing, so that investments in untapped markets abroad seem more attractive. And finally, companies have an incentive to move fast, because the longer they wait, the greater the risk that the renminbi will have fallen a bit more, making their investments more expensive. This is not capital flight, this is the Chinese economy growing up. And on balance, that’s a good thing for the world.

More in ChinaFile.

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No reason to expect financial volatility now - Arthur Kroeber

Arthur Kroeber

Leading economist Arthur Kroeber does not see reason for financial volatility in the short run, he tells at Bloomberg. The Chinese government will not try another devaluation, like they mistakenly did in August, and the funding of banks is very solid, at least for the next two to three years.

Arthur Kroeber 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 stories by Arthur Kroeber? Do check out this list. 

Making sense out of the financial zigzag policies - Victor Shih

Victor Shih

Making sense out of Beijing`s recent financial direction is hard, even for veteran political and financial analyst Victor Shi. In the Wall Street Journal, he tries to give it a shot. “As with any addiction program, the first step is to admit you have a problem."

The Wall Street Journal:

“It’s really difficult for the Chinese government to regain global confidence because it’s really difficult for them to actually deleverage, since that could lead to a financial crisis,” said University of California, San Diego professor Victor Shih, who calculates that interest on China’s existing debt now accounts for 20% of GDP. “They’re walking a very tight rope.” 

The week’s articles follow other zigzag moves. After pledging in 2013 that Beijing would let the marketplace take a “decisive” role in the economy, Mr. Xi’s administration intervened aggressively last summer when the stock market fell, then sparked fears of a global currency war in August when it rolled out a new currency-management system with little warning. 

Mr. Shih said the articles included no specifics on how China should tackle its debt habit, although the unnamed person in Monday’s question-and-answer article appeared to nod at the scale of the challenge, even citing the risk of a “crisis.” “As with any addiction program, the first step is to admit you have a problem,” Mr. Shih said.

More in the Wall Street Journal.

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All-out to regain control over economy - Sara Hsu

Sara Hsu

Few things are sure in China, but the government has called all hands on deck to regain control over the economy. Financial analyst Sara Hsu gives for the Diplomat an overview of the measures already taken to stabilize China´s financial industry.

Sara Hsu:

If the economy cannot be easily swayed, the media can. Media discussion about economic conditions are at present closely monitored, and journalists have been jailed for publishing reports that depict economic and financial events negatively. A new law, going into effect on March 10, will require online media publishers to obtain approval before operating online. Foreign companies, including those in joint ventures, have been banned from producing digital content. Information on China’s economy is increasingly controlled. Notably, this month, the People’s Bank of China omitted data on financial institutions’ foreign exchange holdings, which might expose the scale of state interventions to bolster the RMB. This has left observers nervous about the true state of the economy. 

In a final effort to reduce panic, control has required that China find individuals to hold responsible for the economic downturn. Xiao Gang, Chairman of the China Securities Regulatory Commission since March 2013, was ousted from his position, held responsible for China’s plunging stock market and failure of his circuit-breaker policy discussed above. Wang Baoan, head of the National Bureau of Statistics, was arrested after making a speech on the risks of capital outflows. 

Worried yet? For many Chinese, and for long-time China hands, many of these events are familiar. Policy to curb panic, regulation to cover bad practices, suppression of information, arrest of top officials who go against (wittingly or unwittingly) the party line. All of these events taken together, and in a relatively short period of time with little good news to create hope, are disturbing, especially considering that China is attempting to restructure the economy wholesale. In order to do so, reforms need to keep coming, perhaps more rapidly, and uncertainty needs to be reduced, not by government guarantees but by more transparent data, clearer definition of financial and economic plans (particularly for the exchange rate), and a more marked government timeline and plan for reform. Beijing’s battle to regain economic control hangs in the balance.

More in the Diplomat.

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China´s central bank is safe for another year - Arthur Kroeber

Arthur Kroeber

How deep are the pockets of the People´s Bank of China (PBOC) to keep on funding its financial system? According to economist Arthur Kroeber they are safe for another year, and can use the time to clean up the current mess. Learning how to communicate with the markets is one talent that needs urgent development, he tells Bloomberg.

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Shake-up at financial regulator does not mean change - Victor Shih

Victor Shih

 The surprise dismissal of China´s financial regulator Xiao Gang does not mean that its policies and approach are really going to change, says political analyst Victor Shih in the New York Times. His successor Liu Shiyu is certainly no bold reformer, says professor Shih.

The New York Times:

The shake-up also does little to solve the underlying problem: a government increasingly under the control of one man, President Xi, who is trying to subdue economic turbulence. It is this penchant for control, investors and analysts say, that is driving talent away from the technocratic bureaucracy and rewarding officials who fall in line.

“That’s the problem of a very top-down policy style that’s emerging in China now,” said Victor Shih, a professor at the University of California, San Diego, who studies the confluence of finance and politics in China. “No one dares to challenge whatever preconceived notion the top leadership has.”... 

While Mr. Liu has little experience with markets, he does have connections. In the mid-1990s, he worked the state-owned China Construction Bank. The bank, at the time, was headed by Wang Qishan, who is now overseeing the anticorruption campaign as one of seven members of the Communist Party’s ruling Politburo Standing Committee. 

“He’s definitely not a bold reformer,” Mr. Shih said of Mr. Liu. 

The new securities chief may be in an impossible position, expected to control inherently uncontrollable markets and take the blame if the efforts fail. The push by Mr. Xi’s to assert state control over the markets and the economy go against the philosophy of China’s early reformers under Deng Xiaoping, the paramount leader who sought to give more space to the market.

More in the New York Times. 

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Volatility to remain for next 3,4 months - Shaun Rein

Shaun Rein

While the Chinese stock markets did not plunge after trade resumed after the Chinese New Year, business analyst Shaun Rein expects the markets to remain volatile for the next 3 to 4 months, he tells Money Control.

Money Control:

Shaun Rein, managing director at China Market Research group feels the Chinese markets will remain volatile for 3-4 months, although they have opened up relatively stronger after the Chinese new-year break. 

Rein says, the sentiment has improved post the new-year break with fewer mass layoffs and certain conducive policy initiatives from the Chinese government like lower mortgage rates for first-time home buyers. 

"Certain cohesive and intelligent policy moves by the Chinese government have created confidence but, we may not necessarily see a boom straight through. There may be volatility for some time," he says. 

On the pegging of yuan at its lowest rate since January 7, Rein says, the government is looking to shake out the short sellers, but the pressure will ease off in few weeks.

More at Money Control.

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China leadership lacks interest in economic reform - Arthur Kroeber

Arthur Kroeber

Relentlessness mayhem in China´s financial markets and its impact on the global economy is not having enough interest of China´s leadership, economist Arthur Kroeber tells Reuters. Their interest is too much focused on domestic affairs.

Reuters:

"China's market disasters share a common and dispiriting cause," Arthur Kroeber, head of research at Gavekal Dragonomics, wrote in a research note. 

"This cause is not ... that China is on the brink of an economic or financial collapse and its leaders have begun to panic... At root, the difficulty is that the Communist Party seems uninterested in setting a clear course toward a more market-driven economy."

More in Reuters.

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What will China´s economy do in 2016? - Sara Hsu

Sara Hsu

Financial analyst Sara Hsu looks ahead in the Diplomat at 2016 and what the announced economic shift might mean for the country and the world. An overview of the current state of financial reforms in China.

Sara Hsu:

China is moving away from a manufacturing-based economy to a service-based economy, and has ended a period of intensive fixed asset investment. Overcapacity within the steel industry, for example, has resulted in zero profitability of steel companies and insufficient demand, not to mention supply gluts in the global market. Firms that are inefficient are to enter bankruptcy or be merged with other firms. Excess investment in the real estate sector has also led to an oversupply of houses, which has led to falling home prices, especially outside of the larger cities. Promotion of urbanization policies may help to shore up the demand for real estate. 

Much of the oversupply in manufacturing and real estate occurred as a result of or in tandem with overlending to local governments, which accumulated massive amounts of debt building up infrastructure in recent years. The risks of local government debt default are to be controlled in this coming year in order to maintain financial stability. The issuance of local government bonds has allowed local governments to stay afloat despite holding high levels of debt. Certainly, improving the real estate outlook will help local governments to improve the prospect of further land development and land sales for generating revenue. 

Costs for firms are to be cut by reducing taxes and fees, improving administrative procedures, and reducing social security contributions. These steps will encourage growth of domestic firms. New industries will continue to be promoted; the high-tech industry is growing rapidly, and foreign investment in this industry is expanding along with it. Telecommunications, e-commerce, and new energy sectors are growing as well. 

Goals to maintain macroeconomic stability have been a cornerstone of Chinese economic policy since reform and opening up, in an effort to maintain growth and keep inflation under control. Boosting consumer demand is a somewhat newer task, and with consumer demand rising slowly, it may take some time for demand to make up for other types of spending. However, China’s upper middle class is growing, set to almost double as a percentage of urban households by 2020, which will ensure ongoing expansion of consumer spending. 

China’s leadership has stated that its capital account will be liberalized by 2020, and that its exchange rate will continue to reflect market forces. This process will be aided by the RMB’s recent inclusion into the IMF’s basket of reserve currencies, on the condition that further exchange rate liberalization will take place. The move also increases the attractiveness of holding RMB-denominated assets and will help to push forward opening of the capital account.

More in the Diplomat.

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How Xi Jinping let financial regulators run out of control - Victor Shih

Victor Shih

The central government wrongly used the upswing in stock markets as a proxy for real reforms, says associate professor Victor Shih in the Washington Post. Until those shares came down and created mayhem in China and globally. ""In dictatorships, when things are going well, nobody wants to end the party."

The Washington Post:

“The entire policy establishment was thinking they had found the magic bullet for corporate finance in China and not really thinking about where the money comes from," ... said (Victor Shih, associate professor at the University of California at San Diego’s School of Global Policy and Strategy). 

For Shih, the sorry episode also reflected a more fundamental flaw in China’s system, especially with power so centered in one man. 

"In dictatorships, when things are going well, nobody wants to end the party,” he said. “When anything goes well in China, people can attribute that to the top leader. But it would be very difficult for anyone to come and say, 'Things are not going well; it’s a bubble and it’s about to crash.'" 

"Had power been a bit more decentralized, people would have come to say, 'Lets end the party.' There would be less fear of offending any particular leader." 

Xi’s centralization of power, some experts and foreign business leaders say, has also undercut a strength of the Chinese system — decision-making by consensus, in which policy was implemented only after careful consultation and cautious experimentation. Today, they say, policy seems less considered, more haphazard.

More in the Washington Post.

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For Xi Jinping, the markets are only secondary - Arthur Kroeber

Arthur Kroeber

One of the reasons financial markets went out of control, is because president Xi Jinping is mostly focused on politics and geopolitical ambitions, says political analyst Arthur Kroeber in the Washington Post. 

The Washington Post:

Kroeber, (managing director of Gavekal Dragonomics in Beijing) is also skeptical. While Xi has talked of markets playing a "decisive role" in resource allocation, he has also reaffirmed the “dominant role” of the state sector. His government has reined in excessive credit growth and excessive investment, but it has failed to make good on promises of deregulation and curbing the power of state-owned enterprises, Kroeber wrote in a note to clients. 

“We are increasingly of the view that this mediocre result arises not because a bold and visionary reform program has broken up on the reefs of political opposition, but because the main aims of China’s leader Xi Jinping are political and geo-strategic, while his economic goals are contradictory,” he wrote.

More in the Washington Post.

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How the government messed up financial markets - Arthur Kroeber

Arthur Kroeber

The government has really messed up almost anything they did on the financial markets, says financial analyst Arthur Kroeber on NPR. Internal divisions between different factions did not help to make sound financial decisions.

NPR:

"In the stock market case, I think the government was really incompetent on several levels because they were actively promoting something that was really bad economically," says Arthur Kroeber, the head of research at Gavekal Dragonomics, a Beijing-based economics research firm.... 

Kroeber says when stocks went south, the government lost its way. "They first encouraged an irrational bubble," he says. "Then they tried, unreasonably, to protect the market from the consequences of its own excesses. And then, having done that for two months, they kind of gave up." 

When the government devalued China's currency earlier this month, its performance was no better. 

Officials didn't immediately spell out their motives — sparking fears that China's economy was in worse shape than it appeared.... 

Why has the government made missteps this summer and struggled to manage its message? 

For one thing, it's harder and harder to control information in the information age — even in authoritarian China. But there is another reason, 

Kroeber says: Government officials are at odds on how to handle the economy and slowing growth. 

"There is very clearly a deep division within the government about how much structural economic reform needs to be done, and this is not a debate that has been clearly decided from one side or the other," he says. "So when you look at it from the outside, it looks like confusion."

More at NPR.

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CIC got US$ 100 Billion to distribute over Silk Road projects - Sara Hsu

Sara Hsu

The China Investment Corporation (CIC) obtained 100 billion US$ bond issue from the Ministry of Finance to finance the One Road, One Belt initiative, writes financial analyst Sara Hsu in The Diplomat. Although CIC has been initially less successful, Hsu expects China´s largest sovereign wealth fund will be able to make a huge profit.

Sara Hsu:

China Investment Corporation’s investment in OBOR may encounter the returns it is looking for, as the sovereign wealth fund appears to have found its footing in a longer-term investment strategy after several years of mixed success. CIC has faced funding issues, with a sporadic source of funding coming from MOF bond issues, as well as major losses in 2008, having invested heavily in Morgan Stanley and Blackstone Group, which suffered greatly during the global financial crisis. However, after posting negative annual returns on its global portfolio in 2008 and 2011, CIC shifted its strategy toward long-term investments, particularly direct investments, using funds to renew infrastructure in Europe after the crisis, to invest in African industry, and now to build up infrastructure along the Silk Road. CIC’s direct investments have been, and via Silk Road projects will continue to be, diversified across sectors and countries. That appears to work well: For example, CIC’s investment in Thames Water in the UK became profitable after 2012, and its stakes in U.S. energy company AES Corporation has also provided healthy returns. Many Chinese companies also have long experience building up infrastructure in Africa and other regions, generating profits for successfully bidding firms. 

Within the Silk Road, investments will be made in 65 countries and in infrastructure sectors such as road, railways, and power, providing a diverse array of projects. CIC’s investment in this area will be boosted by participation from other funding bodies, such as the Asia Infrastructure Investment Bank, the Silk Road fund, and the New Development Bank. 

Direct investment in less developed countries will help to build up infrastructure, while investment in developed countries will help to secure technology and other desirables. 

Already, OBOR projects have accounted for more than 40 percent of overseas construction projects in the first half of this year, with returns to be realized over a period of ten or more years. 

Based on the success of previous direct investment deals, it appears reasonable to expect that CIC’s direct investment in OBOR projects will also prove lucrative. At the same time, risks must be tightly anticipated and controlled in order to secure the benefits of overseas direct investment for China’s sovereign wealth fund. Political as well as strategic risk present serious challenges to risk assessment, which the CIC has recently striven to improve. Political risk can present a problem where political leaders or groups arise that oppose the aims of the CIC and OBOR, while strategic risk can occur where planned direct investment projects are not successful as anticipated. Infrastructure projects may not pay off if markets are scant, for example. Further, a relative lack of transparency on the part of the CIC in terms of individual project investment and disaggregated profit information makes it difficult to truly understand the risks and rewards of investment at the project level. 

At this point, the potential for OBOR appears to be wide open, and there has been very little negative assessment of the initiative. Given China’s ability to carry out infrastructure projects more cheaply and more quickly than its Western counterparts can, CIC’s investment in OBOR seems like a sensible endeavor. Given the long-term nature of these investments, however, this will have to be revisited years down the line.

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.

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