China’s Local Sewage Streams
Chinese shares were down after early year gains as bank worries were added to macroeconomic and corporate governance ones with regulators reportedly preparing for a one-third or over $450 billion local government bad loan scenario without property or other collateral payment coverage. They are attempting to boost municipal bond and secondary trading channels to cushion portfolio fallout as existing investors have questioned use of project funding for stated purposes with alleged diversion of large infrastructure outlays. Repeated reserve requirement hikes have slowed still double-digit money supply growth as both inflation and GDP expansion have tapered on a lower trade surplus and commodity prices. Ratings agencies predict that the NPL ratio for state commercial banks already planning to raise additional capital could hit 10 percent next year. After successful ipos in the US mainly through so-called reverse mergers many Chinese companies have been accused by research houses and investigators of disclosure lapses and balance sheet manipulations choking the pipeline as mainland and Hong Kong placements also languish after initial enthusiasm. With unsettled conditions real estate issuers that had frequented the high-yield external bond market have been absent, as buyers fear another round of unfriendly negotiations around looming defaults. In Shanghai both A and B shares are in the negative column, and the slide has implicated Taiwan as cross-strait ties again prove menacing. However performance has been worse in the other Asian BRIC India, off 10 percent on the MSCI Index, where foreign investors overwhelmingly prefer corporate and government debt in their $3 billion net allocation through June with the central bank on a prolonged tightening cycle. The Singh coalition is fighting to re-establish momentum after a string of corruption scandals sparking a national protest movement led by a prominent faith healer. Private banks may be given more competitive leeway provided they set up separately-capitalized subsidiaries to redeem the prime minister’s promise immediately after securing a second term.
Neighboring big regional exposure South Korea has ceded ground on lackluster domestic demand to supplement exports and steep household debt at almost 150 percent of income with rising adjustable rate mortgages. The North Korean dynastic succession has been bumpy and presidential elections are due next year with the unpopular incumbent, who had originally been praised for his business rather than political background, unlikely to benefit any designated candidate. The Philippine and Thailand are struggling in part due to dual Chinese and Japanese squeezes, in addition to fiscal and monetary policy shadows that already obscure Asia’s giants.
