China’s Delicate Dim Sum Dismay
The standout securities frenzy associated with trial yuan-denominated “dim sum” offerings in Hong Kong has joined wariness in other segments as credit risk specialists demand greater disclosure and standardization of Chinese company bonds, and daily currency volume to support the market is off one-third to $1 billion. Before the pullback less-known unrated names had tapped the channel as the currency continued to appreciate in its dollar band in part to blunt trade partner “war” attacks. Since September the 6.3 rate has been relatively constant as authorities, responding to export slowdown, call the exchange rate “basically reasonable.” The global spillover from the Eurozone crisis has caught investors and traders with illiquid positions for the new instruments, and the yuan portion of Hong Kong bank deposits at 10 percent has not changed since its rapid initial surge. The Cannes G-20 meeting reaffirmed a pause in Washington-Beijing confrontation after a Senate bill brandishing retaliation over alleged “manipulation” was stuck in the other chamber, and the Treasury Department again passed on reaching that conclusion with a delayed biannual report. The group communique mentioned the desire for flexibility, but dropped previous criticism of current account imbalances beyond a designated fraction of GDP. Among group members, China has entered over RMB 1 trillion in trade-related swap facilities, including with Korea, Russia and Argentina, and settlement can be extended to the capital account on outbound FDI which came to $70 billion in 2010. Access widening is planned as well through the respective institutional investor QFII and QDII schemes, with a particular stress on promoting internationalization to reduce dollar and euro official reserve reliance. The peril of such holdings was underscored by the recent approach from EFSF representatives for a large commitment to an expanded the rescue fund when Chinese portfolio managers are ambivalent about its current bond pipeline.
Weaker industrial output has tweaked the GDP growth forecast to the 8.5 percent range, but the inflation fight with credit and property crackdowns and a raw material cost respite took it to 5.5 percent. Despite pleas for monetary release, Premier Wen insisted real estate curbs would remain indefinitely as major developers head for serious squeezes and likely bankruptcies. An exception was made for credit-starved small businesses which have often turned to gouging informal lenders, and local governments have also been approved to issue bonds instead of depending on banks. Shanghai and Guangdong province have been chosen for pilot exercises with many foreign investors recalling the latter’s default through its trust company arm during the Asian financial crisis. Local banks also had to be recapitalized due to such debacles, and the leadership there and at the industry regulators has begun to rotate ahead of next year’s party congress arranging the complex political and economic platter.
