China’s New Year Blast Bleats
Chinese shares entered the new year period in bullish spirit up 20 percent from last year’s low, as official GDP growth and PMI indicators returned to the respective 8 percent and 50 percent-plus ranges despite the record central bank cash injections to meet personal holiday and lingering system liquidity demand. In December banks provided only one-quarter of financing now half-controlled on an annual basis by alternative bond, trust and wealth management channels. The big 4 share of the former which may reach the trillion yuan mark in 2013 has in turn dropped to 40 percent, as second-tier lenders have moved aggressively into high-yield and local government business. 20 provinces again set fixed investment growth targets above 20 percent according to reports as central authorities following the recent leadership reshuffle try to tilt toward consumption support. The central bank has warned of a short-term debt hump equivalent to 50 percent of GDP stemming from the post-crisis stimulus programs along with a maturity mismatch for longer-range infrastructure and housing projects through “shadow” sources in particular. Although declared non-performing assets amount to only 1 percent, total on and off balance sheet exposure could come to several times economic output, analysts calculate. The IMF estimates trust industry size at 5 trillion yuan through a combination of licensed and unmonitored institutions often offering products analogous to the “toxic” collateralized debt obligations which precipitated the 2008 US crash. Banks have packaged such instruments at a multiple of that amount to evade general quotas and specific property company prohibitions. Separate non-payment episodes at trust Three Gorges and Huaxia Bank have highlighted dangers, and brokerages have in turn received almost RMB 2 trillion in accounts from the originators for an additional layer of fiduciary complexity. Local governments have tapped this capacity in hiking 2012 bond activity 150 percent to RMB 650 billion as overall debt topped RMB 9 trillion by private and public tallies. One-third of interest and principal due may have been rolled over as three-quarters of facilities were rescheduled with stricter future guidelines at Beijing’s urging, according to international media.
Corporate bond data trackers classify 75 percent of issuers as government-backed to some degree, and foreign investors prefer these names although they returned to mainland and Hong Kong high-yield real estate developers in January with $3.5 billion through ten placements. Global funds put $550 million in Chinese bonds for the month, half the total for all of 2012. 10-year yields for top-rated firms are near 5.5 percent, and small companies continue to account for less than one-tenth of volume. Without the public guarantee, creditor wariness persists in view of the recent workout experience which imposed large haircuts as in the case of fraud-ridden Sino Forest. In the trust sector, participants with long memories may recall the comparable GITIC saga during the Asia financial crisis which created its own fireworks burning extended hands.
