China’s Tarnished Golden Era Passage
Chinese shares after seeing daylight on the regulator’s decision to limit this year’s IPOs to one-quarter the hundreds of pending applications were socked once again by property developer gloom as Moody’s placed the industry on negative outlook and leaders Vanke and Soho referred respectively to the “golden age end” and “iceberg-heading Titanic.” The rater projected flat sales versus 2013’s 25 percent jump, as new home starts were down 25 percent in Q1. Since 2010 developers have issued $50 billion in international bonds and with average debt-equity at 125 percent investors have turned skittish and scotched recent placements. Outside main cities real estate prices have dropped with clear overbuilding, hurting local governments which get over half their revenue from transactions. Under a pilot program ten jurisdictions will be able to sell their own bonds in the coming months before all financing vehicles will be able to raise money through standard municipal borrowing under a formula yet to be determined. In the meantime Beijing has urged accelerated construction for viable projects to maintain the 7 percent growth target, which may be in jeopardy with PMI readings still below 50 as the yuan continues to gently depreciate. Bank listings have been spurned despite record low valuations as reported NPLs rose again in the latest quarter to 1 percent with a spike in the preliminary “special mention” category. Sovereign and state enterprise debt yields are at the 4 percent plus level with central bank liquidity injections as interbank curbs were introduced with likely strains on second-tier institutions like Minsheng, which has moved to raise capital to mixed response. Companies have become big lenders themselves through entrusted loans which doubled to $400 billion last year as authorities look to squeeze that “shadow” outlet as well. Hong Kong banks with one-fifth of assets tied to the mainland and real estate deals at a two-decade bottom have likewise come under investor and supervisor scrutiny, with a May IMF assessment showing stress test durability under moderate risk scenarios. GDP growth there is set at 4 percent on the same inflation range but tourism has fallen with street protests demanding greater political autonomy. Retail sales and re-exports are off and fund managers are considering relocation to Singapore to gain wider Asian exposure.
The Macau enclave with its literal casino economy is also feeling pressure from tighter border currency restrictions and Premier Li’s anti-corruption campaign which has ensnared prominent civilian and military officials. Resort operating stocks are down sharply and the 10 percent economic expansion forecast may not be reached although the investment-grade rating remains intact on strong public finances. However household subsidies have tripled as share of income in recent years and foreign reserves have slid on local bank demand as future mainland boom bets are hedged.
