Tuesday 28 July 2009

Is China investing abraod to secure natural resouces?

There is considerable anecdotal evidence that China is in a "land grab" race in Africa and elsewhere to secure natural resources for its continuing economic growth.

However a recent paper in Pacific Economic Review casts doubt on this conclusion.

The abstract is somewhat contradictory - is China investing in for natural resources or not. It is a shame the abstract does not make this clearer.


EMPIRICS OF CHINA'S OUTWARD DIRECT INVESTMENT
Yin-Wong Cheung*1 and Xingwang Qian 2

ABSTRACT

Abstract. We investigate the empirical determinants of China's outward direct investment (ODI). It is found that China's investments in developed and developing countries are driven by different sets of factors. Subject to the differences between developed and developing countries, there is evidence that: (i) both market-seeking and resource-seeking motives drive China's ODI; (ii) Chinese exports to developing countries induce China's ODI; (iii) China's international reserves promote its ODI; and (iv) Chinese capital tends to agglomerate among developed economies but diversify among developing economies. Similar results are obtained using alternative ODI data. We do not find substantial evidence that China invests in African and oil-producing countries mainly for their natural resources.


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Wednesday 22 July 2009

Corruption in land auctions

Not so shocking result of the day - that there is corruption is Chinese real estate sales.

This is still excellent work though and a good paper.

China's Land Market Auctions: Evidence of Corruption"

NBER Working Paper No. w15067

HONGBIN CAI, Peking University - Guang Hua School of Management
Email: hbcai@gsm.pku.edu.cn
J. VERNON HENDERSON, Brown University - Department of Economics, National Bureau of Economic Research (NBER)
Email: j_henderson@brown.edu
QINGHUA ZHANG, Peking University - Guang Hua School of Management
Email: zhangq@gsm.pku.edu.cn

This paper studies the urban land market in China in 2003--2007. In China, all urban land is owned by the state. Leasehold use rights for land for (re)development are sold by city governments and are a key source of city revenue. Leasehold sales are viewed as a major venue for corruption, prompting a number of reforms over the years. Reforms now require all leasehold rights be sold at public auction. There are two main types of auction: regular English auction and an unusual type which we call a "two stage auction". The latter type of auction seems more subject to corruption, and to side deals between potential bidders and the auctioneer. Absent corruption, theory suggests that two stage auctions would most likely maximize sales revenue for properties which are likely to have relatively few bidders, or are "cold", which would suggest negative selection on property unobservables into such auctions. However, if such auctions are more corruptible, that could involve positive selection as city officials divert hotter properties to a more corruptible auction form. The paper finds that, overall, sales prices are lower for two stage auctions, and there is strong evidence of positive selection. The price difference is explained primarily by the fact that two stage auctions typically have just one bidder, or no competition despite the vibrant land market in Chinese cities.

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Monday 13 July 2009

Is China spawning systematic financial risks?

Yes say local commentators. I agree.

The China recovery is built on sand - where has the money all gone when trade is still falling, profits are falling and output is falling.

Asset bubbles are forming as we speak. Sell China.

Risks Emerge as Bank Loans Hit Overdrive [Caijing.com.cn]

Record bank lending in China is spawning systematic financial risks that may lead to a credit crisis.

New lending in the January-May period totaled 5.84 trillion yuan, 3.72 trillion yuan more than during the same period last year. That's an unprecedented pace for new loans, as lending levels never even reached 5 trillion yuan for an entire year between 2001 and '08.

This huge influx of borrowing, aimed at stimulating China's sluggish economy, is leading to overcapacity.

Most scholars believe China's recovery is solid and strong, but economic statistics suggest otherwise. Industrial enterprise profits and trade volume have fallen remarkably.

Between January and May, industrial enterprises with annual revenues of more than 5 million yuan booked a combined decline in profits of 22.9 percent year-on-year. Profits for big state-owned enterprises declined 41.5 percent year-on-year.

Meanwhile, China's trade volume fell between January and May by 24.7 percent year-on-year, with imports off 21.8 percent and exports down 28 percent.

Those numbers show that the world market for made-in-China products is shrinking. If China's production-driven growth model continues, the country soon may face a predicament that combines "low interest rates, high capacity and finally low growth" – a scenario that's plagued Japan since the early 1990s.

The global economy is now caught in a vicious cycle: The world expects China to lead a recovery, while China is relying on the international market to absorb its products.

And if excessive lending is a power keg, an interest rate hike will be the fuse that sets it off. Indeed, a credit crisis would ensue if China's central bank raises its interest rate.

Interest rate increases were the immediate causes of the 1988 U.S. credit crisis, implosion of Japan's economic bubble in the 1990s, and the 2007 subprime credit crisis.

China's central bank will be reluctant to raise the interest rate, however, so overcapacity in the real economy will continue.

Due to a lack of investment opportunities in the real economy, speculative investment appears to be a reasonable alternative. That leads to high prices on the stock and real estate markets. Meanwhile, low bank interest rates encourage people to transfer cash from savings deposits to asset markets.

In May 2009, total bank deposits increased by a mere 188.6 billion yuan – down 47.8 billion yuan from the same period last year.

If enterprises and individuals use bank loans and deposits to engage in high-risk speculation, assets bubbles can be expected. Commercial banks would then reduce lending to avoid high credit risks, and market interest rates would rise, puncturing asset bubbles and ruining a financial system pillar.


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Debt sale flounders

China's stimulus plan is large. I just don't like the size of it. Nor it appears does the market.

The plan has already caused a bubble in the stockmarket in my opinion.

China Fails to Attract Enough Buyers in Bill Sales [Bloomberg]

July 10 (Bloomberg) -- China failed to attract enough bidders in a government debt sale for a second time this week on speculation record bank lending will spark inflation in the world’s third-largest economy.

The Ministry of Finance sold 25.1 billion yuan ($3.7 billion) in bills of the 35 billion yuan it had sought, according to statements on the Web site of Chinabond, the nation’s biggest debt-clearing house. The government fell short of its target in a bond sale for the first time in almost six years on July 8.

The auction’s failure reflects concern that Premier Wen Jiabao’s 4 trillion yuan stimulus package will cause bubbles in stock and housing markets, forcing the central bank to tighten monetary policy. The People’s Bank of China this week pushed up money-market rates and drained cash from banks, the biggest investors in the nation’s $2.2 trillion debt market.

“The central bank’s open-market operations suggest concerns that the rapid surge in new bank lending in the first half of this year could fuel inflation,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore. “Some people speculate the central bank will raise interest rates this year but I don’t think they can as global growth slows.”

Rising Yields

The Ministry sold 12.48 billion yuan of 91-day bills at 1.15 percent, compared with 0.84 percent at the last such auction on June 19. It issued 12.65 billion yuan of 273-day bills at 1.25 percent, up from 0.88 percent at a previous sale on June 5.

The People’s Bank of China yesterday resumed one-year bill sales after an eight-month pause, signaling a shift from an “extremely loose” policy, Goldman Sachs Group Inc. said.

Chinese banks extended 1.53 trillion yuan of new loans in June, more than double the amount in May, the central bank said on July 8. Housing sales surged 45.3 percent in the first five months of this year, the National Development and Reform Commission said today.

The Shanghai Composite Index has jumped more than 80 percent from last year’s Nov. 4 low. Guilin Sanjin Pharmaceutical Co. and Zhejiang Wanma Cable Co., the first two companies allowed to go public in China since September, were suspended in Shenzhen trading after surging on their stock market debut today.

More IPOs

“More initial public offerings will come, which will further tighten liquidity,” said Shi Lei, an analyst in Beijing at Bank of China Ltd., the nation’s third-largest lender. “Investors are quite bearish on short-term bonds.”

The yield on the 2.29 percent treasury note due April 2014 surged five basis points to 2.53 percent, and the price of the security dropped 0.20 per 100 yuan face amount to 98.95, according to the Interbank Bond Market. A basis point is 0.01 percentage point.

“We doubt their aim was to cause distress in the government’s deficit financing effort,” Christian Carrillo, a bond strategist at Deutsche Bank AG in Singapore wrote in a research report today. “It appears the signaling aim of the PBOC has gone wrong especially given our understanding is that top level governors are very uncertain about the economic recovery.”

Rate Outlook

China’s bond market swelled in size by 16 percent in the year-ended March 31, paced by corporate bond sales, according to the Asian Development Bank. Demand has been waning in recent weeks. Before this week’s failed one-year auction, a sale of five-year government securities on July 3 drew bids for 1.42 times the debt on offer, compared with a 1.65 bid-to-cover ratio in a sale of 10-year notes on June 17.

Investments by China will help developing economies regain their growth momentum in the second half of this year, pulling the global economy out of the worst recession in six decades, the International Monetary Fund said on July 8. The IMF forecasts China’s expansion will accelerate to 8.5 percent next year from 7.5 percent in 2009.

Policy makers will probably refrain from raising interest rates as the government aims for 8 percent economic growth this year to create jobs and maintain social stability, according to a Bloomberg survey of economists. China’s consumer prices dropped 1.4 percent in May from a year earlier, after falling 1.5 percent in April, according to the statistics bureau.

The benchmark one-year lending rate will stay at 5.31 percent and the deposit rate at 2.25 percent this year, according to the median estimate of 15 economists surveyed by Bloomberg News.

China’s exports fell for an eighth month, dropping 21.4 percent in June from a year earlier, the state-run Xinhua News Agency reported today, citing customs data.

“Despite the lack of success in selling the intended amount of bills, it is unlikely that the government would switch its tactics to hiking interest rates,” said Sherman Chan, an economist with Moody’s Economy.com in Sydney. “They are trying to mop up excess liquidity without raising rates.”


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Thursday 9 July 2009

Unrest in Xinjiang - live discussion

From the inbox:

The Director of George Washington University’s International Development Studies Program and Cultural Anthropologist Sean Roberts will be available to discuss the growing unrest in Uighur. He has studied the region for 20 years.

The live discussion will take place today (July 8th) at 1 pm ET at the following link:

http://www.washingtonpost.com/wp-dyn/content/discussion/2009/07/07/DI2009070701491.html


Kicking off the discussion, Roberts says:

"The current unrest in Xinjiang is another chapter in a long history of tensions between Han Chinese and Uighurs, but it is mostly the result of the frustrations experienced by Uighurs over the last decade as the rapid pace of Chinese development in the region has brought scores of Han Chinese migrants to Xinjiang and has displaced Uyghurs from their traditional livelihoods and communities. While the violence that has emerged on both sides of the conflict is shocking, the most surprising aspect of the events may be that the tensions had not boiled over into direct confrontations until now.”

Please feel free to submit questions, or share this discussion with your readers. If you have any questions please let me know.

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Chinese lending - a recovery built of sand

China is new to the capitalism game and I have been concerned for some time about the size of the stimulus plan. One problem is that the spike in lending is resulting in more risk being taken.

The Chinese recovery may well be built on sand and stimulus packages. This leaves me uneasy. The problem (as it was in the previous stockmarket bubble) is the lack of alternative investment homes for all the cash that is still sloshing around.

Risks Emerge as Bank Loans Hit Overdrive [Caijing.com.cn]


(Caijing.com.cn) Record bank lending in China is spawning systematic financial risks that may lead to a credit crisis.

New lending in the January-May period totaled 5.84 trillion yuan, 3.72 trillion yuan more than during the same period last year. That's an unprecedented pace for new loans, as lending levels never even reached 5 trillion yuan for an entire year between 2001 and '08.

This huge influx of borrowing, aimed at stimulating China's sluggish economy, is leading to overcapacity.

Most scholars believe China's recovery is solid and strong, but economic statistics suggest otherwise. Industrial enterprise profits and trade volume have fallen remarkably.

Between January and May, industrial enterprises with annual revenues of more than 5 million yuan booked a combined decline in profits of 22.9 percent year-on-year. Profits for big state-owned enterprises declined 41.5 percent year-on-year.

Meanwhile, China's trade volume fell between January and May by 24.7 percent year-on-year, with imports off 21.8 percent and exports down 28 percent.

Those numbers show that the world market for made-in-China products is shrinking. If China's production-driven growth model continues, the country soon may face a predicament that combines "low interest rates, high capacity and finally low growth" – a scenario that's plagued Japan since the early 1990s.

The global economy is now caught in a vicious cycle: The world expects China to lead a recovery, while China is relying on the international market to absorb its products.

And if excessive lending is a power keg, an interest rate hike will be the fuse that sets it off. Indeed, a credit crisis would ensue if China's central bank raises its interest rate.

Interest rate increases were the immediate causes of the 1988 U.S. credit crisis, implosion of Japan's economic bubble in the 1990s, and the 2007 subprime credit crisis.

China's central bank will be reluctant to raise the interest rate, however, so overcapacity in the real economy will continue.

Due to a lack of investment opportunities in the real economy, speculative investment appears to be a reasonable alternative. That leads to high prices on the stock and real estate markets. Meanwhile, low bank interest rates encourage people to transfer cash from savings deposits to asset markets.

In May 2009, total bank deposits increased by a mere 188.6 billion yuan – down 47.8 billion yuan from the same period last year.

If enterprises and individuals use bank loans and deposits to engage in high-risk speculation, assets bubbles can be expected. Commercial banks would then reduce lending to avoid high credit risks, and market interest rates would rise, puncturing asset bubbles and ruining a financial system pillar.


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Thursday 2 July 2009

WTO looking closely at Chinese trade restrictions

After spending so long trying to get into the WTO China now spends a long time trying to get around the rules.

Even in the face of a global recession or indeed perhaps because of the global recession the US and EU are fighting back over the Chinese restrictions on exports that are aimed at protecting the domestic steel industry.

This is really a none issue and will not save global trade. China will dig in and the US and Europe will give up.

Duties call [Economist]

DESPITE the periodic sighting of green shoots elsewhere in the economy, the landscape of global trade remains resolutely bare. The World Bank said on June 22nd that world-trade volumes, reeling from a drastic collapse in global demand (see chart), will shrink by nearly 10% this year. That would be the sharpest fall since the Depression, and the first decline in trade since a small dip in 1982.

Unsurprisingly, tempers are fraying as governments struggle to find ways to protect their own. The latest salvo was fired on June 23rd by America and the European Union, which complained to the World Trade Organisation (WTO) about China’s restrictions on the exports of nine minerals, including bauxite, coke, magnesium and manganese. These are important raw materials for the steel industry, among others, and China restricts their exports on the grounds that they are exhaustible resources. But America and the EU argue that by hindering their export, China is unfairly favouring domestic industries.

John Veroneau, a former American deputy trade representative, believes the case against China is a strong one. He also argues that this week’s move can be seen as an effort to foster more trade (as there surely would be if China were to ease its export restrictions) at a time when trade is in a great deal of trouble. In practice, it is unlikely to have that effect. If the case proceeds to the stage where a formal WTO panel is formed to decide on its merits, it could drag on for several years, by which time trade will, with luck, have recovered from its current moribund state.

Jeffrey Schott, a trade expert at the Peterson Institute for International Economics, a think-tank, says that the case against China may also help the cause of open trade in other ways. If Ron Kirk, America’s new trade representative, demonstrates that he is actively enforcing the agreements already in place, he may get “the authority to negotiate Doha and other accords”.

That may be too sanguine. True, America and the EU are not resorting to imposing fresh barriers of their own in this dispute; for that matter, China’s export restrictions are not new either. But trade experts warn that protectionism remains a serious worry. Of particular concern are the so-called “Buy China” requirements added to China’s stimulus package this month. These require recipients of money from China’s mammoth fiscal expansion to choose domestic suppliers “unless products or services cannot be obtained in reasonable commercial conditions in China”. This sounds like out-and-out protectionism. But America, which included similar “Buy America” provisions in its own stimulus bill, may find it hard to raise a stink.


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China, Iraq and the collapse of the dollar

A title to chew over that is for sure.

This is an interesting New York Times article. The implications are potentially very serious. Imagine China selling up it's US paper - work it through and the dollar is in deep trouble. Will China risk it? Perhaps it will for oil.

As Iraq Stabilizes, China Bids on Its Oil Fields [New York Times]

HONG KONG — Oil companies from China, the world’s second-largest and fastest-growing consumer of oil, bid aggressively on Tuesday as Iraq began auctioning licenses in six large oil fields.

../

It is common in the oil industry for initial auction results to be followed by weeks of dickering over details. But the bidding in Baghdad on Tuesday was particularly contentious, as multinationals demanded that the Iraqi government allow them to keep more of the revenue from each extra barrel of oil they pump beyond levels previously sustained by Iraq’s chronically corrupt and technologically weak national oil industry.

Few Americans or Iraqis may have expected China to emerge as one of the winners in Iraqi oil, particularly after six years of war. But signs of stability in Iraq this year, and a planned American military pullout from Iraqi cities on Tuesday, happened to coincide with an aggressive Chinese push to buy or develop overseas oil fields.

The Chinese companies “have been interested in Iraq,” said David Zweig, a specialist in Chinese natural resource policies at the Hong Kong University of Science and Technology. “They were interested in Iraq before the war, and now that things have improved somewhat there, it’s on their agenda.”

Some experts contend that the West should not be concerned about a substantial Chinese presence in Iraqi oil fields, because it gives China greater stake in improving stability in the region.

“If you want China to be a responsible stakeholder in the world, you need to let China buy stakes in the world,” said Mark P. Thirlwell, the program director for international economics at the Lowy Institute for International Policy in Sydney, during a speech in Hong Kong on Tuesday.

The Iraqi government originally tried last year to award oil fields to Western companies through a no-bid process. That prompted objections from a group of United States senators, who wanted greater transparency, and the plan was replaced with the auction, which had the effect of letting Chinese companies play a much larger role.

China’s leaders were surprised by the steep rise in commodity prices early last year, which exposed the vulnerability of their country’s huge manufacturing sector to high raw material prices. When oil prices plunged in the autumn, China began buying, importing and storing oil in huge quantities, helping to drive a partial rebound in world oil prices in spring. And China stepped up its hunt to acquire foreign oil.

Chinese officials, economists and advisers have been almost unanimous in recent weeks in saying that their country needed to invest more in natural resources, while also voicing concerns about the long-term creditworthiness of the United States and the buying power of the dollar.

China has $2 trillion in foreign exchange reserves, mostly invested in dollar-denominated bonds, and has been looking for ways to diversify gradually into other assets like commodities, said a Chinese government adviser who spoke on the condition of anonymity because of the secrecy of Chinese reserve policies.

China’s central bank, the People’s Bank of China, called Friday for the development of an international currency other than the dollar that would be a safe repository of value, in the latest sign of China’s search for other ways to invest its international reserves.

Philip Andrews-Speed, a specialist in China’s oil industry at the University of Dundee in Scotland, said Iraq was clearly attractive for China and its oil industry.


More on the second page.

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Chinese IPOs are back - but for how long?

Here we go again. The thirst of Chinese investors to own stocks appears undiminished despite the recent bloodbath.

I have been surprised by the strength of the recovery in the stockmarket and the return of IPOs is an interesting development that needs watching carefully.

Thirst-quenching [Economist]

IT IS like a downpour after a drought. In 2007 and early 2008, hundreds of Chinese companies worked feverishly with accountants and bankers to prepare for initial public offerings. Their work came to nothing. Collapsing share prices, a contracting economy, unrealistic expectations on the part of sellers and, finally, restrictions from regulators crushed the IPO market. Now the companies and bankers that have managed to survive a brutal year are once again seeking capital, through listings on bourses in the mainland and beyond.

The first raindrop in China has been Guilin Sanjin, a manufacturer of Chinese medicine, which is expected to issue shares on June 29th on the Shenzhen Stock Exchange, the market for the country’s smaller companies. The size of the offering is likely to be a bit under $100m—a mere rounding error compared to the mega-deals of two or three years ago, but a sign, nonetheless, that business has resumed.

Another 30 companies have reportedly received regulatory approval to list and have begun final preparation and marketing; 400 more sit in a queue waiting to be approved. Several state enterprises that went public on offshore markets, including China Mobile and CNOOC, an oil firm, are also expected to list at some point in Shanghai. So too may a handful of non-Chinese companies, with interest already expressed by HSBC, in deference to its Shanghai roots, and the New York Stock Exchange (NYSE).

In Hong Kong, a few companies did manage to float in the past few months but the going was tough, with price estimates cut repeatedly prior to the offering, buyers corralled from friends, families and affiliates, and a lacklustre aftermarket. Conditions have turned. Many of these deals are now up significantly. Three small companies have gone public since June 16th, with shares in each case rising by at least 20%.

Bawang, a Chinese toiletries company, is in the final stages of a roadshow and appears likely to price at the top of its pre-marketing estimate. More sizeable deals are expected by the year’s end, including a listing of the Asian life-insurance operations of AIG, and dual China-Hong Kong listings for Agricultural Bank of China and two Chinese electrical-distribution firms.

America’s capital markets are benefiting too. Two Chinese companies, one producing specialty chemicals (Chemspec) and another water-treatment equipment (Duoyuan Global), made splashy debuts on the NYSE on June 23rd. In every case, regardless of where the listing venue might be, the underlying appeal is the same. Says Jonathan Penkin of Goldman Sachs in Hong Kong: “People are looking for growth. You can find it here.”


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