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Problems in China’s Outbound Investment in the Mining Industry

According to a Xinhua report, over the past five years, over 95 percent of the overseas mergers and acquisitions made by Chinese companies in the mining industry ended in failure.

A major problem is that most individual Chinese companies lack an in-depth understanding of the political, economic, legal, and cultural differences in the host countries. Another issue is the proportion of stock ownership on the Chinese side. A higher Chinese ownership simplifies the decision making process and streamlines the operations. However, it invites opposition from the host countries and may even result in a lower market valuation. Chinese companies have also complained about fraudulent mining data and exaggerated mining exploration statistics.

In 2013, China topped the world in both production and consumption of iron ore, crude steel, steel, and non-ferrous metals. Chinese outbound investment in the mining sector jumped from US$4.2 billion in 2007 to 20.2 billion in 2013.

Source: Xinhua, June 1, 2014
http://news.xinhuanet.com/fortune/2014-06/01/c_126570335.htm

Briefings | | |   Economy/Resources

Corrupt Officials Are behind the Housing Market Downturn

New regulations have been proposed, to be implemented by the end of 2014, requiring the registration of real estate. Corrupt officials are trying to sell their real estate before the regulations take effect. According to Zhongyuan, a leading real estate brokerage firm in China, the effort to sell quickly has played a large role in the downturn of the housing market. Zhongyuan, one of the largest brokerage firms in China, has tens of thousands employees in over 30 major cities throughout China. Shi Yongqing, Zhongyuan’s founder, is pessimistic about the prospects for the housing market. “There are three indicators of a real estate bubble: over-building, excess credit, and prices that are too high. China’s housing market has all three. None of these problems can be solved easily.” 

According to Zhongyuan’s real estate brokers, “Officials are selling, and not just a few of them. The purchasing power of these officials is evaporating. They have become a driving force pushing the market downward." One observation is that the upcoming implementation of real estate registration has prompted these officials to get rid of houses they obtained using questionable means. On May 14, 2014, the Ministry of Land and Resources announced that real estate registration will be a priority for its rulemaking in 2014. The objective is to release a final draft by the end of June. 
Sources: 
First Financial Daily reprinted by China Economy, May 29, 2014 http://www.ce.cn/macro/more/201405/29/t20140529_2891382.shtml 
People’s Daily, May 27, 2014 
http://house.people.com.cn/n/2014/0527/c164220-25068014.html
Briefings | | |   Economy/Resources

Pessimism in China’s Housing Market Continues

Since January, the housing market has been experiencing a sharp downturn due to the facts that, in addition to other factors, banks have been tightening credit and inventory has increased. Commodity housing sales in large and medium sized cities slid by 20 to 30 percent with some down as much as 40 to 50 percent. 

In Shanghai, for example, new housing transactions were down 25.56 percent for the first 21 days in May, compared to the same period in April, and down by 34.86 percent compared to same period last year. 
Market analysts believe that, were the banks to loosen credit, the pessimism in the housing market would not change. In fact, it is almost impossible for banks to loosen credit to stimulate the housing market. A reduction in housing prices seems to be the only option to deplete the existing inventory. 

Source: 21st Century Business Herald, May 29, 2014
http://fangchan.21cbh.com/2014/5-29/5MMDA1NzFfMTE4MjM5MA.html

Briefings | | |   Economy/Resources

China Daily: China To Allow Ten Provinces and Cities to Issue Bonds

China Daily recently reported that China is planning that, later this year, the first group of ten provinces and cities will be allowed to issue their own bonds. The bonds will be modeled after the “Western municipal bonds.” The plan includes Zhejiang, Jiangsu, Shandong, Guangdong and two other less-developed provinces. It also includes the cities of Beijing, Shanghai, Shenzhen, and another coastal city. The report estimated that the announcement would be made near the end of May and that the bond issuance might happen in July. Currently, China’s local governments are not allowed to issue bonds directly, at least not officially. The new plan will also include a rating system for the local bonds. However all these are still pending approval of the National People’s Congress (NPC). The scale of this first wave of local bonds is still unclear.
 
Source: China Daily, May 19, 2014
http://caijing.chinadaily.com.cn/2014-05/19/content_17518160.htm
Briefings | | |   Economy/Resources

Ten Local Governments Allowed to Issue Bonds to Repay Debts

According to China’s Ministry of Finance, the State Council has approved 10 local governments as part of a pilot program to give them the authority to issue municipal bonds and be responsible for the repayment of their debts. 

Prior to the pilot program, the central government was responsible for the payments of interest and principal on the bonds that the local governments issued. These payments were then deducted from the funds the central government allocated to the local governments. 
The 10 local governments are Shanghai, Zhenjiang Province, Guangdong Province, Shenzhen, Jiangsu Province, Shandong Province, Beijing, Jiangxi Province, Ningxia Autonomous Region and Qingdao. Of these 10 governments, Ningxia and Jiangxi are considered to have a strong solvency. Their 2013 debt ratios were 50.5 percent and 68 percent respectively. The estimated value of the bonds may reach 150 billion yuan and they may mature in five, seven, and 10 years. These bonds will become part of China’s first-ever municipal bond market. 
Source: China Securities, May 21, 2014. 
http://www.cs.com.cn/zq/zqxw/201405/t20140522_4397444.html
Briefings | | |   Economy/Resources

Business Bankruptcy Filings Escalate

Economic Information, a publication under Xinhua, reported that bankruptcies are on the rise and banks have tightened credit, adding fuel to the economic downturn. 

A total of 346 bankruptcy cases have been filed in the Courts in Zhejiang Province. This represents an increase of 145.07 percent compared to the same period last year. The debt of these bankrupt companies totals more than 159.5 billion yuan. This is a six fold increase compared to the debt in 2012, which was 24.3 billion yuan. 
Of the 346 cases, 198 are from companies in Wenzhou City. Closures of the companies have caused a domino effect. Among the waves of corporate bankruptcies, over 90 percent of Wenzhou credit guarantee companies have gone belly up. Wenzhou Credit Guarantee Investment Co., Ltd., the largest credit guarantee company closed its doors in July 2013. 

Banks have ceased making corporate loans and have started asking for an accelerated payment of principal on outstanding loans. In Hangzhou City, Zhejiang Province, the default of one of the largest companies affected more than 600 companies because they provided credit guarantees to each other. In Xiaoshan, and also in Zhenjiang Province, the insolvency of one company adversely impacted over 300 other companies due to the credit guarantees that they provided to each other. 
Source: Economic Information reprinted by State’s China Radio International, May 23, 2014 http://gb.cri.cn/44571/2014/05/23/3005s4552048.htm
Briefings | | |   Economy/Resources

Housing Inventory Hits Record High

Daily Economic News reported that, as of end of April, 35 major cities saw an overall housing inventory increase of 2.6 percent compared to March and 19.5 percent compared to one year ago, hitting a five year record high. 

From 2009 through 2012, the inventory in Tangshan, for example, reached 17,410,000 square meters. Last year, only 1,460,000 square meters were sold. It would take another 10 years to deplete the existing inventory. Staring last year, banks stopped making loans to developers of residential housing. Shenyang has an inventory of 17,200,000 square meters, an increase of 21.5 percent compared to a year ago. It would take close to 20 months to deplete this inventory. 
Source: Daily Economic News, May 21, 2014 
http://www.nbd.com.cn/articles/2014-05-21/835560.html
Briefings | | |   Economy/Resources

China Securities Journal: Three Major Challenges for China’s Economic Reform

A China Securities Journal article listed three major challenges that severely hinder China’s economic reform:

1. The lack of protection for legitimate property rights. Local governments expropriate farmer’s land, even when the farmers have the proper contracts for using the land. When there is a need to boost the economy, local governments invite companies to invest. Later, when they try to cool down some overheated sectors, the local governments force them to exit the market.

2. The lack of a formal government budget spending process. The top official can, individually, make a decision on spending. At end of the budget year, government agencies rush to spend funds.

3. The lack of measurements for correct performance and of a reward system for government officials and the heads of state-owned enterprises. Their evaluation is linked to short-term economic achievements instead of long-term performance. This induces officials to pursue temporary results while leaving the major burdens for the public to handle in the long run.

Source: China Securities Journal Online, May 13, 2014
http://www.cs.com.cn/sylm/zjyl_1/201405/t20140513_4388241.html

Briefings | | |   Economy/Resources