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Waves of Bankruptcies Emerging in Ten Industries

On September 30, Chinese Business Wisdom published a commentary saying that bankruptcies in 10 industries have been on the rise and that waves of bankruptcies are probably not far away. 

1) Shipbuilding. For example, China Rongsheng Heavy Industries Group Holdings Ltd, a leading shipbuilding company, saw its 2012 revenues slashed by 50 percent. 
2) The iron and steel industry. As banks are short of cash to pay their depositors, small steel mills will most likely be the hardest hit.
3) The LED Industry. The downfall of the Junduoli Enterprise Group in 2011 touched off the bankruptcies of several LED companies. In the next couple of years, as many as 60 percent of the remaining several thousand LED companies may not survive. 
4) The Furniture Industry. Orient Homes, once the largest home improvement companies in China, has applied for bankruptcy to close down its stores. 
5) Small to mid-size Real Estate Developers. In the next three years, at least one-third of the real estate developers will close their doors. Estimates are that the number of companies will drop from 50,000 to 35,000. 
6) The Cargo Shipping Business. In 2012, three companies that are listed on the stock exchange were up to 14 billion yuan in the red. This followed a 10.4 billion yuan loss in 2011. 
7) Trust and Financial Institutions. In less than 6 years, trusts have grown substantially. The number of financial trades they conduct is now second only to banks. Since the beginning of this year, several trusts petitioned to extend the due dates of their loans and were rejected. 
8) Financial Management Companies. They have been under pressure from their competitors, the trusts. Unless they receive funds from private equity or an injection of funds from their shareholders, up to 600 financial management companies may fail. 
9) Private Equity. Private equity has gained a negative reputation because many of its investors ended up involved in Ponzi schemes. It is estimated that 90 percent of all private equity investment firms will close in 2013. 
10) Group-buying. In March 2010, group buying went viral. As of the end of the first half of 2013, 4,570 group buying websites had closed down. The figure represents nearly 75 percent of the total of 6,218 in the group buying industry. 
Source: Chinese Business Wisdom, September 30, 2013 
http://www.bwchinese.com/article/1047225.html
Briefings | | |   Economy/Resources

Totalitarian State Has Caused an Economic Crisis in China

Niu Dao, a popular commentator on real estate and finance in China, stated in a blog at sina.com that the totalitarian Communist regime is bringing about an unprecedented economic crisis in China and that the five year real estate bubble will burst soon. 

 “In totalitarian economy countries … as long as the economy has few problems, the government will find ways to cover things up so that the crisis will not break out. The government’s mentality is that they do not want the economic crisis to spread and become a social crisis. So large bubbles mask small bubbles, and, due to such a cover-up, small problems grow into big conflicts that cannot be resolved. Finally the situation evolves into a full crisis, leading to the disintegration of the government or the dictator stepping down.” Niu cited the examples of former Soviet Union, Romania, Albania, Khmer Rouge, and East Germany. He stated that the upcoming crisis in China will be an unprecedented crisis in history. 
To support his analysis, Niu discussed several factors, including the following: 
In the past three consecutive years, investment accounted for 40 percent of China’s GDP. Investments and exports combined accounted for over 70 percent of China’s GDP. The government has created the housing bubble. Once the bubble bursts, a massive number of developers will go bankrupt. 
The drastic appreciation of the Chinese yuan in a short period of time is extremely rare in history. The real purchasing power of one million yuan today is less than that of 10,000 yuan 30 years ago, and has decreased by 300% compared to 5 years ago. The current housing market does not reflect the true market price; it represents what the government created only to wipe out the wealth of several social levels. 
The current value of real estate in China exceeds 40 percent of the GDP. Further, the number of vacant housing units has reached an astronomical figure. Take Beijing for example. It alone has over 3.80 million vacant housing units, and Shanghai has over 5 million units standing idle. Shenzhen and Guangzhou have even more. 
Source: Blog at sina.com, September 29, 2013 
http://dl.house.sina.com.cn/news/2013-09-29/08082435329.shtml
Briefings | | |   Economy/Resources

Muddled Urbanization in Ordos Results in the Loss of Billions and Helpless Ex-Farmers

On September 27, 2013, China Review News published a report on the failure of the urbanization process in Ordos, one of the twelve major subdivisions in Inner Mongolia, the People’s Republic of China. After 10 years of muddled urbanization in which the government caused overheating in the real estate market and in which almost all residents participated, Ordos, a coal mining city, is now an empty city where most of the new buildings are vacant. As a result, billions in wealth has been lost with the burst of the property bubble. Now, all local-governments as well as ordinary residents have to find ways to repay their debts.

As previous rural villages have been demolished, ex-farmers, now urban citizens, stand idle and feel helpless. They have lost all their relocation money in private financing related to real estate development. When property development was hot, these ex-farmers, without any money and no flocks of sheep, had to find jobs as construction workers. In the most recent couple of years, they could not even find any construction jobs because all construction sites have been shut down.

Source: China Review News, September 27, 2013
http://www.zhgpl.com/doc/1027/6/7/7/102767771.html?coluid=10&kindid=258&docid=102767771&mdate=0927175545

Briefings | | |   Economy/Resources

BBC Chinese: Shanghai Free Trade Zone Launched with No Major Surprises

BBC Chinese reported that, on September 27, two days before the official launch of the Shanghai Free Trade Zone, the Chinese State Council released the General Plan which described the special measures made available in the Zone. The new Free Trade Zone will include four bonded areas where special regulatory freedom is offered in six categories: the Financial System, Shipping and Ports, Commerce and Trade, Professional Services, Culture, and Society. For the Financial System, the Zone expanded permission for independent domestic and international banks and insurance companies to establish operations (although freely exchanging RMB is still restricted for now). For Commerce and Trade, it opened up the market for the telecommunication and video game industries (under the condition that network and information security are still protected). For Professional Services, for now, it mainly covers tourism, which allows joint-ventures to manage Chinese tourists visiting non-Taiwan foreign territories (except that businesses fully owned by foreign investors are still not allowed). For Culture and Society, the Free Trade Zone now opens up the medical care market (including hospitals), the performance agent market, and the entertainment market to businesses fully owned by foreign investors (under the condition that all business activities are conducted inside the Zone).
Source: BBC Chinese, September 27, 2013
http://www.bbc.co.uk/zhongwen/simp/business/2013/09/130927_china_sfz_background.shtml
Briefings | | |   Economy/Resources

CRN: China May Become the Largest Trade Country

China Review News (CRN) recently quoted the Chinese Commerce Ministry, which made the statement that China’s total import/export volume may surpass the United States by the end of this year. This means that, for the first time, China may become the largest trade country in the world. The Commerce Ministry suggested that this world record “did not come easy,” especially in a tough time when the world economy is suffering from low demand. The Ministry expressed the belief that the primary reasons for this achievement are the improved international market environment and the improved competitiveness of Chinese companies. Bloomberg News suggested last year that China is about to set the biggest international trade milestone since 1945, when the United States obtained its dominant status. According official Chinese data, unless there is a major unexpected disaster, China will surpass the United States in the volume of both imports and exports. However the experts argued that being “big” is not necessarily being “strong.” It is much harder to remain the largest.
Source: China Review News, September 26, 2013
http://www.zhgpl.com/doc/1027/6/5/7/102765795.html?coluid=53&kindid=0&docid=102765795&mdate=0927075830
Briefings | | |   Economy/Resources

State Audit: Local Government Debt Almost Doubled in Two Years

According to Economic Information, a publication under Xinhua, China’s National Audit Office conducted an investigation into local government debt. It found that local government debt almost doubled since the 2011 audit. The nationwide investigation started in August and is nearing completion. 

The officials from the National Audit Office indicated that the increase is largely the result of the build and transfer financing strategy (BT) in which the local government establishes a project and then authorizes construction companies to finance and build it and then transfer it back to the government. Since local governments are not authorized to issue bonds, financing platform companies, set up by local governments, have been instrumental in obtaining financing or issuing bonds to the public. In some cases, the interest rate has reached 14 percent. 
The 2011 national audit showed that, as of the end of 2010, local government debt exceeded 10 trillion yuan (US$1.63 trillion). Most financing platform companies were set up by provincial and municipal governments in the developed regions. However, the ongoing investigation showed that almost every country government now has its own financing platform. “It is literally the ATM of the central bank,” said an official of the National Audit Office. These financing platform companies hold assets of very low market liquidity and have no ability to pay off these debts. Many of them are in the red. 
Source: Economic Information reprinted by China Daily, September 27, 2013 http://www.chinadaily.com.cn/hqgj/jryw/2013-09-27/content_10207613.html
Briefings | | |   Economy/Resources

China’s Local Government Debts Result from the Government’s System

On September 24, 2013, Gao Peiyong, Director of Institute of Finance and Trade Economics of the Chinese Academy of Social Sciences (CASS) spoke at an economic forum in Beijing. At the forum, Gao stated that the ultimate risk that occurs as a result of local governments’ debts is not due to the size of the debts themselves, but to the nature of the government system.  

Gao indicated that it is because the local governments lack awareness of the standard of “living within their means” and recognizing an obligation to pay off their debts. “Only by improving local governments’ financial systems can local debt risks truly be resolved.” “The greater problem is that almost all of the local governments give little thought to and have no consideration for how to repay their debts.” Gao said that if a person never wants to pay back his debts or never wants to take his obligations seriously, that person’s actions result in the greatest risk, which is the system’s problem and its most fundamental problem. 

According to Gao, the reason why local governments are such debtors is directly linked to Communist China’s financial system. In the eyes of the central government, local governments are children that need to be controlled. They do not have a separate, sound personality for dealing with self-finance. 

Source: Xinhua, September 24, 2013 
http://news.xinhuanet.com/yzyd/local/20130924/c_117490452.htm
Briefings | | |   Economy/Resources

Economic Bubble: China’s Economic Growth Model Faces a Serious Challenge.

On September 19, 2013, 21cbh.com, a professional financial news website under the 21st Century Media Group in Guangdong Province, published an article titled, “The Economic Bubble: China’s Economic Growth Model Faces a Serious Challenge.” According to the article, China’s export-oriented economy is going nowhere because China’s strength in its large population of cheap labor, its vast cheap land, and the government controlled depreciated RMB exchange rate no longer exist. China is now experiencing an economic bubble:

  1. In 2012, the ratio of broad money supply (M2) to GDP reached 188 percent in China, while the ratio of M2 and GDP in the U.S. was only 90 percent.
  2. In 2012, the ratio of investment in fixed assets to GDP in China was over 70 percent.
  3. China’s PPI has been declining over the last 18 consecutive months, since March of 2012. Meanwhile, China’s CPI has been increasing sharply. The prolonged divergence between PPI and CPI, which has not happened before in history, indicates a prolonged excess production capacity and lingering inflation, with a huge credit expansion.

Source: 21cbh.com, September 19, 2013
http://finance.21cbh.com/2013/9-19/2OMzcxXzc3NTU2OA.html

Briefings | | |   Economy/Resources