Chinese companies to delist?

Posted on March 31, 2012 by admin

Overseas listings have seemingly lost their appeal to many Chinese companies. Some are now taking their publicly traded shares private after realising that it takes more than just a glossy annual report to stay listed.

Some Chinese companies, especially those tarred by allegations of fraud and misconduct, apparently feel that they are stuck in a vicious circle — they release the least information possible for fear of spooking investors further, while investors, lacking sufficient knowledge, respond to any negative news by selling their holdings.

The most likely companies to go private include family-run businesses or those with a relatively small number of controlling shareholders. Stock exchanges in the US will see the most delistings, according to Kroll, a risk consultancy.

Indeed, there are incentives for firms to quit US exchanges and relist in other markets like Hong Kong. “Hong Kong-listed stocks are trading at a 40% to 50% premium to those listed in the US, although the spread has narrowed from a 70% premium a year ago,” said Mark Tobin, a California-based analyst at Roth Capital Partners, an advisory firm.

“We continue to view privatisations as an ongoing trend and expect additional transactions during 2012, driven by a number of catalysts, including a loosening of China’s credit markets and increased interest from companies,” he said.

Privatisation creates growing opportunities for due diligence firms. According to Colum Bancroft, managing director of Kroll’s Greater China financial investigations practice, there are a lot more clients, including private equity firms and auditing committees of listed companies, asking for a financial health check for target companies.

“Their main concerns are the asset quality of the target companies and how reliable the numbers [in the financial statements] are. Since footnoting [supplementary financial and non-financial disclosure] requirements are not very specific in China, it creates lots of potential loopholes,” said Bancroft.

China has the second-highest proportion of companies affected by fraud, exceeded only by Africa in 2011. Chinese companies traditionally have high staff turnover, Kroll said in its global fraud report, which can make it harder to catch and prevent fraud. At the other end of the payscale, China also has a very high rate of fraud perpetrated by senior executives, which are even harder to prevent.

Once an alleged fraud is detected it is hard for institutional investors without an on-the-ground presence in China to find out what exactly is going on. “Investors often respond to negative news with selling, selling and selling, which may not be the appropriate action in some cases,” said Violet Ho, senior managing director of Kroll’s Greater China business intelligence practice.

While the accuracy of financial statements may have been questioned by many, the lack of disclosure of non-financial information is also a big issue. Chinese executives often believe the less information they disclose, the fewer mistakes will be found.

To make the situation worse, many Chinese companies don’t see any incentive to engage with investors to repair their damaged reputation, noted Ho. “In some cases, key principals of listed Chinese companies have this kind of sentiment: It’s a business that I founded, I built and in which I still own a big chunk. Why should I let anyone else interfere with how I run the business.”

Indeed, some Chinese companies have decided to delist simply because they prefer to operate in the entrepreneurial way they did before becoming listed.

Jack Ma, chairman of Alibaba, said the motivation for delisting its business-to-business unit is to “be free from the pressure of market expectations, earnings visibility and share price fluctuations”.

That gives a heads-up for Chinese companies planning for an IPO — it is worth questioning whether they are capable of managing the pressure of market expectations.

China’s Transition- Bo Xilai

Posted on March 30, 2012 by admin

On March 15, the Chinese Communist Party announced the removal of Chongqing Party Chief Bo Xilai, a popular ‘Princeling’ leader, famous for his anti-corruption efforts and dogged support of Maoism. Since the 1989 Tiananmen Square protests, Bo is only the third Party Chief to be fired mid-term, and his dismissal serves as one of the highlights of an eventful month for the Chinese Communist Party.

Since Bo’s removal, Chinese social media exploded in speculation about the mysterious death of a young Ferrari driver in Beijing, rumored to be Bo Xilai’s son, and even claimed that Bo sympathizers in the Politburo unsuccessfully tried to stage a coup in retaliation to Bo’s removal.

In our last article, we outlined the importance of China’s leadership succession, arguing that underneath the stable veneer of China’s one-Party rule lies a competitive political struggle to control the heart of the Chinese state. In this article, we explain why the Chinese Communist Party removed Bo Xilai and discuss what these events might tell us about the incoming Party Chairman Xi Jinping.

Why the Communist Party fired Bo Xilai

The Communist Party chose to remove Bo Xilai as Chongqing Party chief to sideline a national distraction and expunge one of the Party’s biggest political liabilities. Prior to Bo’s firing, his police chief and confidant, Wang Lijun, unsuccessfully tried to escape to the United States consulate in Chengdu, fleeing charges relating to corruption and harvesting human organs, among other counts.

Only after the United States denied Wang Lijun asylum did it became clear that Bo’s anticorruption campaigns in Chongqing often relied on a host of grisly authoritarian tactics led by Wang Lijun, including torturing political rivals, appropriating private property in the name of the state, and censuring fellow Party officials for their ostensible lack of ideological rectitude.

The day before Bo Xilai’s dismissal, Wen Jiabao subtly condemned Bo’s heavy-handed approach, claiming that these types of coercive tactics could lead China down a dangerous road of paranoia and political upheaval, much like that of the Cultural Revolution. China’s leaders’ willingness to sack such a prominent member of their own ranks shows their implicit fear of Maoist-style ideological campaigns.

From this perspective, Bo’s firing can be seen as Chinese leadership’s repudiation of Bo’s unique brand of ‘Chongqing School’ revivalism. In all likelihood, key players such as Hu Jintao, Wen Jiabao and Xi Jinping recognize that charismatic leaders like Bo can capitalize on the legitimate desires of the Chinese people – like the goal of anti-corruption – to sow paranoia, encourage politically motivated purges, and aggrandize themselves to feed their own cult of personality and expand their power.

The message is clear: Ideological battles might have turned the Communist Party into the omnipresent force that it is in China today, but these types of old-school conflicts could derail the awesome progress of the Chinese economy over the past thirty years and sink Chinese international aspirations. By overstepping his ideological bounds, Bo set the stage for his own dismissal.

Xi Jinping: Laying low to rise above

In all of the confusion that took place over the last month, many China observers have wondered where Xi Jinping went. The de facto incoming General Secretary of the Communist Party has had a quiet month after returning from his trip to America, which many in China saw as the international legitimization of China’s sixth generation of Party leaders. Even the Global Times, one of China’s more hawkish and nationalist news outlets, openly called for clarity in the face of allegations of party infighting, denigrating the tepid response from the Party about China’s coup rumors.

Despite this criticism, staying quiet may constitute a coherent strategy on behalf of Xi Jinping. In facing these rumors, Chinese leadership encountered the timeless paradox of the strong: To acknowledge rumors is to give them (and their proponents) political credibility; to ignore the rumors creates the space necessary for these rumors to grow and take on a life of their own.

By sacking Bo Xilai and staying reticent about coup rumors, Xi Jinping and his fellow leaders have attempted to triage between both of these competing goals. On one hand, sacking Bo is an implicit acknowledgment of the corrosive effect of Bo’s policies on the Chinese body politic. On the other hand, by ignoring the associated coup rumors that went along with Bo’s firing, Party bosses have been able to give Chinese citizens the impression of normalcy, delegitimizing the coup rumors by not responding to them.

Today, there are no tanks on the streets and no restrictions on how average Chinese citizens can go about their lives. Projecting this image of stability and continuity in the face of challenges to their own power is a coherent strategy employed by Xi Jinping to create distance from himself and the fallout associated with Bo Xilai’s firing.

As the last month has shown, China is far from a unified monolith, seamlessly handing power from one generation to the next. Unlike elections in the West, where every gaffe and conflict among candidates dominates the news cycle, China’s succession is just as fiercely contested but takes place outside the view of the public eye.

The eruption of the Bo Xilai scandal serves as a stark reminder that just as Western leaders fear China’s political regression to Maoism, Party elites also feel threatened by the stark historical memory of the Cultural Revolution.

Further, while many in the West are content to let their imaginations run wild about purported coups and high drama in Beijing, the Party likely realizes that a show of normalcy and strength will give it the space it needs to usher in the 6^th generation cadres and help China navigate this tumultuous period of domestic politics.

Yuan to rise …

Posted on March 22, 2012 by admin

During China’s National People’s Congress last week, Premier Wen Jiabao said that the renminbi has probably reached fair value against the US dollar. We asked our readers the same question, but got a different answer.

Here’s what Wen had to say: “In the Hong Kong market, the non-deliverable forwards have started to fluctuate in both directions. And this tells us that the exchange rate of the renminbi has possibly reached equilibrium.”

Our readers, on the other hand, were less convinced — slightly more than half of them said that the renminbi was still not fairly valued.

However, depositors in Hong Kong seem to be taking their cues from the Chinese government. Offshore renminbi deposits grew by almost 10 times between the start of 2010 and November 2011 as investors bet on a continued rise, but growth has fallen back since then, in part due to expectations that the Chinese government will limit further appreciation.

Trade data added some weight to this theory, when the February numbers showed that China had suffered its biggest monthly trade deficit since 1989, in reaction to economic weakness in the developed world and the rising cost of energy and commodities. With weaker exports and more expensive imports, China’s trade surplus has shrunk and caused some analysts to predict an end to the renminbi’s rise. At least for now.

But not everyone agrees with that outlook. “Those focusing on February’s trade deficit are missing the big picture,” according to Anthony Chan of AllianceBernstein. “The February data was distorted by the timing of China’s week-long Lunar New Year holiday, which tends to cause a seasonal drag on China’s trade balance early in the year. If history is a guide, the trade account should improve noticeably in the second quarter.”

And the renminbi still has plenty of catching up to do, according to Chan, in a note to clients. Since China loosened its grip on the currency in 2005, the renminbi has risen by about 20% against the currencies of its main trade partners, while its foreign reserves have risen more than fourfold.

That strategy of accumulating reserves has kept appreciation in check, as the Chinese government knows only too well. But the country is also keen to move away from its dependence on exports and to limit the effects of inflation — both of which will be helped by a stronger currency.

“The bottom line? Despite any talk to the contrary, we think the renminbi is set to continue appreciating at a moderate pace in 2012 — and beyond,” according to Chan.

Asian Family Offices must mature to be ready for BOOM

Posted on February 27, 2012 by admin

Asia is set to see a boom in family offices, although they are less sophisticated and professional than they need to be and there’s a lot of family wealth tied up in illiquid assets, finds new research.

There are estimated to be just 100 family offices in Asia-Pacific, meaning their proliferation is not in line with the regional explosion of wealth, according to a study by UBS and Campden.

While it is understood that wealth in Asia is less mature than in the US and Europe, the study found Asian offices were far more closely tied to family businesses, with 80% of respondents actively involved.

Only 40% of family wealth is invested in traditional asset classes such as equities and fixed income, with the remainder in the core business or other illiquid investments such as real estate.

That means private bankers can’t use traditional wealth solutions for a substantial portion of these portfolios and need to employ sophisticated institutional solutions instead, says Munish Dhall, head of UBS Wealth Management’s ultra-high-net-worth offering and client development.

He notes that while an average family office in Europe has 13 staff, in Asia that figure drops below six. “The conclusion is that family offices in Asia need to be very careful about what investment activities they do in-house, and how they want to use banks, for example,” he says.

As evidence that operations in Asia are less professional, Dhall notes that only 38% of respondents had formal risk policies in place. “There is a long way to go before they professionalise,” he says.

While he confirms that Asia is predominantly a single family-office market, he suggests that the lines between single and multi-family offices are becoming more blurred.

“What we are seeing in particular in markets such as China is that people are setting up single family offices with the ultimate vision that once they have established a track record and become a solid organisation, they will open it up to third-party assets,” he states.

Dhall expects to see more family offices emerge in Japan, China and India, although acknowledges that the bulk will be in Hong Kong and Singapore, as well as Australia – international markets with easy access to a range of global investment opportunities.

He adds that more European and US family offices are also setting up in Asia, either as a second arm or even as a main base of operations to better access local markets.

UBS has a family services team comprising 50 staff globally, of which 10 are based in Asia. They either help to set up family offices or conduct health checks and offer advice on streamlining and best practice. Dhall confirms the bank is building its corporate advisory capabilities, teams and presence in the region with a view to advising more business owners.

Last year UBS also established its global family office unit in Asia, providing investment solutions out of its wealth and asset management businesses and investment bank.

Regulators Urges to simplify listing approvals

Posted on February 22, 2012 by admin

No other sector epitomises the controlled nature of China’s state capitalism as much as the country’s primary equity market. The country’s powerful securities regulator, via its listing assessment committee, decides who among the hundreds of cash-thirsty listing applicants can tap the equity markets and also when (and sometimes how) they can do it.

Now this decades-old practice is being challenged by the new head of the China Securities Regulatory Commission (CSRC), Guo Shuqing, who has publicly questioned whether the regulator should simplify the tedious listing approval process.

And market participants are in favour of the idea that the CSRC shift away from its traditional role as a gatekeeper for new share listings and focus more on supervision.

“It should be a question of when, not if,” said one investment banker. “So far, the securities regulator has paid very little attention to the market and has only given the go-ahead to companies whose development is in line with Beijing’s economic blueprint. The approval process could take so long that the listing timing is out of issuers’ and bookrunners’ control and companies often miss market windows when they do become available,” he said.

As surprising as it may sound, it can take several years before a listing hopeful may actually come to market, if it comes at all. One example of the prolonged application process is Dongguan Bank. It filed a listing application in 2008 and hired Goldman Sachs Gaohua Securities to manage the initial public offering. Since then little has happened and the name of the small city lender in South China had been long forgotten until last week when the bank said it was still waiting in the queue and hoped to go public this year.

Moreover, when listing hopefuls clear the application process, they may still be told to wait and make way for flagship deals. In 2010, in a bid to pave the way for Agriculture Bank of China’s massive dual-listing in Hong Kong and Shanghai, Beijing told other Chinese banks that were desperate to replenish capital to put their deals on hold. As the number of investors that would want to put money into Chinese banks can be limited, it was viewed to be important to be first out of the gate.

“Guo’s remarks tell us he wants the A-share market to be more market-driven and more like its overseas counterparts,” said the investment banker.

Currently, all issuers need to seek a green light from the CSRC’s listing assessment committee, which consists of several members who, observers say, may not fully understand the equity market and the businesses of the applicant companies.

CSRC announced by the end of last year that all companies seeking a listing are required to file a preliminary prospectus one month before a scheduled assessment, which is up from five days previously. This will allow investors and committee members more time to understand and verify the information provided by listing applicants.

While generally viewed as a step in the right direction, Guo’s comments have also sparked worries that a relaxation of the approvals process might lead to speculative issuers flocking to the equity market – adding further to the long queue of listing applicants. Earlier this month, in an effort to improve market transparency, CSRC for the first time released the names of 515 companies that are seeking approval for a new share sale.

Guo, the former chairman of China Construction Bank, is well-known in China for his reform-minded style. He succeeded Shang Fulin to become the chairman of CSRC in November last year.

Singapore Innovation Business for Institutions

Posted on January 14, 2012 by admin

Citi has opened its new Citi Innovation Lab in Singapore which is comprised of a client experience and client collaboration centre. The Innovation Lab is part of Citi’s Asia-Pacific global transaction services (GTS) business and caters for its institutional clients in the region. It leverages new web, mobile, supply chain and analytics technologies to engage the bank’s clients innovatively and to help create more effective solutions and products for them. Latest solutions can be test driven through live demonstrations in discussion with Citi GTS product experts.

“Innovation has underpinned our growth in the region and this first Innovation Lab in Asia underlines our continued investment in technology to support our clients and our growth,” said Anthony Nappi, Citi’s Asia-Pacific head of GTS, at the launch of the Innovation Lab in Singapore.

According to Citi, the Innovation Lab is fully interactive and globally-linked which allows the bank to connect with its clients, colleagues and experts through direct video and voice feed for discussions on future needs and collaboration. The bank says it currently has more than 10 clients that are collaborating on ideas and testing solutions for various business challenges using the Innovation Lab. These range from working capital solutions to cash forecasting.

“In a volatile and ever changing world it is important for clients to be able to test various scenarios and the impact they may have on their business,” said Nappi. “The Lab will play an important role in helping our clients navigate uncertain markets.” Nappi says the Innovation Lab overcomes the challenge of allowing clients to visualise new solutions that Citi develops for them. The process used to take weeks and months but can now be done in hours.

Citi employs 12 people including GTS product experts and people from outside the finance and banking industry in the Innovation Lab. The bank has partnered with the National University of Singapore (NUS) and the Infocomm Development Authority of Singapore (IDA) for the Lab. Academics from NUS contribute to developing and refining ideas for current projects, while the IDA helps accelerate the development and deployment of business analytics.

Commodities in Bimodal World

Posted on January 11, 2012 by admin

In an investment landscape more uncertain than usual, asset allocators and fund managers have a tough year ahead. Any outlook for conventional financial instruments — stocks and bonds — needs to be predicated on a view of the world that has, in the words of bond market sage Bill Gross, managing director of Pimco, shifted from the “new normal” to the “paranormal”.

“A new duality — credit and zero-bound interest rate risk — characterises the financial markets of 2012, offering the fat left-tailed possibility of unforeseen policy delevering or the fat right-tailed possibility of central bank inflationary expansion,” wrote Gross in a letter to his investors last week. Gone is a world of muted Western growth, high unemployment and orderly delevering. Instead, we are confronted with a bimodal environment; a dichotomy of impending disaster caused either by deflation or inflation.

In the vernacular, investors are caught between a rock and a hard place.

One route for them to travel, albeit selectively and “on a tightrope”, is towards commodities, according to Michael Lewis, head of the commodities research team at Deutsche Bank. An inference of their analysis in a report released on Friday is that positive secular trends may override ephemeral disarray.

“Ten years ago commodity prices began their long march higher in response to strong demand growth across the emerging markets and years of underinvestment in new productive capacity. Since super cycles in commodity markets typically last up to 20 years, one could argue that we are only halfway through the current cycle,” said Lewis.

Nevertheless, he warned, there is now a serious caveat that means the sustainability of strong commodity prices is contingent on several policy decisions producing effective results.

The US Federal Reserve’s efforts to stimulate growth must be successful, China needs to engineer a soft landing and Europe’s disparate and divided leaders have to find a market-friendly solution to the region’s sovereign debt crisis.

“If unsuccessful then the implications for global growth and hence world commodity demand would be bleak,” said Lewis.

But emerging markets should mitigate some of that threat. Low outstanding debt levels across the emerging markets should help economic growth in the medium term, and that will support commodity demand. Authorities in these countries also have flexibility when it comes to deploying monetary and fiscal stimulus programmes.

Deutsche’s main investment and trading recommendation is the same one that reaped the best returns in 2011 and indeed during the past five years: following momentum. Total returns on the DB Commodity Momentum index rose by 9.3% last year, which was among the best-performing commodity indices. Since the onset of the financial crisis in late-2007, the performance of the index has also been strong.

The alternative, conventional plays — long-only commodity index strategies — will remain vulnerable to further disappointments in Europe and to the “tightrope the world economy is navigating between mediocre growth and recession”.

Specific factors will determine individual commodity sectors.

Geopolitical risks, restricting supply from the Middle East and elsewhere, should outweigh the potential downside on crude oil prices from a sluggish global economy. Inventories are quite low, while supply and demand fundamentals indicate that Opec spare capacity will decline over time.

“Historically, headwinds for commodity prices and specifically oil prices start to appear when world growth falls towards 2.5%. These are environments which typically trigger Opec production cuts of as much as 4 million barrels per day,” said Lewis. On the other hand, a recession in Europe would slow demand for power and cap gas prices.

Negative real interest rates are likely to support a recovery in the gold price, which fell during the past few months as part of a “broader deleveraging trend in global ‘safe-haven’ trades”. It will be further boosted by central bank diversification, resumption in US dollar weakness later in the year and continuing uncertainty about the European financial system. But Deutsche’s top pick among precious metals is palladium “given its bias to the US and China”.

Of course, base and industrial metal prices are more dependent on economic activity — and particularly Chinese demand. Deutsche says that near-term deflationary fears may continue to depress pricing for the base metals complex in the first quarter of this year, but that accommodative monetary policy could successfully jump-start global growth and lead to stronger prices later in the year. The bank favours aluminium and copper prices, which have the lowest correlations to the S&P500 and will benefit as China embarks on another round of fiscal stimulus, which would include more housing construction.

Initially, the prices of some agricultural commodities — especially soybean and corn — are likely to be supported by the La Niña weather effect (a phenomenon that cools the Pacific Ocean off the west coast of South America), but will, in general, fall during most of 2012. But low inventories, adverse weather conditions, high oil prices and government intervention are likely to make the sector prone to price spikes.

Certainly, secular trends — mainly the structural shift in demand that is feeding, fuelling and building new industrialised and urban communities in many parts of the world, and especially China — provide a long-term case for investing in commodities. But the short-term matters more for investors

Riding periodic momentum may be one way to bridge the gap between temporary uncertainty and enduring confidence.

In an investment landscape more uncertain than usual, asset allocators and fund managers have a tough year ahead. Any outlook for conventional financial instruments – stocks and bonds – needs to be predicated on a view of the world that has, in the words of bond market sage, Bill Gross, managing director of PIMCO, shifted from the “New Normal” to the “Paranormal”.

“A new duality – credit and zero-bound interest rate risk – characterises the financial markets of 2012, offering the fat left-tailed possibility of unforeseen policy delevering or the fat right-tailed possibility of central bank inflationary expansion”, wrote Gross to his investors last week. Gone is a world of muted western growth, high unemployment and orderly delevering: instead we are confronted with a bimodal environment, a dichotomy of impending disaster caused either by deflation or inflation.

In the vernacular, investors are caught between a rock and a hard place.

One route for them travel, albeit selectively and on a tightrope, is towards commodities, according to David Lewis, head of the commodities research team at Deutsche Bank. An inference of their analysis in a report released on Friday, is that positive secular trends might override ephemeral disarray.

Nevertheless, he warned, there is a now serious caveat that means that the sustainability of strong commodity prices is contingent on several policy decisions producing effective results.

“If unsuccessful then the implications for global growth and hence world commodity demand would be bleak,” said Lewis.

But, emerging markets should mitigate some of that threat. Low outstanding debt levels across the emerging markets are constructive for the medium term GDP and commodity demand growth outlook. Authorities in these countries also have the flexibility when it comes to deploying monetary and fiscal stimulus programmes.

Deutsche’s main investment and trading recommendation is the same one that reaped the best returns in 2011 and indeed during the past five years: following momentum and taking advantage of positive carry differences. Total returns on the DB (Deutsche Bank) Commodity Momentum index rose by 9.3% last year, which was among the best performing commodity indices. Since the onset of the financial crisis in late-2007, the performance of the index has also been strong.

The alternative, conventional plays – long-only commodity index strategies – will remain vulnerable to further disappointments in Europe and to the “tightrope the world economy is navigating between mediocre growth and recession”.

Specific factors will determine individual commodity sectors.

“Historically headwinds for commodity prices and specifically oil prices start to appear when world growth falls towards 2.5%. These are environments which typically trigger OPEC production cuts of as much as 4 million barrels per day,” said Lewis. On the other hand, a recession in Europe would slow demand for power and cap gas prices.

Negative real interest rates are likely to support a recovery in the gold price, which fell during the past few months as part of a “broader deleveraging trend in global ‘safe-haven’ trades. It will be further boosted by central bank diversification, resumption in US dollar weakness later in the year and continuing uncertainty about the European financial system. But, Deutsche’s top pick among precious metals is palladium “given its bias to the US and China”.

Of course, base and industrial metal prices are more dependent on economic activity – and particularly Chinese demand. Deutsche believes that near-term deflationary fears may continue to depress pricing for the base metals complex in the first quarter of this year, but that accommodative monetary policy could successfully jump start global growth and lead to stronger prices later in the year. The bank favours aluminium and copper prices, which have the lowest correlations to the S&P500 and will benefit as China embarks on another round of fiscal stimulus, which would include more housing construction.

Initially, the prices of some agricultural commodities – especially soybean and corn - are likely to be supported by the La Niña weather effect (a phenomenon that cools the Pacific Ocean off the west coast of South America), but will, in general, fall during most of the 2012. But, low inventories, adverse weather conditions, high oil prices and government intervention are likely to make the sector prone to price spikes.

Certainly, secular trends, that is the structural shift in demand that is feeding, fuelling and building new industrialised and urban communities in many parts of the world, and especially China, provides a long-term case for investing in commodities. But, the short-term matters more for investors

And “all hopes for the commodity complex, and specifically energy and industrial metals demand rest on US growth remaining positive, China avoiding a hard landing and a market friendly solution to Europe’s sovereign debt crisis,” said Lewis.

But, riding periodic momentum might be one way to bridge the gap between temporary uncertainty and enduring confidence.

What can Year of Dragon offer?

Posted on January 9, 2012 by admin

The global economic outlook for the year of the dragon is bleak, but some asset classes still offer decent investment opportunities, according to HSBC.

While most countries have lower consensus growth forecasts for 2012, the US, Japan and India are all expected to grow faster — by 2.1%, 2% and 7.5% respectively, as opposed to 1.7%, -0.6% and 7.2% in 2011.

The eurozone is already in recession and its growth forecast for this year is negative, according to Philip Poole, global head of macro and investment strategy team at HSBC. “It is not a problem that is not going away, it is a problem that is going to take a long time,” Poole added. “I think the problem we have in the eurozone is probably a 10-year type of problem.”

Recent US economic statistics have signalled stronger growth, but the political paralysis may take a toll and undermine fiscal sustainability. Despite the declining fiscal deficit since 2009, gross general government debt as a percentage of the country’s gross domestic product has continued to rise.

“There is no sign yet that the paralysis has come to an end, and in fact it is very unlikely that anything will be done until after the election,” said Poole.

Growth in Asia will slow down, but is still expected to be growing much more quickly than the developed world. “The problem in the emerging world in 2011 was inflation but as the economies slow, including China, the inflation concern is going away,” Poole said. “That is good news in a sense, because these economies have been growing too rapidly, unsustainably rapidly.”

Diversification is important in hard times, but Poole stressed the difficulty in doing so thanks to the high correlation between markets. “Diversification has almost become like a binary decision between risky and safe-haven assets,” he said.

However, for medium- and long-term investors, HSBC says there is significant value in corporate credit in both developing and developed markets, UK gilts and German bunds. Supported by strong balance sheets, investment-grade corporate spreads have widened to above 300 basis points from around 200 in March 2011.

“This spread has widened relative to treasuries not because corporate fundamentals are suffering, but because we have been in this risk-off environment and everything has sold off pretty much together,” said Poole.

Asian equities also offer significant value. “At the moment you have got an opportunity to buy the market at a cheap level when they are still very profitable,” said Bill Maldonado, Asia-Pacific strategy chief investment officer at HSBC global asset management. “We do not expect profitability to collapse at all; we actually expect it to be quite robust.”

Asian equities have suffered from similarly low valuations during previous crises, but in those cases, profitability also suffered.

According to HSBC, Asian equity investors would have an 85% possibility of enjoying a positive return of above 30% if they bought at a price-to-book ratio of between 0.8 times and 1.5 times, with a view to holding for one year. The MSCI Asia ex-Japan Index is trading at around 1.5 times, compared with a minimum of 1.2 times during the global financial crisis.

Chinese Banks offering value

Posted on January 6, 2012 by admin

After being shunned by investors for the past two years, there is finally a glimmer of hope that China’s banks may once again offer an attractive opportunity.

However, investors are being drawn back by cheaper valuations and more accommodative government policies, rather than any fundamental improvement in China’s banking businesses.

China’s recent monetary policy loosening has created an opportunity to recoup losses suffered during 2011, according to J.P. Morgan Asset Management, which is particularly optimistic about investments in the Chinese banking industry, despite a fair amount of concern over the sector.

“There is a meaningful prospect for earnings per share upgrades, especially as analysts have become more negative for 2012. Taking into account the prevailing domestic and external environment, our prognosis is for a gradual normalisation in the share price of Chinese banks. Their valuations have fallen below 2008 financial crisis levels, which we think are too depressed,” said Howard Wang, head of the Greater China team at J.P. Morgan’s asset management arm.

China cut reserve requirements for commercial lenders in early December for the first time in three years, dropping the ratio to 21% for large commercial banks and 17.5% for small and medium-size banks. Policymakers have indicated that China will cut reserve requirements further in 2012 to pump liquidity into the country’s banking system.

Analysts forecast that this easing will promote an overall rebound in Chinese stocks. The MSCI China index lost 20% during 2011 and 38% during the past four years. After two consecutive years of losses, the Shanghai A-share index is down 58% since the end of 2007. “In the last 16 years, the Shanghai A-share index has never suffered losses in three consecutive years. The market is probably ripe for a rebound around the Chinese New Year,” said Shen Minggao, head of China research at Citi.

Barclays Capital also sees value in Chinese banks, supported by upcoming policies. “China’s government is turning more accommodative in terms of monetary and fiscal policies to support growth,” said May Yan, head of China banks research at Barclays.

“More tangible policy or reforms would likely be announced later this year, including the possibility of setting up a ‘financial Sasac’ to own and manage state-owned financial institutions,” she said.

Sasac (or the State-owned Assets Supervision and Administration Commission) acts as the board of directors to China’s more than 100 large state-owned firms and often decides how much they should pay the government in dividends. However, financial institutions in the country do not fall under Sasac’s scope.

Government policy aside, China’s banking industry is still facing many challenges. Earnings have grown substantially during the past decade, but in some ways the banks themselves have changed little since the 1990s. And bad loans are once again at the fore after a lending binge in 2009, with Fitch Ratings warning that the cash cushion at most Chinese banks has thinned considerably during the past couple of years.

According to the credit rating agency, China’s banking system is increasingly distressed thanks to a combined result of excessive lending and a policy orientation that relies too much on credit controls and low interest rates, and prioritises the state sector ahead of private companies and savers.

To attract sustainable investment into its banking industry, China must eventually address these fundamental problems.

China plans for stable growth in 2012 amidst “extremely grim” outlook

Posted on December 19, 2011 by admin

China will seek stable and relatively fast economic growth next year amid the “extremely grim and complicated” global outlook, according to a statement issued after the closure of a three-day central economic work conference on 14 Dec 2011.

The conference agreed to set the main theme of next year’s economic and social development as “making progress while maintaining stability,” the statement said. The plans mapped out at the conference will chart the course of next year’s economic work.

“Stability means to maintain basically steady macro-economic policy, relatively fast economic growth, stable consumer prices and social stability,” the statement said.

“To make progress, we must seize this strategically important development period to make new advances and breakthroughs in transforming China’s economic development model, deepen reform and improve people’s lives,” it said.

The statement indicated Chinese policy makers’ intention to shore up growth while avoiding reawakening the inflation dragon, analysts said.

“China must stabilize economic growth to prevent a sharp plunge, which might dampen employment and cause social problems,” said Zhu Baoliang, deputy director of the Economic Forecast Department of the State Information Center, a government think tank.

China’s economic growth has been slowing all year. Its GDP growth slowed to 9.1 percent in the third quarter from 9.5 percent in the second quarter and 9.7 percent in the first quarter.

Growth of the consumer price index (CPI), a main gauge of inflation, eased to 4.2 percent in November from this year’s peak of 6.5 percent in July. It was the slowest pace seen since last September, when it rose 3.6 percent.

However, even with the sharp fall in November, the country’s CPI rose 5.5 percent year-on-year during the January-November period, well above the government’s full-year inflation control target of 4 percent.

Although the CPI rise has slowed, there are still factors that may push up prices, including price increases triggered by higher costs and uncertainties of imported inflation, said Wang Yiming, deputy head of the Academy of Macroeconomic Research under the country’s top economic planner, the National Development and Reform Commission.

The country will maintain its stance of prudent monetary policy and proactive fiscal policy in 2012, said the statement. At the same time, the country will keep the yuan’s exchange rate “basically stable” while deepening interest rate and exchange rate formation mechanism reforms.

It will preset or fine-tune monetary policy according to changes in economic development, employ multiple monetary policy tools and maintain a “reasonable increase” in money and credit supply. Meanwhile, the country will implement fiscal policy, such as further improving tax cut policies on selective sectors and enhancing input on sectors involving improving people’s welfare.

Measures aimed to regulate the property market will also be maintained next year to ensure housing prices return to a “reasonable level,” said the statement, adding that more ordinary commercial residential housing will be built to increase effective supply.

With the world economy slowing and international financial markets in chaos, several prominent risks have arisen. The world’s economic recovery is expected to remain unstable and uncertain, the statement said.

It noted the country’s economic development still contains “unbalanced, uncoordinated and unsustainable” strains, and faces pressure from both slowing economic growth and inflation.

“We should strengthen our awareness of risks and develop a full understanding of the challenges and opportunities brought by the global financial crisis to enhance our comprehensive strength and global competence through more strategic planning,” it said.

Concern about a slowdown in the world’s second-largest economy and the eurozone debt morass have dragged China’s key Shanghai stock index down by more than 27 percent from this year’s peak on April 18.

Growth of exports, one of the major engines used to power China’s expansion, also slowed, to 13.8 percent in November from 37.7 percent in January.

With the external demand waned, the government attempted to turn to domestic consumers to take up the slack. The country vows to expand domestic demand next year and increase residents’ income, especially for disadvantaged groups.

With the size of its economy, China cannot base its long-term economic development on external demand. “If the country can spur domestic demand, especially domestic consumption, it will get inexhaustible growth momentum,” said Yao Jingyuan, a special researcher with the Councillor’s Office of the State Council, or China’s Cabinet.

The statement said the country will keep moderate growth of fixed asset investment, optimize investment structure and ensure capital supply for major water conservancies, railways and equipment manufacturing projects.

The country also vows to foster the development of emerging industries with strategically importance, make breakthroughs in key technology to enhance core competence, and speed up the construction of key energy bases and transportation channels.

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