China's Lending Explosion

Is there anything wrong with China's lending spree. The central bank basically "advised" banks to ratchet up their lending, and the banks followed dutifully for the past couple of quarters with amazing results.

First of all, you cannot suddenly find so many attractive "borrowers" to lend aggressively to. Secondly, not many will say no when you offer to lend them money.

To be fair, this strategy pulled the domestic economy from falling further along with the ill effects of a global economy in crisis, but at what price. As I have mentioned before, this has to play itself out, and will not result in a sudden correction in property or stock prices in China. The liquidity rush will soon find its way into higher equity prices in China (hence bullish for the rest of the year for Chinese equity), and some may trickle back into Chinese property mart as well. Brace for high default rates when the music stops, probably after Chinese New Year in 2010.

China’s new lending more than doubled in June from a month earlier, increasing concerns bad loans and asset bubbles will emerge amid a credit boom.

New lending was 1.53 trillion yuan ($224 billion), the central bank said on its Web site today, bringing total lending this year to 7.4 trillion yuan. The calculation for new loans is preliminary, the central bank added.

The government is countering an export collapse by flooding the economy with money to fuel domestic demand. Rapid credit growth poses a risk to the nation’s lenders and a concentration of credit in some industries and businesses may damage the stability of the financial system, the banking regulator said yesterday.

Excess liquidity is fueling speculation and that means asset bubbles and wasteful investment. Already China recently failed to complete a $4.1bn auction of one-year government bonds, which suggested that investors are positioning for higher inflation caused by the credit surge.

Just something more to chew on, in 2005 Ernst & Young published a survey estimating that the bad loans in the Chinese banking system equaled close to $900 billion. Since then there has been enormous speculation in both the stock and real estate market. The average urban residential property prices fell by 15 to 30 per cent over the next two years from their levels at the end of 2008. Of course, by the end of 2008 they had already fallen from there 2007 highs. You cannot have real estate fall that much without having bad loans. Here is the juicy part, according to the prospectus for the Commercial Bank of China, it is illegal in China to foreclose on residential property.So what are bad loans? Bad loans = immediate write downs? No, they are then carried as what??? ... long term assets??? The reality is that no one knows exactly how bad the situation is in any bank. Information has value and is not disclosed unless required by law or for consideration. Since the banks in China are owned by the state, there is no legal requirement.


Something's gotta give ... but let's have a bull run first...

p/s photos: Elanne Kong Yuk Lam

China's Liquidity Traps & Benefits

China has been ramping up lending over the last 7 months. Yes, it was with good intentions. Yes, it was actual lending not just for show. Yes, banks in China were "asked" to do their bit to lend aggressively. While there is a lot of good to have money circulating around, it will also weigh down on those borrowing on the "unqualified" end of the spectrum, people who willing take on more debt than they should. Its a mini time bomb. No, it will not implode yet. What the figures below shows to me is that China's equity markets will have a major run up right through the end of 2009. When you pump in so much liquidity, there are very few places for it to surface. We may see a combustion effect only maybe in the second half of 2010.

China's credit card debt that was at least six months overdue rose 133.1 percent year on year in the first quarter to 4.97 billion yuan (727.67 million U.S. dollars), the People's Bank of China, or the central bank. Debt overdue by six months or more accounted for 3 percent of the total outstanding credit card debt at the end of March, or 0.6percentage point more than in the same period last year, the report said.

It warned of potential risks of the increasing overdue credit card debt as financial institutions expanded their credit card business. As of March 31, Chinese banks had issued more than 150 million credit cards, or 0.11 card per person, up 42.9 percent year on year. But Chinese consumers still have relatively few credit cards, compared with 4.39 per person in the United States and 0.95 in Brazil. Outstanding credit card loans rose 87.6 percent year-on-year to165.86 billion yuan at the end of March.

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New bank loans in China will exceed 1 trillion yuan (US$146 billion) and may top 1.2 trillion yuan this month as the regulator expressed its concern over irresponsible lending, according to a newspaper report.

This month's figure may be the third-highest this year after March's and January's, the China Securities Journal reported yesterday, citing people it didn't identify. That would also represent a sharp jump from May's 664.5 billion yuan.

The news, coming in the wake of the central bank's remark on Thursday that it will stick to an appropriately loose monetary policy to support economic growth, sent bank shares higher yesterday on expectations of better profit.

Shanghai Pudong Development Bank gained 3.79 percent to 22.98 yuan while the Industrial and Commercial Bank of China, the country's biggest lender, rose 2.02 percent to 5.55 yuan, easily outperforming the key Shanghai Composite Index.

Earlier this week, the China Banking Regulatory Commission demanded that lenders avoid a sudden jump in loans at the end of each month and each quarter, a move used by domestic banks to meet internal targets.

The regulator told lenders to ensure the money is channeled to the right sectors such as small businesses to help stimulate the economy, and to monitor capital flow into the stock and property markets.

This month's lending surge was mainly fueled by mortgage loans and funding of government projects, the Journal said.

The new bank loans in the first five months of the year have reached 5.84 trillion yuan, more than last year's total and exceeding the government's target of 5 trillion yuan for this year.


p/s photos: Zhou Weitong

China's Growth Sustainable???

China has led the way by asking its banks to loosen the lending taps, and that has been reflected in the broader economy. China is an important export market for most of the smaller Asian countries. China's stimulus plan is a huge kicker, and the country has begun to stockpile a lot of soft and hard commodities. The black spot is that the easy credit has seen outstanding balances on credit cards more than doubled in the most recent quarter. Can China continue on its merry ways to lead the way to stimulate the rest of the world out of the recession?

• China's economy seems to have re-accelerated from the lows of Q4 2008 and Q1 2009 helped by significant government investment and credit extension. While exports continue to deteriorate, reducing the trade surplus, government investment has surged and consumption influenced by government investment is holding up, suggesting that that the Chinese economy may grow at a faster pace in Q2 and Q3 2009 than the 6% rate at the beginning of the year. However in the absence of new external demand and limitations on domestic demand, there is a risk of developing over capacities.
• In April 2009, many private sector analysts began scaling up 2009 estimates to the 7-8+% range from 6-7% range following the investment and lending surge and suggestions that the Chinese economy might be bottoming out. Now forecasters like the world bank are also doing so, if more cautiously.
• World Bank: very expansionary fiscal and monetary policies have kept the economy growing respectably with the country likely to experience a 7.2% growth rate for all of 2009. But China may not grow in the high double digits until the global economy recovers. Market based investment will lag, and despite resiliency, consumption will slow, meaning that the boost to growth may not carry through to 2010.
• In Q1, China's real GDP growth slowed to 6.1% y/y, the slowest in more than a decade and the seventh consecutive quarter of deceleration. Growth slowed to 6.8% in Q4 2008 from 9% for 2008. Several indicators (investment, stabilizing Manufacturing sector, robust consumption) began to show improvement by March 2009, indicating that the growth may accelerate in Q2-Q4 09 from the very weak pace and near stall of end 2008/early 2009.
• In Q1, Government stimulus boosted investment and consumption holding up despite a fall in real incomes. final consumption, investment and net exports contributed 4.3, 2.0, and -0.2 percentage points to GDP respectively.
• Goldman: More aggressive policy stimulus and stronger domestic demand response than previously expected suggests a growth will be 8.3% (previous estimate 6%) in 2009 and 10.9% in 2010 (9%) policymakers will eventually normalize and shift away from aggressive policy loosening, when they are more assured of a stabilization in domestic unemployment and external demand, giving additional insurance to the growth trajectory.
• The recent flood of credit-fuelled (and government-led) investment has staved off an economic collapse that might have sent unemployment surging and damaged the confidence in China's growth trajectory that is so important to its development prospects. However, it is a huge leap to go from this short-term success to declaring China to be out of trouble and back on the road to double-digit growth.
  
• Morgan Stanley: On a seasonally adjusted basis, the economy experienced a 5% rebound in Q109, after the first qoq contraction (-0.5%) in almost eight years. The aggressive policy stimulus should bring about further recovery in H209, making China among the first to emerge from the global downturn. The recovery should be relatively ‘job-rich’ but ‘profit-deficient’, especially in H109, with those exposed to government-supported capex programs likely benefiting most.
• BNP: In Q1, GDP rebounded as a result of the fiscal stimulus and the most expansionary monetary stance since 1997. Household demand for property and autos is rebounding while the credit surge is boosting fixed asset investment meaning China will achieve GDP growth of 7.7% in 2009.
• Citi: After seasonal adjustment GDP growth actually rebounded to 5.3% annualized in Q1, compared to 0.9% growth in Q408. The aggressive expansion in credit and investment seem to bank on a substantial rebound in final demand, or run the risk of greatly increasing overcapacity.
• HS: Given the prevailing external environment, it would still be a severe challenge for mainland China to achieve its 8% growth target this year and officials need to have exit strategies to prevent credit and money supply from expanding too rapidly to jeopardise future macro-economic stability.
• Even with the stimulus, China’s overall economic growth is likely to decline to around 5% in 2009. Although the country could potentially sustain higher growth, the poor outlook for exports over the next two years severely limits any quick recovery.
  
• ADB: Little evidence that China is rebalancing away from investment-led growth, but it is shifting investment sectors. Risk of entrenched inflation and overheating in some sectors

p/s photos: Zhang Xin Yu

Will China's Aggressive Stimulus Succeed?

• March 4: Chinese Premier Wen suggested that the country's stimulus spending is having an effect supporting growth but announced no new spending
• Mar 6: NDRC plans to change the composition of the stimulus, reducing the share on infrastructure investment and increasing that on social spending. It plans a 300b yuan cut from an initial 1.8T yuan for infrastructure investments, such as low-income housing, and a 140b yuan reduction in spending on projects that focus on energy conservation and sustainability. technology projects would get an additional 210 billion yuan, while spending earmarked for rural public works projects and social welfare programs would rise 120b and 110b yuan.
• Total government expenditure in 2009 is about 2% of GDP
• Concerns were being raised about where the previously announced stimulus is being spent and reports suggest that NDRC may restructure the stimulus to spend more on
  
• Standard Chartered had said officials in Beijing had been discussing the possibility of raising the plan to Rmb8,000bn-10,000bn from the Rmb 4000bn announced in November 2008 - . In January the government released the second batch of funds - 130bn yuan (first batch 100 bn yuan in 4Q08).
• Citi: The front loaded program in which the government will speed up spending in 2009 suggests that more stimulus may be necessary to sustain growth in 2010. The lack of new spending signals that the government is giving more time for past policies to take effect
  

Details of the Stimulus to date
• China has been rolling out additional sector specific support packages that aim to support demand. There are concerns that Chinese investment may be exacerbating overcapacities in the Chinese economy especially through the use of tax rebates
• Nov 2008: 4 trillion yuan ($586 billion) stimulus, almost 1/5 of China's 2007 GDP, includes some previously announced spending. Government share is RMB 1.18T over next two years (1/3 of the package) with loans making up most of the rest. Targets investment in low-rent housing, infrastructure in rural areas, as well as roads, railways and airports as well as increasing purchases of grain to support the price and allow tax deductions for fixed asset investment as previously rumored. China has though rolled out new sector specific funding (autos, steel)
• HK: The stimulus package has a strong emphasis on rural development, as well as the less developed central and western regions including infrastructure
• half of the funds (1.8T) will be funneled to transportation infrastructure and power grid construction projects. 1T yuan will be used for earthquake reconstruction, and 370b yuan to improve rural livelihoods and infrastructure. Another 350b yuan for environmental protection, social security and housing will receive 280b yuan. 160b yuan for technological innovation and 40b yuan on public healthcare and education.(Caijing)

How Effective Will it Be?
• Pettis: instead of reducing China's export dependence, the opposite is happening. The stimulus isn't working because the money isn't going where it needs to go -- to household consumers and service industries, whose rising demand could absorb a greater share of Chinese production.
• WB: The stimulus policies provide an opportunity to rebalance the economy in line with the objectives of the 11th five-year plan, speeding up pension funding. government-influenced expenditure could contribute more than 4 pp to GDP growth (WB)
• AB: the ability of Infrastructure to stimulate growth may be limited. It must offset a contraction in property and manufacturing investment which account for a much larger share of growth and investment. China has been good at running a counter-cyclical fiscal policy in the past through and total stimulus might account for 2.5% of GDP
• Danske: Housing and infrastructure spending will probably have the greatest effect on growth
Zhou Xiaochuan: boosting spending at home is the best way China can help support global growthWB: In a more serious slowdown, a fiscal easing would be better suited than a monetary loosening, given the need to contain inflationary expectations, rebalance the growth pattern, and lower the current account surplus
• Zhou Xiaochuan: boosting spending at home is the best way China can help support global growth
• WB: In a more serious slowdown, a fiscal easing would be better suited than a monetary loosening, given the need to contain inflationary expectations, rebalance the growth pattern, and lower the current account surplus
• Risks: Reduction in revenues - expenditure growth was 30% y/y summer 2008. Government investment might boost overall output but do little at the micro level, exacerbating weakness in some regions (Citi) money may be circumvented to avoid defaults of SOEs

How Much New Spending?
• Lex: At most, half of the spending relates to new projects and the rest for projects that are underway; construction spending may kick in only by Q2-09 so some temporary unemployment is unavoidable. Spending by provincial govts. will be constrained by slowing revenues.
• Citi: The real incremental amount is more like RMB1-1.5 trillion, this could add 2-3 ppt every year to GDP growth in 2009 and 2010
• UOB: many projects delayed by the NDRC in recent years can now be green lighted, starting the stimulus effect quickly. Around 25% of investment projects are subject to the central government’s approval while the other 75% are subject to the approval of local governments

p/s photos: Ueto Aya

China Stimulus - Sector By Sector

• In addition to stimulus plans announced in November, State Council has announced additional sector specific ones relating to auto, steel, textile, machinery manufacturing, shipbuilding, light industries, electronics, petrochemical industry, logistics, and non-ferrous metal sectors. General focus is to try to reduce overcapacities and foster encourage consolidation (long term goals), though doing so may be difficult, particularly as some of the funds may just add to overcapacities. Additional real estate and energy focused support has not been included (federal and regional govt already rolled out real estate supportive policies in late 2008) but are being discussed at the party conferences.
  
• Auto and Steel: lower purchase tax on certain cars, especially fuel efficient; $730m in one-off allowances to farmers to upgrade vehicles; encourage industry consolidation;and establish a 10b-yuan government fund in steel. However it may be more difficult to phase out surplus and consolidate than expected - China currently has a steel glut as producers reversed production cuts too soon
• Non-ferrous metal: increase tax rebates; support high-value added exports of non-ferrous metal products; create and expedite national reserves; give credit to upgrade the technology. total capacity of nonferrous metal producers will be controlled
  
• Textile: increase tax rebate; phase out obsolete capacity; eliminate energy-intensive equipment and technology; and encourage relocation to central and western areas (these plans have been under way for some time but may not be key priority)
• Shipbuilding: increase credit extend the financial support for oceangoing vessels until 2012; suspend construction of new docks and the expansion of slipways
• Electronics: promoting the 3G mobile services and digital TVs; develop national science and technology projects and improve public technological service platforms; and promote outsourcing and increase tax rebates
• Light industries: subsidize farmers' purchase of TVs, refrigerators, washing machines and mobile phones, microwave ovens; increase export tax rebates; and remove restrictions on some labor-intensive and hi-tech processing trade
• Petrochemical: speed up of oil refining and ethylene projects construction; limit development of the coal-to-chemical industry and stop approvals for production expansion
• Logistics: develop transport and transshipment facilities; build logistics parks esp in rural areas,; encourage the development of logistics for major industries such as energy, minerals, automobile, agriculture and pharmaceuticals.

p/s Elanne Kong Yuk Lam

China Markets Extending Gains

China markets continued its strong showing after Chinese New Year holidays. The GDP growth rate was respectable at 6.8% in the fourth quarter and the expected government stimulus that should ensure a growth rate of 8% in 2009. Moreover, the Shanghai Composite Index was up an impressive 9.3% in January. That is impressive in comparison to the nearly identical 8.8% change in the Dow, though for the Dow it was in the other direction.

China's official purchasing managers' index (PMI) for January rose to 45.3 from 41.2 in December and a record low of 38.8 plumbed in November, the China Federation of Logistics and Purchasing (CFLP) said on Wednesday. A reading over 50 indicates an expansion of activity in the manufacturing sector while one below 50 suggests contraction. New orders, including those for exports, and production rose strongly. The only two sub-indexes to decrease were stockpiles of finished products and employment.

The January PMI indicates that China's economy is gradually bottoming out. The government's 4 trillion yuan ($915 billion) stimulus plan had started to have a positive impact on business, which was booking more orders for capital goods. Moreover, banks extended about 1.2 trillion yuan in new loans in January, a monthly record, in response to government calls to lend more to halt the economy's decline.

The stimulus plan is just as big as Obama's stimulus plan. One big difference, the China plan has a huge slant towards infrastructure. While Obama's plan is dissected into hundreds of pieces to satisfy various interest groups and to create a strong safety net for the poor. It is easier to marshal resources and get all provinces to work in tandem with government policies in China - and that is a huge advantage.

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previous posting on China in mid-January 2009:

1. The “smart money” is buying, not selling. Many foreign banks (including Li Ka Shing) have been selling down their Chinese banking shares in droves - the activity has been substantive over the last few weeks. We have to recognise that the foreign banks are selling because they are in trouble, not because the Chinese banks are in trouble. Secondly, the Chinese banks are the only kind of assets that can still get a decent price nowadays. Thirdly, the Chinese banks are the only kind of assets that there are plenty of willing money to buy them even now. Funds investing in emerging-market stocks raised their Chinese holdings to the highest level since 1995.
   
2. Chinese shares are very reasonably valued. If legendary investors like Warren Buffett really like US stocks trading at 12 times earnings, they should be rabid over Chinese stocks. Based on the MSCI China Index, the average Chinese stock trades for less than eight times earnings, and they do not have to contend with the massive de-leveraging.
3. Oil is much cheaper. One of China’s biggest challenges was to keep a lid on inflation, while still maintaining its breakneck pace of economic growth. That was no easy task with oil at $150 as the cost of shipping, food and fuel were increasing rapidly. Keep in mind, China imports a net 3.3 million barrels of oil a day. Now that oil prices are down considerably, the recently announced stimulus would see a more effective trickle through effect and multiplier effect, and not being "wasted" on oil prices. The risk of inflation in injecting the huge stimulus is muted as well.
   
4. The economy is NOT in a recession. Sure, it’s slowing down, but China is still on track for a solid 5%-6% expansion based on analysts’ estimates. And 8% if you believe the government statistics. Regardless of who ends up being right, compared to the contraction in most other economies, such a rate is downright explosive.
5. The last time Chinese stocks were this cheap was during the Asian financial crisis. Back then, most Asian countries were running huge deficits. But this time the roles are reversed. As of December, China boasts $1.95 trillion in foreign reserves. And counting. If necessary, the government can deploy these surpluses to keep economic growth humming along.
6. The consumer is just getting started. The country’s burgeoning middle class, now the size of the entire United States, is just getting started. The McKinsey Quarterly estimates that it will take two decades before these nouveau riche reach their full spending potential. As we know from our own experience and prosperity - 70% of GDP in the United States is attributed to consumer spending - the consumer is an engine of economic growth. In other words, the global recessionary headwinds are no match for the Chinese consumer. Like it or not, the global economy has grown by 70% in trade terms since 2000 till mid 2008. Much of that growth was due to globalisation and a huge new middle class of consumers being created in China, India and Latam - that middle class, while affected by the current crisis, will still be a force to be reckon with.
   
7. Locals are optimistic. We know consumer confidence plays a big role in the success of our own economy. It flat out stinks right now in the United States, And the economic conditions reflect it. But in China, it’s an entirely different situation. A recent survey from the Pew Research Center shows that most Chinese (86%) feel positive about where their country is headed. And that’s up from 25% just six years ago.
   
8. The “mother of all stimulus plans.” While the Obama stimulus has yet to take hold in the United States, rest assured it will. Same goes for the $584 billion the Chinese government is pumping into its economy. China’s “got the mother of all stimulus plans” when you factor in the government spending, savings rates and the rapid decline in commodities prices.

p/s photos: KC Concepcion

Is Asia Doing Enough Stimulus?

Well, the US can afford the stimulus because it can print as much Treasuries that it wants as long as there are demand for it. Other countries don't have it so good. Other countries have to watch our balance sheet, our reserves, our foreign debt levels, etc... Its unfair, and the global economic paradigm will shift, albeit slowly, to require more accountability from the US, but until then, we have to play by the slanted rules. Asia have come up with its own economic stimulus, with Japan and China hogging the limelight, and both should have no problem financing the stimulus. What about other Asian countries?

So far, Asian countries are introducing over $600 bn in fiscal stimulus to raise govt spending on infrastructure and public services, cut taxes, offer subsidies and ease credit for households and firms incl. exporters and SMEs in order to cushion domestic demand, promote investment and curtail job losses amid export slowdown and global recession. Stimulus by most countries have been a small share of GDP, esp. in those running deficits. Therefore, stimulus will be largely insufficient to offset the shortfall in private demand during 2009.

Apart from stimulus spending, other risks to fiscal deficit may reduce the ability of govts to use counter-cyclical policies: High food and fuel subsidy burden (esp. in in Indonesia, Malaysia, India, Taiwan, Vietnam), slowing income and corporate tax revenues. Cut in import tariffs/excise duties (to reduce import prices of food, oil) are reducing revenues; scheduled elections in 2008-09 in India, Indonesia and political uncertainty in Malaysia is also raising populist spending.

India - Eased credit access for NBFCs, infrastructure, housing, SMEs, export firms in 2nd stimulus. 1st stimulus of $4bn incl. additional spending; value-added tax cut; export credit and elimination of duties; govt refund for sales taxes; tax-free bonds for infrastructure. Fiscal deficit may hit 8-9% of GDP in 2009.

China - $586 bn fiscal stimulus package is dominated by infrastructure spending but includes tax reform to support fixed investment, and social security investment, provide capital SMEs; has increased selected export rebates. But falling revenues post challenge. Furthermore some of the package is repackaging of older projects. Still, China's stimulus if enacted speedily, will cushion the slowdown from export demand somewhat. Dollar for dollar, the China's stimulus is greater in its effects than the $825 bn proposed by Obama.

Taiwan - speed up infrastructure and investment-promotion projects, distribute spending vouchers, loan guarantees for businesses. Budget deficit to be around 2% of GDP in 2008-09. One of the mildest stimulus packages - does the Taiwanese think they are so different from the rest?

Malaysia - RM7 bn stimulus to boost govt investment, spending on infrastructure, public services, incentives for firms. Govt planning for another RM7-10 bn package. Deficit estimate for 2009: 4.8% of GDP. Unlike other market watchers, I am not terribly concerned with the level of deficit funding as that is just one side of the story. I am comfortable with another RM7-10 bn package. Just stop lying to the people - our politicians need to grow up because the populace have. Its not like 30 years ago whereby you can control the media and say the right things and lull people into a false sense of security. The internet is the great equaliser with most taking their news and analysis from the web rather than mainstream media. We all know the global credit crisis is bad, what we want is a government that acknowledges the problem and deals with it. Nobody is blaming the government, we ride it out but we want honest people to us things as it is, and not whitewash them. Its a credibility issue.

Thailand - Announced 3 stimulus packages to alleviate the impact of inflation on poor and govt's waning popularity; Oct-08:10 billion baht injection into SET, accelerated disbursement of government expenditure; Aug-08: $1.3bn package to cut excise tax on fuel, subsidize transportation and electricity; Mar-08: Personal and corporate tax cuts, state-owned bank loans to small businesses and low-income earners. Will raise 2009 deficit to 3.5% of GDP

HK - higher fiscal spending incl. rent concession, Inflation relief package, electricity subsidies, cash grants; reduce diesel duty and fuel tax; projected $15 bn surplus for 2008-09 and may return $7bn to public (20% of total spending). Being the most open economy in the world, HK has the added cushion of being the services capital to mainland China. The flow on effects of China's stimulus will help HK somewhat.

Indonesia - 27.5 trillion IDR package in tax incentives and lower import duties for labor intensive exporting firms, lower diesel and electricity tariffs, spending on infrastructure and public services, create 3 mn jobs. Deficit forecast to rise to 2.5% of GDP in 2009 financed by multilateral loans. Hate to say this but Indonesia will be more harshly affected than most of its neighbours. It has to do with its balance sheet.

Singapore - S$20.5 bn in tax incentives and public works spending. Includes corporate tax cut, tax rebates for industrial/commercial properties, loss-making firms to retain local workers. Split risks of bank loans to firms; rebates for citizens, the poor and unemployed. deficit forecast for FY2009 of S$8.7 bn (3.5% of GDP) will be financed using S$4.9 bn of its forex reserves. The country which has put out the most aggressive stimulus and defence plan. The package is already more than 3x the size proposed by Malaysia. Singapore is more vulnerable owing to its open economy and property bubble there as well.

Vietnam - $1bn stimulus fund (to aid businesses) as part of the overall $6bn stimulus package to promote consumption and investment incl. construction projects, electricity plants, low-income housing; cut taxes on businesses. Deficit expected to rise to 7% in 2009. Vietnam was already in trouble prior to the global credit crisis. Will be a long hard slog for the country. Beware companies that still have huge committments in Vietnam.

p/s photo: Zhou Wei Tong

China Calling

China markets have been trying to wrangle itself away from the market weakness in the US and Europe. So far, we have seen the buyers winning the battle over the last week or so, albeit marginally so far. More institutional and private funds have funneled into China funds, and a deliberate move by Beijing to try to reignite some positive activity in the Chinese markets have pushed the markets there forward.

There are good reasons to start ,oading up on some H-shares in HK and a riskier bet would be some of the locally listed China-covered warrants.

1. The “smart money” is buying, not selling. Many foreign banks (including Li Ka Shing) have been selling down their Chinese banking shares in droves - the activity has been substantive over the last few weeks. We have to recognise that the foreign banks are selling because they are in trouble, not because the Chinese banks are in trouble. Secondly, the Chinese banks are the only kind of assets that can still get a decent price nowadays. Thirdly, the Chinese banks are the only kind of assets that there are plenty of willing money to buy them even now. Funds investing in emerging-market stocks raised their Chinese holdings to the highest level since 1995.
   
2. Chinese shares are very reasonablt valued. If legendary investors like Warren Buffett really like US stocks trading at 12 times earnings, they should be rabid over Chinese stocks. Based on the MSCI China Index, the average Chinese stock trades for less than eight times earnings, and they do not have to contend with the massive de-leveraging.
3. Oil is much cheaper. One of China’s biggest challenges was to keep a lid on inflation, while still maintaining its breakneck pace of economic growth. That was no easy task with oil at $150 as the cost of shipping, food and fuel were increasing rapidly. Keep in mind, China imports a net 3.3 million barrels of oil a day. Now that oil prices are down considerably, the recently announced stimulus would see a more effective trickle through effect and multiplier effect, and not being "wasted" on oil prices. The risk of inflation in injecting the huge stimulus is muted as well.
   
4. The economy is NOT in a recession. Sure, it’s slowing down, but China is still on track for a solid 5%-6% expansion based on analysts’ estimates. And 8% if you believe the government statistics. Regardless of who ends up being right, compared to the contraction in most other economies, such a rate is downright explosive.
5. The last time Chinese stocks were this cheap was during the Asian financial crisis. Back then, most Asian countries were running huge deficits. But this time the roles are reversed. As of December, China boasts $1.95 trillion in foreign reserves. And counting. If necessary, the government can deploy these surpluses to keep economic growth humming along.
6. The consumer is just getting started. The country’s burgeoning middle class, now the size of the entire United States, is just getting started. The McKinsey Quarterly estimates that it will take two decades before these nouveau riche reach their full spending potential. As we know from our own experience and prosperity - 70% of GDP in the United States is attributed to consumer spending - the consumer is an engine of economic growth. In other words, the global recessionary headwinds are no match for the Chinese consumer. Like it or not, the global economy has grown by 70% in trade terms since 2000 till mid 2008. Much of that growth was due to globalisation and a huge new middle class of consumers being created in China, India and Latam - that middle class, while affected by the current crisis, will still be a force to be reckon with.
   
7. Locals are optimistic. We know consumer confidence plays a big role in the success of our own economy. It flat out stinks right now in the United States, And the economic conditions reflect it. But in China, it’s an entirely different situation. A recent survey from the Pew Research Center shows that most Chinese (86%) feel positive about where their country is headed. And that’s up from 25% just six years ago.
   
8. The “mother of all stimulus plans.” While the Obama stimulus has yet to take hold in the United States, rest assured it will. Same goes for the $584 billion the Chinese government is pumping into its economy. China’s “got the mother of all stimulus plans” when you factor in the government spending, savings rates and the rapid decline in commodities prices.

p/s photos: Amy Fan Yip Mun (aahhh, finally found my dream girl, to me she was the best looking starlet from the 80s and 90s in HK)

Beijing's BYO To The Party

Beijing has unveiled a 4 trillion yuan (HK$4.54 trillion / US$582bn) economic stimulus package to help boost domestic demand - in what is seen as a shift to "proactive" fiscal and "moderately easing" monetary policies.

The measures, which run until the end of 2010, were announced after a meeting of the State Council chaired by Premier Wen Jiabao, Xinhua News Agency reported. Some 100 billion yuan (US$12.8bn) is earmarked for this quarter alone.

The spending will focus on 10 areas, including low-cost housing, infrastructure in rural areas, and social welfare, in addition to transport networks - railways, highways and airports - environmental protection and technical innovation.

It also includes capital expenditure to renew city power grids. Some of the spending overlaps longer-term stimulus plans reported earlier - including a 2 trillion yuan railway plan and 5 trillion yuan expenditure on roads, waterways and ports from 2006 to 2020.

BNP Paribas chief economist Chen Xingdong said: "This is the first time China has officially confirmed the shift to easing monetary and fiscal policies. Although it was a 'slow heating up process,' it shows the government's realization of the urgency to bolster economic growth." Economists have been anxiously waiting for a huge stimulus plan ever since gross domestic product growth slowed to 9 percent in the third quarter from 10.4 percent in the first half.

"At the Central Economic Work Conference, to be held later this month, Chinese leaders are expected to announce concrete measures to stimulate the economy ... Beijing's new policy drive of upgrading infrastructure, rural land reforms, and expansion of social welfare is akin to a 'New Deal' with Chinese characteristics," said Jing Ulrich, chairman of China equities at JPMorgan. China's economy grew at the slowest pace in five years in the three months through September as export orders shrank amid the global financial turmoil. Domestic industrial production also fell after Beijing ordered heavily polluting factories to shut down ahead of the Olympic Games in August.

The Cabinet also confirmed that reform of the value-added tax system will cut companies' tax bills by 120 billion yuan. Beijing will also remove credit limits of commercial banks to further encourage lending support to small and medium-sized enterprises. The People's Bank of China has cut interest rates three times since mid- September. People's Bank of China governor Zhou Xiaochuan, meanwhile, said the central bank forecasts the mainland economy to expand between 8 and 9 percent next year.

The success of this plan depends crucially on continued government credibility in the face of rapidly rising deficits as well as on the health and stability of the banking system.If the banking system can withstand a downturn without any significant rise in NPLs and without forced credit contraction, this may be the shot in the arm China and the world needs. This move by China is a very big hint of how worried the government is and how determined they are to address the issue that this plan was approved.

The government can force credit expansion by requiring the banks to lend more.

Certainly they are trying. Last week, after weeks of rumors that loan caps were being relaxed, the PBoC announced that they were junking the credit restrictions they had previously imposed on banks. But loan growth has still been very low.

This is hardly surprising. In such dire economic circumstances with global credit markets and liquidity seizing up, with domestic bankruptcies rising, with inventories and receivables also rising, it takes both brave banks and brave borrowers to accommodate credit expansion. Most good companies seem reluctant to borrow and anyway banks are reluctant to lend.

So what if policy-makers simply announce minimum loan growth targets for every bank? That should certainly cause an expansion in banks’ balance sheets. However, this will create some problems. It might not be effective in net credit creation for the country. If banks don’t want to lend but are forced to, we will see off-balance sheet transactions placed back on balance sheet and a much more rapid decline in loans from informal banks. That means that real credit expansion can still be negative even with minimum loan growth target enforced onto the banking system. Forced lending will also result in a sharp deterioration in quality of borrowers. It is always possible to find borrowers, even in a sharp economic contraction or investment crisis.

US$582bn is not a small sum, even if you spread it out over a few years. There is the multiplier effect or trickle down effects. The rule of thumb is that every one dollar spent is worth between 4-8 dollars in the real economy, velocity of money supply.

The sum announced by China is certainly very big. Is it big enough? The US GDP is about US$14 trillion or 3.5x China's GDP of US$4 trillion. Say US loses 2% of its GDP, to make it up, China would have to grow by a staggering 6.8% - of course, that's assuming the problem is just contained in the US, and that China is the only engine of growth left in the world. The other factor to bear in mind is that Chinese consumer only make up some 35% of China's GDP, much lower than US consumers. Final conclusion - its not a Prozac, but its better than nothing, a lot also depends on whether its for "show and tell" or will the measures be implemented assiduously.

p/s photos: Sammi Cheng