November Caijing

Indicators – 65% of urban residents believe home prices were too high Q3, up 2.8pp qoq. 41% expect a rise in Q4, 16.2pp higher qoq. Probable home buyers jumped 1.3pp to 17%. Aug interbank bond issues down 34.1% mom as proportion of long bonds increased despite expectations that financing costs will increase later to inflation. Industrial profit slide slows due to improved perf since June. Rare Earth exports down 73.6% yoy YTD as China discourages outflow of strategic resources. Japan, EU, and US are major importers. PMI fell by 0.1pp to 55. Overseas orders and factory output have rebounded. Most new orders came from domestic demand. Face cost pressure from higher corn, iron, oil, and steel prices. Forex reserves hit $2.27T. Survey says Sept exports may have fallen 20.5% yoy, compared to a 23.4% fall in Aug. Outstanding foreign debt down 3.76% to $360B. 53% is short-term, the rest medium-long-term. Big Four contributed only 21.4% of new Sept loans, down 70% from H1. Most of the new lending came from postal banks, agri coops, policy banks; only 3% from jt-stock banks. Medium-sized banks have had lending restricted by tighter reg controls. Banks are selling loans as syndicateds. New loans were higher than expected by 10%. YTD cargo throughput up 106%. Iron ore inventories estimated at 100M tons. Exports fell 15.2% yoy, much better than expected; imports down 3.5%. Exports and imports grew by double digits mom. Iron ore imports were up 35.7%, prices down by 45.5%. Crude imports up 8.2% yoy, price down 48% yoy. Christmas orders and inventory restocking is fueling export recovery and will last through 4th quarter. CICC expects 2010 exports to grow 10% yoy. EU is China’s biggest trade partner YTD, US 2nd, Japan 3rd. Steel prices may rebound as price cutting by producers is probably over. Futures prices may take off. However domestic stocks have hit a new high of 11.9M tons as prime steel output soared in Aug to 52M tons. HK investors worried more aobut fin health than sheer size of land banks; 8 RE firms are trying to go public in HK this year. Power consumption in Sept rose 10% yoy, fastest pace of growth since Jun 2008. Power gen rose as well to record 344B kWh. Housing sales up YTD. RE inv rose 17.7% yoy. Prop sales rose 44.8% yoy YTD. Crude steel output up 28.7%, pig iron 27.7%, steel products 25.1%. Coal output up 12.7%, cement 25.1%, power output by 9.5%, Q3 GDP up 9.1%. New lending grew 278% mom by fin firms from 5.6% total lending in Aug to 17% (lol). YTD Urban Res disposable I up 9.3%yoy. 9mo retail sales up 15.1%yoy, Sept sales up by 15.5%. UFAI up 33.3%. Industrial output up 13.9%. Urban res dispoable income up 9.3%. PE Q3 fundraising down 87% as contributors became more selective after the GFC. Shanghai LCD imports grew 58% to 30M units in Sept as local manus see recovery in demand. Benchmark coal prices rose on winter C expectations; DPPC analyst suggests coal could rise higher as higher transport costs from western province dev. YTD 3G inv at 96.1B yuan. Petrochemical industry’s FAI up 11.5% yoy YTD. FAI for oil exploration and refining fell 14%. Petrochem output up 3.3% yoy in Sept, ending 9mo of decline. Nuclear power capacity could hit 70M KW by 2020. Q4 fiscal rev projected to rise in Q4 to 6.6T yuan, 8% yoy. Oct new lending by Big 4 slight up over Sept. 136B yuan.

RE – Shanghai office rents continue to drop as multinationals defer expansion plans.

Commodities – Grain output to increase slightly yoy, dispelling drought fears. 123M tons this autumn.

Premier – No, really, we’re not going to ignore western China. Shaanxi, Gansu, Qinghai, Ningxia Hui, Xinjiang Uyghur, Tibet, Sichuan, Yunnan, Guizhou, Chongqing muni, Guangxi.

Yuan Currency – 6B yuan bonds issued in HK, 1st sale of sovereigns outside the mainland. 2yrs (2.25), 3yrs (2.7), 5yrs (3.3%); available to a mix of retail and institutionals. Will provide a benchmark IR for overseas yuan bond issues by other institutions and price benchmark for yuan financial products, as the offshore yuan market develops. Shanghai plans yuan-Taiwan $ convertibility trial program.

ETFs – Funds develop overseas ETFs.

Trade – CISA complains that its steel pipe exports are shipped above cost. EU Court of Justice overrules dumping finding on Chinese ironing board manufacturer. Prepares trade investigation into unfair car subsidies by the US govt. Trade Rep and Vice Premier pledges to stand against protectionism. US pledged concessions on pork and wind power and China plans to lift the swine flu ban on pork while allowing wind-power equ for govt to not be made in China. China also pledged to fight Internet piracy and the US will stop accepting trade protection cases; both agreed to stop abusing mediation remedies such as filing WTO complaints. Chinese steelmakers urge India to withdraw steel import tariffs. Tariffs are said to be temporary. US ITC anti-dumping and countervailing investigation into seamless steel pipes.

Shenzhen SE – Will curb speculation on stock debuts. 30 min suspension if price rises/falls by 20% from opening price. 2nd suspension if by 50%. Best SSE 100 index funds Efunds SSE 100 EFT, Rongton SSE 100 Index Fund. Will curb intraday speculation on GEM.

SSE – International board rules won’t be released until after National Day holidays. IPO boom may be winding down due to poor MCC performance. Limits use of expected funds from larger-than-expected IPOs on GEM. Extra proceeds must go to core business, not wealth man products, stocks, or derivatives. International board will list 1-2 foreign firms next year. Will a redchip list next year? In 15yrs, 100 companies will probably list. Part of Shanghai’s conversion into a trading and financial center. Technicals issue include accting standard, market pricing, requirement to inv in china. Legal securities and corp framework may need to be restructured for foreign firms. Needs to avoid complex, tedious review and approval process.

SFE, DCE, ZCE – Domestic futures investors exited long positions at SFE, Dalian Commodity Ex, and Zhengzhou Commodity Ex.

CFFE – Chinese Fin Futures Ex is ready to launch stock index futures, 3yrs after formation.

HKSE – China Menswear fell, due to too-high initial price expectations. Peak Sport fell on its debut due to bearish market expectations.

NCE – Beijing Chaoyang district plans to establish an national coal exchange to trade 600-800M tons annually on spot and futures deals.

GEM – CIC warns that IPOs and openings on GEM will exceed reasonable ranges. 1st 10 firms to list will raise 6.9B yuan from IPOs, exceeding previous estimates. Avg PE ratio is 54, prices were set at upper limit of proposed ranges. Nanfang Ventilator, Bestway Marine Engineering Design, Ultrapower Software, Chongqing Lummy Pharma, Anhui Anke Biotech, Lepu Medical Tech (Beijing). 431 funds interested in GEM investments. 1st 10 firms to launch IPOs froze 784B yuan following their subscriptions. 128x subscribed, 434x is the avg. (ouch) 188 firms to list on GEM. First debut on Oct 30.

QFII – Restrictions on transfer of inv quotas are likely to discourage short-term inv in A-share market. Quotas have been raised $200M, but may not be transferred or sold. Foreign investors may shift to A-share index products or apply for a license (long arduous process).

QDII – Quotas will be expanded even further after E Fund and China Merchants were given $1B and $500M quotas.

SSF – PE inv units of SOE securities firms may be exempt from transferring 10% of holdings in newly listed firms to SSF.

MinFin – Approves proposal to exempt govt VC firms from requiring the transfer of 10% equity to national Social Security Fund.

MinComm – China is a victim of rising protectionism, Yu Jianhua (dir of Dept of Int Trade and Economic Affairs). Trade remedy cases have increased 120% by G20 countries. Expects trade surplus to drop in 2009 to $180-190B, down $100B yoy.

MinIndusIT – Regulations to encourage M&A among cement industry to curb excess capacity. 2.8B capacity, 1B excess. 3500 cement firms in China.

CBRC – Basic fin services will be available in 3yrs to all towns. 2945 towns w/o bank outlets, 708 with no fin services at all. Mostly in western China. Comm banks will be required to deduct from Tier 2 capital their crossholdings of bank subordinated acquired since July 1. Liu Mingkang warns about city comm banks overexpanding.

CIRC – Fines CIGNA, CMC Life for misleading sales tactics 100K yuan (oh, wow).

CSRC – Central govt should regulate PE and VC, which are currently subject to local govt rules. 2 securities firms’ sponsors had their licenses revoked for lying about career experience, third suspended for irregularities. Will monitor GEM trading to stop overspeculation and share price manipulation. Will not control IPO price setting. Will allow exchanges to determine timing of IPOs, suspensions and delistings (w/o authorization req by CSRC). Foreigners may apply for senior exec positions in securities firms.

NDRC – Raises min govt purchasing prices for wheat and high-quality rice in 2010. Corn output has hit record yields, keeping a lid on prices. Long-term grain supply strains from thin margins in planting and natural disasters. Grain brokers seem to be taking most of the benefits from higher prices. Govt involvement may hamper development of the market and add to local govt fin burden. Should shift from increasing output to growth in circulation and reducing production costs through agri infra investment. Bans industrial energy specil discounts on power pricing to retail or to industrial users. Will announce scheme for retail electricity price hikes in midNov and adjust on-grid prices. This will rebalance ints of power firms and transmission firms. On-grid power tariffs will be cut for power generators in coastal regions but raise them for the inland provinces.
On-grid tariffs are the prices that power distributors pay to power plants. State Grid and China Southern are only authroized buyers of power plant output and only sellers to supply end-users.

NEA – May cancel talks btw coal miners and power generators, and may let the market figure out how to pass power costs to customers.

National Audit Office – Investigates irregularities at loca govt inv firms linked to stimulus package.

WTO – Will allow China to screen media imports for inappropriate content as long as they don’t discriminate against US products, according to Beijing trade office. WTO has ruled otherwise, though China is appealing. Goods or distributed s services classification legal matter.

IMF – Fin Min urges speeding up quota reform. Create an auto adjustment mechanism to reflect evolving weight of each member.

Guernsey – Opens office in Shanghai, signs MoU on personnel exchange and business flows btw Guernsey and Shanghai.

Kazakhstan – Will import 6-7M tons of crude from Kazakhstan through the pipeline this year. Expansions of the pipeline will increase length and capacity.

Gazprom – Its NG pipeline in Central Asia will reach 40-50B cubic meters a yr by 2013.

Beijing – Housing supply down due to sales pickup and slowdown in housing starts. Housing stock will be cleared in five mo.

Guangzhou Port – Issues 1.3B in 1yrs to increase working cap and optimize debt structure.

Guangzhou Baiyun Airport – Cargo throughput grew 64%, passenger vol 13% yoy. In uptrend

Guangzhou – New home sale prices and volume hit 2007 marks. Fell during October holidays 80% yoy by floor area.

Guangzhou Prov Expressway Dev – 800M yuan bonds open for SSE trading. Will be used to supp working capital.

Shanghai Airport Authority – Ties its HK counterpart to manage Hongqiao Airport and increase retail income at the site. Smaller of the two main airports.

Wuhu Port Storage – May seek to list after buying rail transport and logistics As from Huainan Mining Industry.

PBoC – Yi Gang (Deputy Gov) “strength of lending isn’t a concern and will stabilize”. Unlikely to pull back on stimulus. New lending and money supply jumped in Aug. More moderately loose and boosting of domestic demand. BoC VP Zhu Min appted vice gov, may be groomed for IMF position, groomed in BoC and World Bank. 100B yuan auction of 1yrs flat, largest since July 9 resumption. Plans to set up national market for loan transfers to boost liquidity of credit assets. 3yrs to establish, will strengthen regulation of the loan transfer business, allow for institutions to diversify credit risk. Banks will not likely use it much initially as most I is still derived from net int I. Transaction costs remain high due to lack of unified rating criteria, different loan standards, mandatory non-disclosure agreements with clients which increases transaction costs. Launches CP trading system.

CIC – Purchases 11% of GDRs of KazMunaiGas Exploration Production for $939M. 2nd largest oil company in Kazakhstan. Chairman warns of small global asset price bubble. Invests $700M in a Mongolian mine ($500M convertible), $500M in expanding a Canadian coal mining firm in Mongolia. Invests $500M in SouthGobi convertibles, subs of Canadian Ivanhoe Mines. The 8% convertibles can be converted into 22% of SouthGobi; proceeds will fund construction of a railway btw China and the Ovoot Tolgoi coal mine in Mongolia. CIC may nominate 1 dir to 8-board.

Central Huijin – Boosts holdings in 3 major banks, may be trying to stabilize market ahead of ChiNext opening. Zhao Haiying named Deputy Gen Man by CIC. Previously head of strategic research and asset allocation.

Banking – Major banks agree with managed funds on sales commissions for distributing PE products. Confirms recent registration of PE products with securities regulators. Floating compensation is replaced with a fee structure. Securities firms will benefit from GEM investments as brokerage, i-banking, and direct inv divs benefit.

CDB – Buys Stockfly Sec. Loans $2B to Yunnan govt to help provincial firms secure overseas deals in SE Asia.

BoC – Upgrades IT systems in Hebei after 5yrs of delay.

CCB – Launches medical PE fund. Wants culture, aviation, and enviro funds as well. Will continue to lend to infrasturcture sector next year. Expects to hit 2009 earnings target, and will use profits to raise provisioning levels. Current NPL coverage is at 161%.

ABC – Moves its private banking, commercial bills, and CC divisions to Shanghai by 2012.

ICBC – Will spend 370M yuan in buying ACL Bank, a Thai lender. Expanding into SE Asia. May buy COSCO’s 20% stake in ICBC-CS JV fund. Standard Bank (20% stake) may buy 33% stake in Russian private inv bank Troika Dialog and create a trading platform across emarks. Opens first European retail banking outlet in London (Chinatown). Offers retail banking and overseas remittance; no mortgage or CC ops.

Bank of Ningbo – Issues 2.5B yuan subordinateds with mats up to 10yrs, to supplement tier 2 capital. CAR is falling to 10.8% this year.

CITIC Guoan Info – Unit of CITIC. Will not reach 1.7B yuan target from its warrants, due to share price slump.

Gaohua Securities – Wins As man license. Strategic partner with GS.

Guoyuan Sec, Hongyuan Sec, Northeast Sec – significant profit growth in Q3. 600-11000%. Growth from strong sales in securities brokerage ops and rising inv returns.

Guoyuan Sec – will issue 500M shares to raise 10B yuan (underwritten by Ping An, Galaxy). Proceeds to boost underwriting operations, improve brokerage network, fund securities purchases, build infra.

Western Sec – Mellon waiting for final JV approval from CBRC and CSRC; Mellon will hold 49% stake in the JV. Mellon hold a substantial share of the currency markets.

HSBC – Rolls out personal unsecured loans for farmers and sel-employed in rural China. Liu Che Ning (formerly MS) named head of global banking in HK, will build client coverage and advisory biz in China.

Ping An – Holds lead on china Pacific after gaining leader status in July in prop premium I. China Life dominates life ins, PICC prop.

PICC – Opens as jt-stock entity after restructuring. 4th largest insurer by As. May list next year.

China Pacific Ins – Life ins premium growth will rise in 2009 as restructuring takes effect.

China Re – SOE. 10B yuan swing from yoy due to inv gains and cost controls. Hopes to make underwriting profitable by 2010.

Sino Life Ins, CDB Leasing, China Life, Mingsheng Fin Leasing – each bid several hundred million yuan for Shenzhen commercial sites.

Petrochina – New Huizhou, Guangdong, and Qinzhou refineries should ease shortgages of oil products in central and southern China. Refining capacity will rise by 110M tons per annum.

CNPC – Plans to invest 20B yuan to build an oil products reserve and logistics facility in Changzhou, Jiangsu. Includes a 1000km pipeline and a chemical material production base. Will likely adopt new NG pricing regime that will use weighted prices for imported and domestic gas. Prices at urban gas distribution centers would rise, ex-factory prices would rise also. Will allow for more NG imports and diversification of energy sources. Currently, consumers pay a capped ex-factory price and a fixed pipeline transmission cost, along with some fees.

CNPC, Gazprom – Signs gas export and refinery and retail distribution network agreement.

CNPC, KazMunaiGaz – Signs jt dev of Urikhtau NG field. Reserves of 40B cubic meters. Also finalized construction agreement over section II of phase II of the pipeline.

Sinopec – Withdraws from Eni consortium which won dev rts to Iraq’s Zubair. Eni, Occidental, and Kogas will invest $10B to boost output. DISREGARD THAT, still part of 2nd round of oilfield bidding despite difficulties over Addax deal. Addax had deals with the Kurds whom the Iraqis regard as illegitimate.

Nobel Oil – Russian oil firm plans to backdoor list in HK, stake owned by CIC. Kaisun Energy (coal mining and coke processing) has signed a MoU to buy out Nobel Holdings which controls Nobel Oil Group’s assets. CIC will own 45%, Oriental Patron Fin 5%, Russians the remainder.

Yanzhou Coal, Felix – Submits 3rd version of acquisition plan.

Yunnan Copper – Galaxy suggests rise in copper prices might help the firm’s profitability.

Zijin Mining – Fuijian mining conglomerate. Plans to allocate $1B to acquire overseas gold and copper mines in 2010.

Rare Earths – Chian suspends issuing prospecting licenses for rare earth, tungsten, antimony.

Sinogold – Merger with Eldorado Gold approved by Aussie Foreign Inv Review board. Eldorado will own 75%, Sino Gold the remainder.

Fortescue – Loan talks with the miner suspended over disagreements about risk settlement. Missed Sept 30 deadline over loans talks, but will continue to pursue talks.

Cazaly – Seeks A$100M from Chinese steelmakers to develop iron ore project.

Minmetals – Plans to acquire stake in Hunan Nonferrous Metals. State Council approves merger with Changsha Research Institute of Mining & Metallurgy and Luzhong Mining Industry Group.

Wuhan I&S – Works with Aussie Dept Def to settle mining inv dispute with military over Western Plains investment.

Hebei I&S – Under capacity. An excess of iron ore supply in 2010 will happen as domestic steel output is restrained by fewer bank lons and declining steel demand. Steel inventories are approaching late 2008 level.

Baosteel – Parent of Baoshan I&S is operating at 85% capacity.

CISA – Will continue to press for unified iron ore prices regardless of source, quality, and ore grade.

Wuliangye – Share trading suspended due to failure to disclose losses on securities inv and overstated revenues.

Silver Base – Largest Wuliangye distributor. Denies it is linked to Wuliangye investigation or engaged in fictitious export transaction and smuggling.

Sinograin – SOE. Recently bought Sanhe Rice to expand in NE China as it tries to expand and become the biggest supplier in the country. Private players are being crushed. Sanhe will receive inv and marketing support, and try to become #1 rice processor in Beijing and Tianjin markets. Govt hopes to use Sinograin as a major grain reserve and control prices through product control. Sinograin also hopes to establish 6 trans-province logistics routes throughout the countries for 400M yuan inv. In 2007, NDRC released a plan to raise logistics organization levels and build trans-province routes for distributing grain. Grain processing was seen as a way to integrate the firm and overcome difficulties with sales. Sinograin has had to buy grain through open auctions, but volumes and prices fluctuated volatilely. Company already had a strong presence in processing white rice, flour, corn, vegetable oil, etc. In Feb, it inv 1.3B yuan in Sinograin Zhenjiang Grain and Oil Processing, Storage, and Logistics, which is a govt-backed project. Sinograin Northern Logistics was registered in June. By Aug, construction for oil processing facilities and R&D had begun. Vertical integration is the final goal. Competition has taken a hit: Yudeshun Rice Industry is a large rice processor, which faces lack of cap, inadequate storage facilities, and weak transports. It can’t compete with Sinograin’s ADB loans and developed rail transports. Private firms believe that Sinograin should stick to grain buying, storage, management, and policy-related ops. But Sinograin expansion allows govt to expand its control beyond buying and selling unprocessed grain to handle the market, and compete against foreigners like the Wilmar Group (Singapore). Should reserves be reduced and private enterprise be given more room to develop?

Gome – Buys back 1.3B yuan in convertibles. 3.27B remain.

Times Ltd, Lotte – HK retailer. Lotte Group bids for 72.3% stake over Wumart’s bid.

China Telecom – Smallest of the mobile operators. All new subscribers will receive free long-distance calls. Will delay for 1mo the introduction of nationwide caller-pay scheme for existing CDMA users due to slow progress of work.

China Unicom – Sells 3G iPhones in Oct. Prices set higher than expected.

ZTE – 2nd largest telecom equ maker. Signs 5yr contract with Unitech Wireless to build and maintain GSM networks in India.

General Tech Holding – State Council approves merger with Xinxing Corp.

NEC, SVA – Will stop its LCD line JV with SVA due to cash flow problems.

BOE – Considers building a 2nd 8G thin-film transistor LCD line to consolidate its position as a market leader. Faces Japanese, Korean, and Taiwanese competition fast expanding their mainland ops and partnering with domestic rivals. Will also be building 4.5G and 6G LCD lines. Sharp has allied with Electronic Tech Group, Electronics Panda Group, and Nanjing to build an 8G line in Nanjing. LG Display has allied with Guangzhou to build its 8G line. Samsung and Chi Mei have shown int in bring production facilities and technology to China due to low manu costs, preferential lending rates, and a huge potential market.

Xinjiang Goldwind Science and Tech – Hopes to become top five wind power equ-maker in 3yrs. Will list in HK for $1B. Concentrates R&D on offshore wind turbines, hopes to produce by 2012.

Hisense Kelon – Believes regulators will approve of white goods assets restructuring with its shareholder Qingdao Hisense AC. Both will merge As and man with CSRC approval.

MCC – Largest engineering and construction firm in China. Construction is concentrated in steel, property dev, mining, equ manu. Has raised 1.62T yuan this year from Shanghai and HK IPOs. Underwriters promoted it as an engineering services provider with strength in tech, integrating its prin divs and extending its industrial chain. Proceeds will go to resources project acquisitions overseas. Faces industry overcapacity.

Zhangjiang Hi-Tech Park Dev – Increases inv in wholly-owned subsidiary Haocheng VC by 48M yuan to help Haocheng buy a 0.4% stake in Shandong Buchang Pharma. Supporting its core business of deving industrial parks by investing in tech firms. Shenzhen China Euro Cap will be obliged to repurchase the stake if Buchang does not list by Dec 31, 2013 under a buyback provision. Buchang is integrating pharma assets from its parent Buchang Grp.

Gemdale – Pays 2.44B yuan for Shenzhen sites, largest transaction by area in Shenzhen this year.

Vanke, COFCO – buy suburban Beijing site for 3B yuan. Fangshan District.

Vanke – Sept sales up 27% yoy, and yearly sales will exceed 2008 sales total. Q3 I doubles yoy due to rising prop prices and sales.

Evergrande, Excellence, Fantasia Holding, Minfa Group, Xiamen Yuzhou – May reduce IPOs due to weak demand, fears of overvalued assets, high IPO prices.

China Merchants Prop – Q3 I grew 170-200% yoy thanks to forward-delivery property sales.

Beijing Urban Construction Inv & Dev – buys res plot in Fangshan Beijing for 1.5B yuan, 60% above asking price.

Runxing Weiye RE, Chongsha RE – bid 1.5B yuan, 181% above floor price for Tongzhou Beijing site.

Huayi Brothers – approved for GEM listing of 620M yuan. Actors will get shares and proceeds will fund film and TV drama productions.

Shanghai Media Group – Completes restructuring into Shanghai Radio & TV. First to emerge from media industry restructuring towards financial independence.

Education – Rural Credit Co-ops: Running loan programs at full capacity, 745B yuan in H1 to borrowers such as govt firms, securities inv platforms. CARs aren’t meeting regs (4.3% vs 8% reg min). Most local govt inv platforms have invested loans into infra projects w/o giving guarantees or repayment schedules. 710 credit untions have negative CARs and wrote 138B yuan in loans. Leveraged risk abounds, considerable operating risk. Loan loss provision ratios are expected to climb from 30% H1 to 70% 2010. 500B yuan bad assets currently on RCFI books. Many locl govts meddle in rural credit union affairs. Hebei Provincial Coop Assoc raised 39B yuan from 134 county-level unions and invested it in govt inv platforms; CBRC quickly issued a risk advisory to its credit issuers and ordered an immediate halt to fundraising. Rural credit unions have gone far beyond comm banks or rural coop banks; banks undergo stricter standards. Rural credit unions plan cap replenishment by tapping retained earnings and reinvesting in local firm invs. Most RCFIs don’t have satisfactory cap replenishment plans to match their credit explosion. CBRC worried about NPLs hurting RCFI ability to meet targets. Supposedly in H1, the RCFIs reduced NPLs and NPL ratios, while improving provision coverage ratio. ROA and asset I was stable. Poorly managed RCFIs have written loans at an incredible speed as comm banks started withdrawing credit from industries disfavored by the govt for high energy C and pollution. RCFIs drifted from agri, farmers, and rural areas to meet this demand. RE lending in the East has risen 50%, RCFI lending has risen 100%. Many RCFI loans also went into county projects, which are considered financially shaky. Projects can’t be halted as they might be abandoned and spread damage among provincial RCFIs. Many projects also have high debt ratios. Local govts may have trouble repaying loans due to falling land tax rev.

Opinion – Hu Shuli (Caijing): IMF needs to become global lender of last resort, change governing structure, not manage countries forex reserves. Developeds should transfer 5% of voting power to developings. US should concede veto power. China should adjust economic structure, reform currency, and improve communication w the developeds.  Guo Shuqing (CCB): Urges more outward direct inv in total overseas inv, raises limits from 6-7% to 20-40%. Yi Gang (PBoC): IMF should improve monitoring mechanisms of international cap markets to ensure stable ex rates. Wang Sicheng (NDRC): Curbing expansion of polysilicon production capacity may causes shortgages by 2012. Hua Ercheng (CCB): New loans will total 9.4T-10.4T yuan this year. H2 issuance will be down by 50% from 1st half, and will mostly go to construction projects. Many firms increased deposits as the Big 4 accounts. Andy Xie (Rosetta Stone): Total debt for financials in 2009 was $16.5T, 2008 $16.6T in Q2. Govt forced reduction in leverage which came from increasing equity base and government capital injections. Financials reported profit gains in H1 2009 despite global contraction. This was from trading income due to the rising markets. Trading gains are a form of I redistribution from the few to the masses who are tricked into being the last fool. Fin supervision has not changed globally and is actually worse with the suspension of M2M and the token gesture of regulating banker salaries. Need to make leverage transparent, so as to reveal bubbles quickly. Complex accounting rules and varying treatment of different institutions make this difficult. Basel II sets 8% capital as the standard for leverage, which allows 12x lev. OBS treatment can be used to amplify this. Industrial finance, hedge funds, mutual funds, PE firms, etc are even less regulated, and often become banks when purchasing securitizations and lending in the CP and wholesale markets. MMF buck-breaking created a demand for liquidity as their model collapsed and required govt to bail them out. Leverage in the economy causes asset prices to rise; shadow banking system was how it occured and rising collateral values allowed it to expand and lend more. Need principle-based, not just rule-based, regulatory agencies to take effective action. CFPA is being produced to regulate new fin products sold to consumers, in order to slow down future bubbles. US govt has failed to set a new example. Policymakers have blown opportunity to build a better fin system. Negative wealth effect has increased US savings. Increased savings could hit 10% in 2010 and have the trade deficit in 2010 after already being halved in 2009. Bullish on $. Stocks, commodities, and property values have skyrocked despite a synchronous global recession. OECD will stage a weak recovery, stimulus can’t cause realignment to occur faster. Bubble can last due to a large multipler effect in an economic boom that boosts asset returns. Tech bubbles can be extended by cutting costs and boosting profits, property bubble stimulates demand for consumption and boosts corp earnings, benefitting fin institutions, retailers, construction firms, and mat suppliers. Current bubble will only keep fin system from collapsing, won’t lead to substantial demand creation. Serial bubble making only creates a larger economic crisis later; Asian contagion began the current string. Malcolm Ridell (RiddellTseng): Stimulus, loosening restrictions on home purchases, land sales and dev, bank ordered lending to RE firms, permitted ins firms to invest in RE, etc. have driven up home sales and devs are buying land to replenish land banks. Before foreigners bought billions of dollar worth of properties, using little equity and much credit. Govt quashed speculation and dubious practices, and foreign inv became difficult. But foreign investors created offshore firms with complex legal and fin structures to own properties. Investors could avoid Chinese taxes and capital repatriation problems, and lev up through offshore debt. Those who didn’t get out in time own unwanted assets, own stakes in devs that didn’t go public, or own the offshore stakes which have no market while their firms debt begins to mature. Foreign investors may return as credit loosens, govt loosens restrictions on foreign inv and streamlines the inv process. They are directly investing though they face domestic competition, partnering with Chinese devs who either have little cash or equity or who are cash-rich and hostile to partners, purchase the shares in the offshore companies, refinancing offshore companies before their debt comes due. Chinese investors are investing overseas in foreign RE as well. Many millionaires want to buy homes in the US and residential brokers are going to China to showcase their properties. Govt is encouraging Chinese firms to establish offshore enterprises and to invest or buy overseas firms. Lin Yifu (World Bank): Advises China to transfer labor-intensive industries to Africa and build relationships that may lay the foundation for industrial upgrading. Ex rate not the main reason behind the trade imbalance, yuan may appreciate over long-term and not as fast as trading partners would like. Rise now would lead to declines in exports, rise in U and overcapacity, causing a deflationary spiral. Worried about asset bubbles, suggests monitoring fund flows and project approvals. Pettis: Exports and imports data was better than expected, though some October activity may have been pushed into Sept due to National Day. Commodities imports busted out big, up 23-30% on copper and iron ore imports. Metals inventories have doubled since year-begin (/HG up 500%!). Stockpiling will eventually have to end, speculation occuring in unreported copper stocks. 900K tons, lol. Govt worried aobut steel oversupply and is trying to close obsolete mills, encourage mergers, and reduce # of iron ore importers. Cement, plate glass, coal-chemicals, polysilicon, windpower equ also show severe overcapacity. Electrolytic aluminum, ships, soybean oil show overproduction. Govt policies transfer I from households to production. Undervalued currency, low IRs hurting depositors, large spread btw deposite and lending rates, sluggish wage growth due to lack of effective unionization, unraveling social safety nets, weak enviro regs, manu subsidies on lnad and energy. Chinese steel glut could kill margins around the world. Market share has been taken from the rest of the world through lower prices. Migrant workers means that manufacturers can reduce costs and adjust down the quality ladder. Expiration of global textile quotas means China can increase market penetration through its usual advantages and export tax subsidies and low-int loans from state banks. Total new loans are up 160% yoy for YTD. M2 up 29%. Zhou Zhongshu (Minmetals): Urges no ideological bias in overseas acquisitions.

Opinion – Zhu Hongren (MinIndusIT) – Industrial output growth not yet stable due to weak demand for exports, govt spending main driver of inv and C growth this year. Wang Dongzhi (XinAo Gas): NG prices to rise by 20-30% in 2010 under new regime, prices will reflect movements in the upstream more closely. Factory prices for gas up 20-30%, retail 10%. Zhang Wenkui (Dev Research Center, State Council): Fin restrictions should be eased to encourage domestic M&A, especially for SMEs; consolidation should allow room for smaller, innovative firms. Small firms need to be able to realize acq deals by issuing additional shares or through a share swap. Jim O’Neill (GS): GDP will grow 9.4% and 11.9% in 2010. CPI could rise 2.6% next year. Domestic demand will grow 13.3% yoy in 2009, 13.6% in 2010. Yu Hai Rong, Wang Zhen (Caijing): Exports dependent on forex rates, global trends, raw mats, customer payment risk. Appliance makers have seen improvements in exports, possibly due to restocking. Canton Fair traffic below pre-recession levels. Most orders coming from SE Asia and ME. Orders for machinery and electronics made up 86$ of all deals, brand names were more successful. Midea, Haier, TCL, Hisense Kelon, Gree Electronic Appliances. AC exports have decreased dramatically. China-ASEAN Free Trade Area in 2010 would lift duties on 93% of products, which will help demand. Motorcycle and autoparts makers face Indian and Italian competition due to yuan appreciation fears. Rising raw mats prices may hurt more than yuan appreciation. Many customers are buying on credit and exporters lack bargaining power. Li Qiyan (Caijing): Solar pricing. NDRC is preparing to set a lowball price benchmark for major solar power plants. Pricing is necessary for potential investors to calculate return expectations while driving power firm and industry supplier decisions. At 1.09 yuan per KWhr, the majority of photovoltaic enterprises won’t be able to achieve profitability. Solar energy firms want to use a system that sets prices according to costs, instead of using a low bid as the yardstick like the wind power prices. NDRC wants low prices to pressure upstream solar producers to cut costs of raw mats. Zhang Guobao introduced a system in 2003 to decide wind power prices through competition and tender benchmarks. July 2009, they switched to a fixed, regional benchmark system based on wind levels and construction reqs. Subsidies can help initially but as scale increases, market forces should determine price and guide development of the industry. Need a cost-based perspective. Zhang Boling (Caijing): CISA proposes a unified Chinese model that reduces the # of eligible importers and uses a fixed-price term for the year. Long-term price would fluctuate according to volumes, with large volume buyers enjoying lower prices. Ore suppliers would not be able to sell to Chinese firms at any other price. Wants done for 2010 price talks. This will eliminate diff btw long-term fixed prices and spot market prices for iron ore. FOB (free on board) price for iron ore is different among areas. Australian and Brazilian imports are purchased according to long-term fixed prices, spot is used for imports from other countries. Spot makes up 60% of trade, 159M tons of iron ore. Unifying the spot market may not be possible due to variety of mines from India, Peru, Ukraine, etc. BHP wants a price index system; BHP, RIO, Vale want a 30-35% hike in 2010-2011 to make up for 33% price cut over the past year. CISA points out that Chinese steel mills have suffered and steel production capacity is expected to fall. Excess ore output and falling steel production may lead to excess ore supplies in 2010. Steel industry inv will decrease as bank lending declines next year. Ore prices may rise rather than fall globally if business conds improve. Chinese govt is preparing to improve steel industry bargaining power by reducing # of importers and preventing suppliers from raising prices easily. Recent price hikes may have been a result of importer restrictions as they deprived steel firms of opportunities to buy ore at fixed, long-term prices; long-term prices have been lower than spot since early 2008. Mills with permission to buy at the fixed price have launched side-businesses working as spot market ore brokers for small and medium mills. This spot side market has made Chinese bargaining more difficult. Import quotas could be allocated to eligible steel firms; buyers would bid for ore paying FOB price + agent free; the practice would accelerate steel industry M&A. Overseas acqs have not helped controlling position much; positions in Australian firms involve holding less than 15% of shares.