September 24, 2009

Indicators – Gold output rose 13.4% yoy YTD. New bank branch apps rejected by CBRC because of low CAR. Inflation expected to begin to rise in Oct or Nov (Nomura), 2.5% in 2010, 3.5% in 2011. New loans in July totaled 356B yuan, down 77% from June. Might be a loan surge in Sept. The Big 4 represent half of outstanding loans, yet their new loans issuance shrank significantly in July. The only new loans seem to be consumer loans which made up 66% of new July credit. Personal loans may reflect returning RE purchases, though higher prop prices will hurt individual credit. Many Chinese banks may face a lack of liquidity as reserves decline and loan-deposit ratios rise. Avg cap reserves may fall below 11% for comm banks. Small banks have a 10% CAR requirement, and are trying to issue rts or subordinateds to supplement capital. Deposits in H1 seems to have come from loan proceeds; but increasing cash flow into the real economy, a reduction in new loans, and cap market adjustments means that sustained deposit growth is uncertain. CB fin through short-term notes and bonds may help liquidity. Syndication is on the rise as multiple weak banks join forces to issue  more loans. If the global ecnomy improves, these smaller banks credit may improve. CCB has lent 7.3T yuan in new loans for H1, while showing more caution earlier in increasing its loan-loss provision to 150%. Earnings are down though and the markets fear NPLs are in the future, despite hopes for a stable lending base. The increased lending served to decrease NPL ratios, along with settling old NPLs. CCB seems to have both decreased NPLs while recovering twice the decreased amt. China Merchant and CITIC have been hit hard by decreasing NIMs and an inability to cover the loss by increasing loans. NIMs will not recover in H2 as it is unlikely that a stable increase in int rev from borrowers is possible. May be worsened by potential IR increases to control inflation. Stock market may influence lending as greater equity inv will hurt deposit growth. Rising loan-loss provisions by regulators will also hurt short-term profits. Coal prices to remain flat this month. Car sales rose 29% YTD, and will hit 10M units sold by Oct. Tax cuts on cars with 1.6L engine and subsidies for rual buyers of small vehicles and motorcycles have juiced sales. Vehicle exports have plunged 50-59% this year. Outward inv rose 111% to a record $56B in 2008. Fin inv surged 741% to $14B, nonfin $41.9B. Most inv was by the SOEs (85%). Mostly in services, fin, mining, and transportation. Economists believe recovery accelerated in Aug with faster indus output growth and retail sales, and strong growth in inv, though inflation concerns are emerging. CPI is expected to have fallen in Aug. Oil products sales up in Aug by 3.2% yoy. Steel traders call for lower prices from steel mills. Q4 will be difficult part of yr for domestic mills as weak demand can’t absorb growing output and inventories. UBS predicts 8.5% growth in 2010. Exports should improve and fiscal policy will not be tightened. GDP will grow 9% in Q3, 10% in Q4. Apartment sales fell 10% in Beijing for Sept, mom. High prices are hurting demand. October sales will be a barometer for the market as inventory enters the market. Qinhuangdao coal price rises ahead of National Day. Thermal power plants increased inventories in preparation for power demand.

Strategic Oil Reserve – NDRC says the 3rd phase will hold 169M brls. Reserve will be finished in 2020. Facilities will be built in Hainan, Hebei, and Chonqing municipality. 1st phase is finished and hold 102M brls. 2nd phase construction begins next year and will take 4yrs to complete. In Gansu, Jiangsu, and Guangdong.

Derivatives – SASAC is responsible for overseeing derivatives trading, but its supervision is limited to govt SOEs conducting trades in oil-related structured options. SOEs generally lack credit lines on the international market and need Chinese comm bank help before signing contracts w foreign inv banks. COSCO lost Bs in yuan; most SOEs in I-E and forex also probably lost money in derivatives. China Railway, Eastern Air, Air China have also disclosed losses. Deficiencies in SOE corp gov and risk control complicates investigations. No public market price. OTC trading of interests has also occurred in secret. Only 31 licenses issued by CSRC for overseas commodity hedging.

Trade – Anti-dumping duties on styrene butadiene rubber from Russia, Japan, SK for 5 more yrs. 38% tax. Tengzhong’s bid for Hummer blocked by MinComm due to lack of detail. MinComm plans to develop service outsourcing and improve China’s inv environ via greater foreign investor participation in clean energy and power-saving tech. MinComm vows to support tire industry against US tariffs via improving industry structure and raising technological standards. Tire Q4 earnings are expected to plummet due to the tariffs, increased domestic supplies cutting prices, and stockpiling.

Yuan – 6B yuan treasuries will include a retail tranche of 2B yuan; 2yrs for individual investors, 5yrs for institutions.

SSE – Red chips wil be the first to list on SSE’s international board. Red chips are incorporated outside the mainland and listed in HK. Investors have been buoyed by govt proactive fiscal policy and moderately losse monetary policy.

SFE – Shanghai Futures Exchange. Widens trading band prior to Oct 1 to 7%, by 2pp.

Shenzhen SE – Completes test of GEM board for IPOs, stock trading, and settlements.

HKSE – 19 IPOs planned to raise HK$117B by yearend. Traders worry about a capital drain from other stocks.

GEM – Chongqing Lummy Pharma plans to issue 23M A-shares on the new exchange, to be used for 8 production lines. CSRC approves 6 more candidates including Beijing Toread.

QDII – No new products for 2009, though 2010 should see some entries. GEM is the current focus.

National People’s Congress – Wu Xiaoling (deputy dir of Fin and Econ Affairs Committee) wants to keep controls on lending and deposit rates.

MinFin – Issues 200B yuan local govt bonds as part of an effort to channel funds to less-developed regions, market did not eagerly take them.

SAFE – Raises quota for QFII program from $800M to $1B.

NDRC – SMEs will be encouraged to pursue foreign inv opportunities and set up trading entities and research opportunities overseas. Will also support small private VC firm via tax breaks and will encourage them to invest in SMEs (less than 2K employees, rev <300M yuan, A < 400M yuan). Refuses to interfere in power-coal negotiations. Players want electricity price reform. Proposal to institute market trading for coal and railway transport capacity, separate grid and transport by setting up distribution and transport businesses for the power grid and rail network separate from firms that market power, coal, and transport, standardize I by setting fees collected by local govts, transport links, and power distributors, while instituting a resources tax, system oversight by eliminating gradually planning targets and pricing approvals. Industry leaders want to raise prices. Coal trading is still separated into 2 markets; Key Order Contract Transactions (for coal), the other exchanges. KOCT accts for 60% of coal burned for electricity through fixed contracts signed at coal order conferences, which usually end in NDRC intervention. At the 2009 conference, the power firms proposed a decrease in coal prices, while coal firms demanded an increase. Coal and power markets are affected by market fragmentation via KOCE. Logistics links btw coal and power firms are enormous, management is laissez-faire, efficiency low. Railways transport is split into planned and market portions. Non-core subsidiaries affiliated with coal and power firms profit from insider status. Arbitrary changes are added before supplies reach downstream, increasing already high costs. Prices for non-liberalized power are set by govt, while electricity is distributed by plans. Power trading is handled by monopoly grids, which increases trading costs and reduces fairness. Need a nationwide coal exchange market based on short-term and long-term contracts. Intermediaries make up 30-60% of costs; railroad is a major bottleneck. Rail also has its unplanned and planned portions. Next round of reform would allow govt to check and ratify a basic price for railway coal transport. Railway affiliates and intermediaries would be solidated into a coal transportation sales firm, and its transport capacity would be traded on the national coal exchange market. Grids in change of transmission would leave power trading and instead charge for use of a grid. Power generation scheduling currently follows a planned quota, while grids buy capacity from power firms and sell it to consumers; the grids enjoy monopoly in this system. March liberalizations have resulted in problems. Lacks indpendent electricity transmission and distribution pricing.

SASAC – Investigating loss-making fuel option deals made by SOEs, who may recover losses from their trading partners. Only 31 firms are licensed to conduct cross-border futures trading. 1T yuan worth of derivatives were entered into by SOEs.

CSRC – 12 firms have listed in Aug, most of them on Shenzhen. Reviews Shenzhen Overseas Chinese Town Holding’s plan to pay for parent assets with 7.3B yuan worth of new shares. Reviews 7 firms that wish to list on the GEM board. Funds and brokerages have submitted plans for pilot REIT programs. Harvest Fund, Bosera Funds, CITIC, CIC.

CIRC – Drafts rules requiring insurers to seek reg approval for transfer or alteration of a stake in another firm above 5%, as opposed to 10% previously. Also, drops reqs for adequate solvency when an insurer seeks to pursue an IPO or refi. Insurers will have an 8% asset limit on PE operations.

National Audit Office – Investigating recent lending by major comm banks in an effort to trace loans issued as part of the 2008 stimulus. Regulator investigation began after 23% of total H1 new lending was extended in discounted bills financing, a short-term lending practice that allows firms to raise cash by surrendering receivables at a discount; once bills are cashed, banks can no longer monitor capital flow, allowing for divestment opportunities.

IMF – PBoC may pay its $50B IMF notes in yuan, instead of using $s to diversify channels for its forex reserves.

CIC – Stepping up purchases of commodities firms by buying $1.9B of Bumi debt (Indonesia’s biggest coal producer) and $850M for a 15% stake in Noble Group, a HK global commodity supplier. 12% coupon.

Shanghai – August housing loans at record high due to increase luxury prop transactions.

Yunnan – Creates mining trading platform to facilitate trade in minerals, exploration, and exploitation rts.

PBoC – Will sell 6B yuan in sovereign bonds in HK, first sale in an offshore market to help develop the HK bond market. Expects lending by Chinese banks to return to reasonable levels in H2, major tightening unlikely due to stronger-than-expected banking data. Urges IMF to reform governing quotas and add votes for developing countries.

BoC – Swiss subsidiary will issue yuan-denominated Swiss funds as a way for chinese investors to invest globally w/o currency risk.

Eximbank – Central Huijin injects funding into Eximbank and China Export & Credit Ins in order to make them more market-oriented.

Shenzhen DB – Prefers current IR controls rather than floating. Funds with Invesco Great Wall managed fund a PE fund product in Sept with an entry of 1M yuan and max of 200 potential investors.

Bocomm – approved to buy China Life CMG ins, becoming the first bank to tap the ins sector. Will own 51%, the other 49% will be owned by Commonwealth Bank of Aussie. Bocomm now works in the man fund, fin leasing, trust, and ins sectors as well as its core banking, inv banking, and ins services in HK. Gives low-int loans to transport sector for infra porjects.

Industrial Bank – wins approval from PBoC to issue 10B yuan subordinateds.

Bohai Bank – Issues 1.2B yuan 10yr subordinateds at 5.3% for 5yr before being callable. Standard Chartered owns a 19.99% stake.

CDB – PBoC grants permission to increase new lending ceiling for 2009 by 130B yuan to 580B yuan.

CCB – BAC still holding onto its 11% H-share stake. BAC is still not allowed to offer personal banking services though it may serve corp customers.

Hong Yuan Securities – Chairman Tang Shisheng will resign and may take up post of chairman of Founder Securities. Feng Rong, assistant to president of Jianyin Inv (subsidiary of Central Huijin) and former VP at Hong Yuan will replace him.

Galaxy Securities – Central Huijin will appoint new executives. Central Huijin vice gen man Chen Youan will beocme hairman of Galaxy and its parent Galaxy Fin Holdings. Galaxy chairman Li Ming and secretary Li Zhengqiang will return to the CSRC.

Everbright – Board approves 5.8yuan dividend for every 10 shares. 35.3% of distributable profit.

China Merchant Securities – Sets up PE unit to invesst in unlisteds.

Guoyan – Additional A-share issue approved. 10B yuan offering to supp cap and fund expansion.

Minsheng – President of Life Ins subsidiary resigns for personal reasons and may move to Sino Life Ins, which is part owned by Tokio Marine and Nichido Fire Ins.

Pacific Century – Expects AIG’s asset man biz it acquired to be profitable this year. Includes unaffiliated clients, some general accts, and affiliated assets under man. Richard Li owns this private inv firm with ints in infra, prop, satellite comm, and other inv in the region.

First Eastern – HK PE firm. Will set up yuan fund to invest in Northeastern SMEs.

CLSA, Guosheng – JV to begin in 2010 for domestic yuan fund.

Insurance – Life ins premium income up 2.2% YTD.

China Life Ins – Aug premium I down 12%.

PICC – Prepares for 4th restructuring in its 60yr history. Branching out into prop ins, life ins, and investments for IPO. Assets have tripled to 300B yuan and assets under man have 5x’d to 725B yuan under Wu Yan. Could’ve listed on SSE when its affiliate peaked on the HK bourse, but parent would not have been able to support developing its branches in the future. Firm was hamped by lack of open market capital access nor possible cash injections from the govt. Listing would also have diluted its stakes in its HK affiliate and may have had its affiliate taken over hostilely. Injecting other assets into it would have been possible, but its growth had limits and would’ve undervalued its nascent businesses. Hit hard by Sichuan earthquake. Overshadowed by China Life, Ping An, Pac Ins. Was able to boost lif ins by reforming its provincial life ins subsidiaries into PICC Life, while ensuring P&C received a stake in Life. Was able to pick up rural clients. May be hurt by high cap costs and heavy spending to build its sales force. Increased stakes in Asset Man, Life, and Health, while branching out into Credit Trust and Huawen. Huawen holds hundreds of billions of As and licenses for financial business including MFs and trusts. Owns shares of People’s Daily (yes, that one).
China Post – National post service. Launches life ins firm for its subsidiaries. 500M yuan.

Yangtze Power – Buys assets from SOE parent China Three Gorges Project; operates Three Gorges Dam.

Huadian Power, Yinxing Coal – buys 45% stake for 600M yuan, given priority in purchasing coal at market prices for 45% of miner’s output.

Trina – Obtains $300M loans from 5 Chinese banks to fund 500Mw solar photovoltaic project.

Shanghai Electric – Siemens injects 712M yuan into Power Generation Equ subsidiary. Large mechancial and electrical equ manufacturer.

CNPC – CDB extends $30B in credit lines to fund overseas expansion. Parent of PetroChina. May expand into deepwater exploration in 2015.

Petrochina – JV btw China Ocean Shipping and CNPC lost billions in unrealized losses from oil derivatives.

Venezuela – China will invest $16B in heavy-oil JV in Orinoco.

Galaxy Resources – Aussie firm. 4h largest lithium carbonate producer after signing a fin deal with a Chinese PE firm Creat Grp who gets a 19.9% stake worth A$26M and becomes largest stakeholder. A$130M in bank loans will also be arranged to help dev a spodumene extraction project and a lithium carbonate project.

CNCE (China National Chemical Engineering) – CSRC approves app to list 1.23B A-shares in a Shanghai IPO. Proceeds will supp working capital, buy equ, develop IT. Owned by Chemical Engineering Group Corp which is SOE.

CISA – spot and contract iron ore prices converging at $80 per ton.

Hebei Iron & Steel – Applies to CSRC to inject subsidiary assets from  Chende Xinxin Vanadium & Titanium and Handan I&S into another subsidiary Tangshan I&S.

Jien Nickel – Extends offer period for Canadian Royalties (mineral explorer).

Jinchuan – Metal producer. Expands output to 8K tons of cobalt, 130K tons of nickel. Plans overseas expansion.

Baosteel – Lowers steel product prices for Oct by 200-350 yuan per ton from Sept levels. Hot-rolled carbon, hot-rolled low-carbon, cold-rolled prepainted steel, steel plate.

Shougang – Expands steel capacity to 30M tons by 2012, comapred to 12M last year.

Railway Erju – Wins contracts to build 4 expressways worth 1.17B yuan in Sichuan, Fuijian, and Hunan.

China State Construction Engineering – Wins 1.9B yuan construction project in Guiyang. Largest home builder in China.

China Vanke – Largest RE dev by market cap. Sales rose 18.3% yoy in Aug. Shareholders aprove 11.2B yuan share offering. Will not seek to spend heavily on sites in top-tier cities. Will try not to bid up record prices for prime sites (translation: hell yeah we are).

COFCO, Vanke – Jointly win auction for 2.2B yuan for Beijing reisdential site in Fangshan district.

Glorious Property – Will raise $1.5B in an HK IPO on Oct 2, following a share offer with UBS, JPM, and DB underwriting. Shanghai Industrial, SOLI, NanFung Prop, and other QDII under China Southern Fund will be key investors. PE ratio of 19-24.7.

Country Garden – Issues $300M 5yr HY bonds at 11.75%, which will be used to repay $30M in loans from CITIC Ka Wah Bank and fin prop dev projects. 100% oversubscribed.

Shimao Prop – H1 earnings rose 30$, boosted by one-time gain from selling comm prop projects to subsidiary Shanghai Shimao, and strong prop sales.

Legend Holdings – Parent of Lenovo. Plans to inv 10B yuan over the next 5yrs into clean energy, new mats, enviro protection, fin services, high-tech. Will go public after its core ops have floated. Hony Capital may inv in Happigo Home Shopping.

COLI – considers takeover of Everbright assets held by appliance maker Shell Electric MFG.

Dalian Wanda – Files A-share listing app for 2010.

GOOG – President of Google China Lee Kai-Fu resigns to start own business. VP Liu Yun will take over. YEo Boon-Lock (director of Google’s Shanghai engineering office) takes over the engineering and R&D responsibilities. Lee rose from natural language and user interface divisions and has had stays at Silicon Graphics, AAPL and MSFT. Will invest 800M yuan over 4-5yrs w US VC firm WI Harper Grp, Lenovo chairman Liu Chuanzhi, Hon Hai Precision Industry chairman Terry Gou, etc. Enterprise will act as an angel investor, providing seed capital for startups and helping them with management expertise and analysis. May target Internet, wifi, e-commerce, search engines.

Alibaba – YHOO sells 57.5M shares, due to frosty relations. Fears about Alibaba stripping high-quality assets from YHOO China.

Tencent – ISP. Has no plans to list on A-shares currently, though expects to in the future.

SNDA – Gaming subsidiary plans to list on NASDAQ, issue 63M ADRs ($10-$12). Capital will go towards divesting the unit and allow parent to focus on developing online games platform.

Lenovo – Mobile unit launches first OPhone supporting China Mobile’s 3G service.

ChinaCache – Largest content delivery networks provider. Obtains $10M inv from INTC. Upgrade core capabilities and CDN tech.

Gome – Ex-chairman’s asset freeze extended.

Lianhua Supermarket – largest supermarket chain. Shareholders approved Hualian Supermarket purchase for 492M yuan.

Mengniu Dairy – H1 earnings rose 13.6% due to lower costs and an optimized product portfolio.

Wuliangye – Liquor producer. CSRC is investigating securities violation.

Huiyuan Juice – H1 profit dropped badly due to disruptions from failed takeover by KO. Op rev fell 32%. Will benefit in H2 from consolidated distribution network and a broader product line.

Wumart – In talks to buy Jiangsu Times retailer. 4th largest retailer.

Yashili – Carlyle Group and Fosun High Tech inject $100M funds in return for 23% stake.

Sinopharm – Top pharmaceutical distributor. Hopes to raise $1B from HK IPO this month. It is a JV btw Sinopharm Grp and Shanghai Fosun High-tech Grp.

ZTE – Leading telecom equ manu. Wins contract w HK’s mobile operator CSL for a nextgen mobile network tied to Long Term Evolution tech. (4G)

China Unicom – $1B share swap w Spain’s Telefonica as part of a strategic alliance. Telefonica also gets a seat on the board.

China Mobile – Will pursue listing on mainland, will not do Depository Receipts or A-shares. New users rise in Aug by 1.32M, due to handset subsidies. Target of 3M new 3G users may hard to attain.

NEC – cuts 25% of Beijing staff as part restructuring of Chinese subsidiaries.

Bestway – Marine engineering design as well as ship design. IPO planned of 20.5-28.7 yuan on GEM.

Beijing Toread – IPO range of 19-25 yuan per share. 35-45 PE? Outdoor sporting goods producer. Offering proceeds will fund expansion of sales network.

Opinion -Lee Kaifu(Innovation Workshop): Rebuilt GOOG market share from 16-31% after 2006 govt blockages. Liu Yun was once CEO for SK Telecom in China and bought convertibles in 2007 to get a stake in China Unicom. Is trying a 50M yuan incentive plan for SMEs to use search engine marketing.  Wu Xiaoling (National People’s Congress): MinComm should lower threshold for establishing leasing firms and offer equal accesss to Chinese firms. Currently, foreigner and JV leasing comapnies are approved by provincial branches of the ministry. Domestic leasing firms are still in trial phase.  SWS Research: As long as new lending doesn’t fall below 300B yuan a mo for the rest of 2009, then China will continue to grow. Banks in western China have already implemented credi restrictions. 50% of new loans were given to govt-related fin institutions. Platforms must now submit more than guarantee letters from local govts to get loans; hold land collateral? But some project inv went to stock and RE markets. Banks can only inspect funds flowing internally; funds in the borrower hands are hard to track. National Audit Office has increased observation and are tracing securities funding sources. Lending should enter phase of steady growth, restrictions are unlikely to rise drastically. IF funds outstanding for forex increase, pressure on current monetary pressure will increase. Those funds are up 77.8B yuan to 220.5B yoy. Investors are also adding to trusts and other banking products. 180 were launched in Jun, 135 July, 145 Aug. Monthly issue exceed last year’s total issue. Personal IRs will probably rise higher. Andrew Shang (HK Sec and Futs Comm): EU is the largest economy in the world at 30% GDP, though the euro is only in use in 16/27 of countries. Pretty remarkable despite being only 10yrs old and the first notes being issued 7yrs ago. Predecessor EEC was formed n 1957; transition was thus 45 years long and with many intermediate steps along the way. European Monetary System failed in the 80s, fighting speculators. Coordinating monetary and fiscal policies for stabilizing the currency or maintainng parity is hard as some country has to lose out during adjustments. Maastricht Treaty imposes restraints on members from running up more than 3% GDP debt. Vol of currency turnover is at 38% of total, unchanged since 2001. USD accounts for 64% of 6.4T offical reserves worldwide, $4.1T identified reserves. Euro accounts for 26.3%, pound 4.4%, yen 2.5% (ouch). Euro was a tool of political, not economic, integration (wat). Union of many currencies after internally fixed pegs among members and flexible rates individually against USD. Europe has a large, stable internal market and runs a small current acct deficit with the world, international bal sheet deficit of 10% GDP. Still a rivalry btw nationalized banking system. Asia only has trade integration at the moment, and even then…  Jiang Liping (Energy Research Institute, State Grid Corp): Intermittent nature of wind makes it difficult for state grid to use wind power on a large scale. Balance btw gen and C loads necessary, but this is difficult to adjust with coal power. Xia Bin (Fin Research Institute of State Council): China’s high growth and potential will put pressure on the yuan to appreciate, as neighbors wish to hold more of its currency. HK should be pushed to develop its offshore yuan market and widen the use of the currency in Asia (as reserves?). Expand crossborder trade, encourage domestic firms to use the yuan for outward inv and overseas acquisitions. Fan Junli (Caijing): Regulators have instituted changeds that allow securities firms to consolidate. 107 firms will merge. Local govts that control minor brokers will be hurt, though the industry will be strengthened in a step towards allowing foreign competition. Huatai, Guoxin, and GF are being encouraged to integrate and expand their territories, while large brokerages like CITIC and Huijin Family are limited by the 1 Participant, 1 Controller Rule. First consolidation wave in 1990s, followed by the emergence of the powerhouses in 2000-2001. 2001-2004 saw an overhaul of the industry which triggered further consolidation among the weaker firms. In 2008, more M&A among the smaller firms shrank the industry further. Only 70-80 are expected to survive this round. Regulators want to chip away at brokers protected by tight links to local govt fund-raising. Local govts also hold controlling stakes and don’t want to lose them. One Participant, One Controller Rule requires 2 or more securities firms controlled by a single firm or individual to not conduct overlapping brokerage business. During the 2004 overhual, Central Huijin took ints in 9 firms, giving tem the largest market share. It has now been buying some of CCB Invs’ brokers, allowing CCB Invs to reach the standard. Huijin is also transfering its broker stakes to UBS, Guotai, and Qilu, though it still controls Galaxy, Central Inv, Shenyin Wanguo, and CITIC Construction Inv Securities. China only allows foreign firms to offer inv banking except for China Euro Securities which is a JV with foreign backing and has a brokerage permit to operate in the Yangtze Delta and a inv advisory permit from CSRC. Huo Kan, Wang Jing, Yu Hairong (Caijing): NBS announced Aug 11 that industrial growth only increased 0.1pp mom; the markets dived the next day. The govt-led lending increase in inv has helped the economy in H1, despite exports being a drag. Urban FAI growth slowed further than expected. Halt of govt int in July hurt. 200B yuan remains to be allocated by the govt. New projects and planned inv for new projects also fell in Jul as hopefully the economy grows at a slower but steadier pace. Worries however about inflation with a global recovery mean that policymakers may tighten in mid October or in December. Consumption in July was stable and retail sales grew, though they are unlikely to replace govt spending quick enough to prop up economy. Trade declined by only 19.4% in July.  Andrew Sheng (Tsinghua U): Countries with a constant trade surplus should have an appreciating currency. Japan had to keep exporting capital in order to keep the yen down. Japanese were unable to promote their currency as a reserve currency despite offering cheap aid through yen loans due to the high volatility of the $-yen exchange rate; it was difficult to hedge and borrow. Seignorage and the services income that comes from being an international fin center would have supplemented its manufacturing exports. But to be a reserve currency, the yen must be stable, have low transaction costs, and high transparency. Yen was volatile and expensive to transact in. Being a yen exporter meant that a spreads btw Treasuries and Japanese deposits could be wiped out by any significant yen appreciation unless your earnings were in yen. Japanese exporters have preferred to export in yen and import in $s in order to protect their earnings in yen term and saving on import costs when the yen appreciated. Borrowers had to pay forec costs which made the yen more volatile. A yen appreciation causes both borrower and investors to buy yen to protect themselves from appreciation. It also helps if a wide variety of fin and real assets are available for purchase at attractive yields in liquid markets. Japanese asset bubble explosion has prevented that. Huang Yiping (Peking U): Diversify forex holdings away from $, increase outbound direct inv, widen the trading band of the yuan. Euro, yen, yuan or rupee will gain greater prominence as a reserve currency. Zhuang Jian (ADB): Predicts a steady economic recovery and sustainable Chinese growth for the next 2yrs. Wang Ziwu, Wen Xiu (Caijing): Hot money is flowing back into China at a record $170B in H1. Hot money increases China’s forex reserves. SAFE is concerned that it may start inflation. Hot money is derived by subtracting trade surplus, FDI, forex gains/losses from the forex reserves. $122B in hot money may have entered in Q2. Figures don’t exclude service trade, securities inv, and other inv that affects balance of payments numbers. Hot money piggybacks into the country through standard cap channels, service trade deals, and personal forex transactions. Stephen Green believes that $56B in unexplained outflows occured in Q1 and that $30B inflows occured in Q2, possibly up to $90B total in Q2. Expectations for yuan appreciation on the non-deliverable forward market remain dampened. Yua Hairong (Caijing): Exports have been buoyed by increases in shipping traffic, China becoming the world’s largest exporter, other positive indicators. Jiaozhu, Shangdong has posted a 5% increase yoy in exports for Q1, but Q2 saw a slump; Wang Jian (bureau chief at Foreign Enterprises Admin) explains that Q1 reflected unfinished 2008 orders while Q2 reflects new orders for 2009. Zhejiang shows similar slumps among 64% of exporters. Taiwanese Inv Enterprises Assoc of Dongguan has seen its membership shrink as members suspend ops. 2-3M migrants have left Dongguan and not returned. Foreign orders for labor-intensive goods have started to improve, but not so for machinery and electronics. Trade decline has narrowed but container production has halted. Overseas customers have been defaulting, making expansion unlikely. The State Council has tried to help SMEs by increasing export credit ins to offset payment risk associated with foreign trade. Low-tech firms are the hardest hit as bargainin power has been reduced and firms must upgrade tech. Local govts are offering to help by subsidizing costs associated with expanding trade through advertising and marketing. Liu Chuanzhi(Lenovo): Founder. New shareholding structure. China Oceanwide Holdings (Lu Zhiqiang) has paid 2.7B yuan for a 29% stake in Lenovo’s parent Legend, reducing the state’s take from 65-36%. Academy still holds the biggest stake, followed by an employee group. Lieu is still president. New shareholder supports Legend’s long-term vision. Didn’t prefer a SOE owner. Restructuring has given Legend better governance and for Liu’s successor, though succession remains a difficult issue. Management incentives issue still big. Also, the direct inv business. Future dev model might resemble Cheung Kong Holdings. Lu Zhiqiang (Oceanwide): Launched career in 1985 and has invested in RE, financing, energy, chemical engineering. As of 10B yuan. Friends with Liu Chuanzhi. Lenovo was a strategic investment. Appraised and reappraised Lenovo based on net A. Will Liu stay on? Employee stock ownership is still too low, Lenovo’s dev requires more new employees. Worries that incentive mechanism may become a problem. 8-1o yuan per share in the future? Ming Shuliang, Yu Ning (Caijing): 25yrs ago, Liu Chuanzhi accepted 200K yuan from CAS to establish Lenovo. Trying to shift from state ownership to private ownership, qualify for A-share listing. Doesn’t need govt approval for internal decisions. May need to dilute shares to resolve the incentives problem. Lu and LIu are members of the Taishan Association, a club for executives at top Chinese enterprises. President of Taisahn Evertrust Chairman Lin Rongqiang informed Lu that CAS was selling part of its Legend stake; Lu found Liu to discuss the matter. Liu had halped Lu in 2004 to finance land deals. Lu was able to lobby the Dept of the United Front Work CPCCC and All-China Federation of Indus and Comm to convince CAS to consider Lu. Part of a process to transition from the red hat of govt agency approval to private board of directors. Liu introduced a flexible bonus system to motivate employees, and to reduce state shareholdings and increasing employees holdings. MinFIn told him to fuck off, but CAS gave some away anyway. When Lenovo split from Legend subsidiary Digital China, Liu entered the VC market. Zhu Linan was put in charge of Legend investments and began investing in stock and established Hony Capital. Also launched Raycom RE Dev to invest in prop, and an autonomous fund for direct investment. Liu worries about employee turnover as most workers are still relatively new. Needed an investor with understanding with CAS and Legend, back Legend’s future strategic plans. Beijing U professor Zhou Qiren believes that the SASAC policy of “1 majority shareholder” is flawed and costly. CAS demanded reqs of registered cap and profitability. Was the price too low? Based on estimated NAV of state-owned assets and management costs? Legend is trying to increase direct inv ventures while reducing dependence on Lenovo. Core assets need to reach the scope of Lenovo’s total assets. Can Legend list on the H-shares and A-shares?

Education – Policy Banks: Exim Bank, ADB, CDB are used to promote and finance the construction of infra, promote exports, and safeguard food production. Now, they have been commercialized, though the ADB still caters to agriculture. Exim was once 1/10 the size of CDB but has expanded rapidly through providing foreigners with dev aid and preferential loans, distributing govt-backed loans to foreign nations, financing international engineering projects and the export of high-tech products, overseas expansion, and built a market-oriented division alongside its policy-directed functions. By 2008, the market division had completely covered losses from policy-lending and reported profits for the 1st time ever. NPAs are down 2B yuan to 7B. Its primary policy objective is the promotion of foreign trade and diplomacy by capitalizing domestic exporters and exporting credit to profitable foreign projects; yet its customer base is overwhelmingly private biz ints which it competes for against the Big 4. They can provide loans at half the Big 4 IRs. CB has planned to inject 200B yuan into Eximbank to help with restructuring. Regulators are worried about the effects of the trade collapse earlier this year on the bal sheet and its policy goal of supporting export financing. In Q2, its lending surged 130% yoy, raising concerns about CAR and a lack of recapitalization. Info about its cap structure/bal sheet is sketchy; NPL provisions are probably insufficient and reg standards would imply the bank is neg net cap. Eximbank gets its capital by issuing interbank bonds, receiving loans from the CB, and fiscal injections. Li Ruogu, Pres of Eximbank, believes that compliance with the 8% min cap req wil require a 40B yuan injection after loan loss provisions. A 200B injection by the CB would ease pressure from soaring forex reserves. Restructuring would imply a move away from the state policy bank model and establishing capital adequacy and an effective risk control framework.