May 21, 2010

Indicators – Substantial improvement in global IPO market, Asia playing lead role. East Asia GDP to grow 8.7% in 2010 (World Bank). Global fin markets remain strained, trade weak. Fiscal stimulus withdrawal, further structural reforms needed to promote long-term growth. SOE profits up 75% in Q1. Raw mats pressure, slowing govt inv, rising production costs in H2. Rising rice prices. Big 4 banks isue 1T yuan in Q1; but priv lending grew much faster. Trade deficit on vehicles and commodities. 97% of M&A was into developed resource industries in Aussie and Canada; Aussie 90%. Oil firm strategy of giving foreign SOEs and Western oil firms of participating in downstream in return for upstream rts. Intranet banking system shut down to rein in lending, capping lending through admin orders, OBS lending is up greatly, increase in credit-based fin products. Proj construction and bank credit issuance are cyclical and hard to scale back. Shift from window regulation monetary policy. Lending spree means inflation, excess capacity, rent-seeking, corruption. Land sale revs up 63% yoy to 1.59T yuan in 2009, res dev prices growing faster than land for biz and industrial dev. Govt inv only rose 9% in Q1, decline in growth rate for urban FAI. Central and local govts are slowing down expansion of construction projs. NDRC has limited pace of govt spending and inv. 21 provinces have set regional GDP targets of above 10%. Chen Changhua predicts 4-5T yuan loans issued to continue construction projs launched by stimulus. 180B yuan raised in local govt bond sales. Urban construction bond volume is expected to decline, more focus on flexible short- and medium-term state bonds. 13% of power and heat production was private, 9.6% finance, 7.8% communications and software, 6.6% enviro and infra man. Inflation 2.8% in Apr, prop price up 12.8%, lending was $113B and BTE.

State Council – Suspends 3rd mortgages. Residents who work for more than a yr in a city may get bank mortgage loans. Property taxes may be next. Old facilities to be shut down by 2012 ye; power, concrete, steel, coal, coking coal, leather, textile, paper. Small polluting furnaces will be phased out by 2010 ye. Steady in yuan ex rate mechanism.

SASAC – Most derivatives contracts still intact. Has concentrated on avoiding speculation outside of core biz.

SAFE – $428B outstanding external debt holdings; $266B external debts, $161B trade credit.

PBoC – Raises RRR for 3rd time. Removes 300B yuan from the system, pushes back IR increase until Jun. Forex reserves jumped $22.5B in Mar. due to hot money. Manu and mat costs jumped. Hoping for 22% reduction in new loans.

Central Huijin – Prepares to issue 50B yuan bonds in May, proceeds to capitalize Eximbank and Sinosure. Refused to buy CCB shares, turned over bank share divs to MOF. Rates would be lower than comm banks but higher than policy banks. Xie Ping has been its only president and now will work at CIC; voice for reform, capital injections, fin restructuring, public listing, corp gov, outspoken critic who failed to receive promotions.

CSRC – Criticism over stock inv restriction on fund company relatives. Not allowed to invest before reporting to fund company, not allowed to open trading accts except at certain firms. “rat accts” for relatives or friends. Includes futs exchanges, banks, ins firms, stock exchanges. Employees must report intentions of relatives to buy/sell stocks or derivatives, which has to be approved.

CBRC – Redefines 2nd home definition regardless of bank borrowing or paying off previous loans. 2nd home will be determined by housing registration office, not credit record. No direct loan issues to prop devs who flip land, didn’t sell apartments upon construction, or use bank loans for land purchase for other purchases. Hainan prices up 64%, Beijing 12.3%, Guangzhou 20.3%. Min downpayment of 50-60%. Provincial and municipal govts can limit apartment purchases to people. State Council is trying to increase supply for low-rent/cost apartments, seize idle land, 70% of total supply to be allocated to low-cost apartments by local govts. 11.5% CAR over next 3yrs, need to deduct loan growth from total cap. 30B yuan could replenish reserves, categorized as supp capital? 45% limit on div distribution of profits. Liu Mingkang wants banks to prepare provisions for risky loans, reassess projs which received loans last year and report to CBRC by June.

NDRC – Will raise gas and diesel prices by 4-4.5% to reflect higher oil prices.

MOHURD – Housing and Urban-Rural Development. Will tighten rules on housing presale and investigate hoarding. Devs can’t take deps for sales of uncompleted homes w/o proper approval, must disclose prices of all available homes to the public within 10d after receiving pre-sale approval. Will investigate high cancellation rates and abnormal prices. Local govts must also comply.

Shanghai – Tightens bidding process regulations for RE, will factore more the bidder’s ops and plans, must pay 50% dep within 10d of the contract. No extensions or installments will be allowed.

Costa Rica – Signs free trade agreement with Beijing.

UN CDM – Rejected 14 Chinese wind power applications for funding. Cut off CDM supp for 10 Chinese wind power projs before Copenhagen. Accusations for manipulations of power prices to qualify for CDM funding.

ABC – Is rural fin services div, halting reform? Policy vs comm ints. Rural areas have low margins, serves 800M farmers. ABC wanted the div to become set of agri supp institutions, which would have delinated policy and commercial entities. 9 underwriters: GS, MS, DB, Macquarie for H-shares and UBS fin advisor for H-shares. CIC, CITIC, Galaxy Secs, Guotai Junan A-shares. 800M yuan NPAs would be moved to an OBS account under MOF and Central Juijin.

ICBC – completes 97% stake in ACL Thai bank.

BoC – Wants to sell 40B convertibles, raise 20% of market cap in HK.

SPDB – Earnings up 5.6$ on higher loans and assets. 231B outstanding loans, CAR 10.34% through a private placement. China Mobile stake will raise CAR to 12% by 2012.

GDB – sells 15B yuan shares to replenish capital. C, China Life Ins, State Grid, and CITIC own 20% stakes. Hopes to pursue IPO to fin rapid expansion.

China Merchants – Earnings down 14%, boosted 73% in mortgage loans. NPLs down to 9.36B yuan, NPL ratio down to .83%.

China Merchants Securities – op rev 76%.

ChinaAMC, CITIC – largest fund manager. CITIC wants to sell stakes of 10% while retaining 49%. Want to avoid it becoming a JV with foreign firms. CSRC prefers domestic JVs only and done before Jul. Sale price would convert to 12B yuan. CSRC suspended new production applications in Jan, Apr 1 expanded to include new domestic MFs. CSRC is trying to enforce the rule that states no single stakeholder can control more than 49% of a domestic fund.

PTR, Sinopec, Daimler – Admits that Daimler offered bribes to former employee. Daimler bribed officials of at least 22 foreign govts btw 1998 to 2008. Petrochina vows to investigate.

CISA – Steel traders have been told to halt imports of low quality ore with less than 60% iron content. But low quality ore accts for most iron ore imports, and will push up ore prices. 100-200M tons imports will be affected. 70M ton reserve (20d).

RIO – 20 Chinese firms have been implicated in bribery cases. Hebei Jingye Steel, Tangshan Guofeng Steel, Shandong Rizhao Steel, Tianjin Rockchech Steel, Hebei Puyang Steel, Sinochem International, CNBM International.

Sino Iron, CITIC – 25yr mining rts to 2B tons of magnetite, option for 4B more at Capte Preston. CITIC owns it completely and has built ore dressing plant, pellet plant, slurry pipeline, port facilities, power station, desalination plant. $5.4B total, $1.2B overbudget, production delays, long approval process, higher labor costs, Aussie man team. Hua Dongyi kicked out the Aussies and brought in subordinates from CITIC Construction. Aussie govt was hostile to bringing in Chinese laborers from China Metallurgy Group, though caved in. Enviro regs. Cost of extracting is 40% above hematite higher quality costs by BHP and RIO. Refused to specify annual production costs at Sino Iron.

CNPC – Venezuela deal is worth 2.9B barrels, estimated reserve 8.7B brl, 20M tons pa. $1B to access the reserves.

CEC – Pilot to encourage major power consumers to buy electricity directly from plants face mounting difficulties from lack of market pricing system. State power grid operators would leave the power buying biz but charge for use of a grid. Transmission costs remain murky and the two SOEs refuse to disclose their actual costs.

Huaneng, Datang, Huadian, Guodian, China Power Inv – submit joint request for higher prices to SERC. Took heavy losses in Feb? Face high debt ratios.

Alibaba – Invests 5B yuan in Alipay (largest online payment net) to upgrade security, product dev and expand the client base.

Tencent – Makes final bid of $120M for ICQ against Digital Sky Technologies.

The9 – Record heavy losses on the end of its WoW ops, expansion costs, faces losses into the distant future. Blizzard has switched to Netease.

Opinion – Xiao Gang: 3 major gov crises (man dictatorship, fraud, embezzlement). Reforms at supervisory mechanisms, corp ethics, minority shareholder protection. Chinese need to be wary of market pressures of board of dirs. State supp keeps market happy about state banks. Too much short-termism. Shareholding model v family enterprise model (results connected to responsibilities). Indep directors are fail. Chen Changhua (Credit Suisse): specs don’t think govt has the minerals, 3-4yr risk, 50-100 times annual I to buy a home. 30% of property buyers are short-term specs. 20% of local govt rev will come from land-sales, which will not help action. Andy Xie: inflation could hit double digits faster than expected. Need to raise rates first, then move yuan. Yuan first would inflate the property bubble and inflation. Worse, a small appreciation would increase inflation and hot money while doing little to ease foreign pressure. Imported consumption goods aren’t big enough to affect CPI. Prop bubble bigger than US bubble rel to GDP? Chinese imports are mainly raw mats, equ, and components; appreciation won’t stop inflation. Appreciation wouldn’t be supported if it caused a hot money exit or dampened appreciation expectations. Up 5pp rates by 2011? Wouldn’t burst bubble (lol)? Need to keep RE int rates from declining further. Trade surplus due to distortions in domestic pricing rather than cheap yuan. Prop bubble suppresses C, prices for middle class goods and services are high and C is higher than expected, middle classes taxes are too high (45% marginal income tax! 17% VAT),

Education – Private Equity: has developed financing, regulation, inv, exiting. CCB International in Sept 09 raised 2.6B yuan through a HC industry inv fund. Tianjin Shipping Industry Fund and CITIC Mianyang PE Fund have also done recent capital raisings. NSSF has been authorized to engage in PE inv. High net worth individuals are accessing through wealth man channels. Local govts are creating guidance funds to attract PE fund registrations. Success however remains dep on governing policy, complicated supervision and control. NDRC approval can mean SOE financing access. Banks and ins funds are limited by regulation from inv in PE. Funds with more than 500M yuan of fin need to keep detailed record with local govts (who are responsible for regulatory oversight); thus most funds are below 100M yuan. Self-regulating? Big on ChiNext IPO scene. Offshore PE can used to establish domestic partnership enterprises. Foreign capital and domestic cap differentiation problem.