China’s Rattled Rat Catchers

2013 May 16 by admin

Chinese bank shares continued to languish even as monthly lending topped RMB 1 trillion in March, as regulators demanded further disclosure on broker and investment fund exposure and arrested suspected “rat traders” including a prominent executive who may have skimmed money in the interbank bond market. With local governments tapping the channel bonds now account for one-quarter of credit activity which is “out of control” according to a major local auditor. Fitch Ratings puts their debt at 25 percent of GDP, and the recent sovereign downgrade to AA was attributed to the load although the CDS spread remained relatively unchanged at 80 basis points. Property loans also continue unabated with an almost 15 percent quarterly increase at the end of 2012 as investment was up 20 percent in Q1 on an annual basis with new taxes readily circumvented. House prices rose in 70 cities according to the latest statistics as half of developers have negative cash flow. Under official prodding risky small business lending has spurted as total new financing mainly in the shadow “social category” reached $1 trillion sending credit/GDP to 200 percent. With bank supervisors struggling to devise and enforce curbs the National Reform Commission has stepped into the breach on the interbank bond scandal, with the charge led by a veteran of the post-Asian crisis GITIC collapse where malfeasance was discovered but foreign creditors were also stiffed. The influential Academy of Social Sciences has called for bond-market unification and default procedures, as the central bank head recognized modernization needs as he previewed a wider exchange rate band at the IMF-World Bank spring gathering. International reserves have soared to almost $3.5 trillion with restored capital inflows as the current surplus should settle at 3 percent of GDP this year. The economic growth pace has stayed under 8 percent as the PMI reading tries to keep above 50. Fixed outlays and retail sales continue double-digit gains but industrial output is sluggish with flat power generation and steel production. Inflation was just 1 percent in March as lower Chinese demand dents the entire commodity complex.

Food price relief should aid the region generally and allow for modest interest rate reduction, while diminished energy imports may help BRIC pole India in particular as it copes with a singular current account gap. In Australia mining projects have been shelved and local dollar inflows are off on the reversal although the 3 percent GDP growth forecast is intact on real estate and construction stability. In Japan consumer sentiment at its highest in five years could be further boosted at the margin although nuclear reactor shutdown had created an indefinite power premium. The yen meanwhile last sank against other currencies by the same magnitude two decades ago as a precursor to emerging Asia’s financial meltdown. The G-20 in a summit communique however supported “Abenomics” reflation intent as members behind the scenes expressed exchange rate target reservations when cornered.

China’s Home Wreck Rumblings

2013 April 25 by admin

Chinese property shares led by mega-builder Vanke tumbled and erased Shanghai exchange gains to date as a 20 percent tax was slapped on sales just as the Communist Party Congress opened to formally tap new leadership. The GDP growth target was reaffirmed at 7.5 percent as PMI readings stayed above 50 especially for services, although officials acknowledged overcapacity in cement and steel and a rise in bank non-performing loans one-third tied to real estate directly and indirectly, including through local government financing platforms which have also moved deeply into bonds. So-called chengtou instruments outstanding are close to 2 trillion yuan, almost one-quarter of the corporate total, and come with a range of coupons and tenors within typical investment-grade ratings. Yields can be double the 4 percent average for higher-return wealth management products, where the regulator has now ordered off-balance sheet disclosure as worries mount about the “shadow” system threat with estimated assets at 40 percent of GDP. Foreign exchange has again become a profit center as capital inflows resumed on expected appreciation, aided by liberalization of offshore renimbi fixed-income quotas and of equity short-selling restrictions, which only affect listed blue-chips in an initial stage. Taiwan has now launched its own version of Hong Kong’s dim sum market as Chinatrust bank issued a Formosa bond to harness mainland currency appetite. Retail savings accounts could reach RMB 250 billion in the medium term on the island, as insurance companies clamor for paper with 10-15 year maturities. The development has shifted attention from lackluster export performance registering 1 percent GDP growth last year, as life companies continued with large portfolio outflows. The Asian and global high-tech sales outlook is brighter for 2013, as lower energy prices should also keep inflation under 2 percent with the central bank on hold.

Hong Kong land had already been subject to cooling measures as stamp duty was added to loan-to-value curbs, as prices have doubled since the 2008 crisis. The clampdown was factored into the stock market which barely budged in anticipation of another raft of mainland company offerings after 2012’s slump. Smaller banks and brokers still awaiting Beijing’s approval to list are in the pipeline, as the center tries to recapture top regional standing from Malaysia. The index has been flat as short-sellers have attacked firms suspected of fraud and questionable accounting, and new corporate governance rules step back on transparency in top executive dealings. The government asserts privacy rights for the change but activists claim conflict of interest and criminal activity will go undetected. With its “prudent fiscal stance” S&P recently re-affirmed the AAA rating, as the new council head unveils plans to use the ample surplus for social spending. He may also introduce additional taxes and a minimum-wage law while honoring the longstanding US dollar peg requiring HK$ 100 billion in intervention the last quarter to protect the structure.

The Asian Development Bank’s Burnished Bond Distinction

2013 April 10 by admin

The Asian Development Bank issued its 2012 local currency bond report in advance of the annual meeting hailing its distinct asset class status, but fretting over rising capital flow and currency volatility from foreign investor participation. In the balance of payments the portfolio account has converged with traditional direct allocation strength with the pace of debt now outpacing equity purchase, as East Asia markets reach one-tenth the global total. The non-regional exceeds the intra-regional share of domestic bonds, which as in 2009 can foster instability despite the benefits in terms of price discovery, efficiency and liquidity, the lender believes. Institutional investor entry also diversifies the base dominated by banks, and is driven by host-country economic and monetary policy push factors outside Asian official control. Lacking cross-border coordination taxes and other inflow restrictions have been imposed to counter inflation and exchange rate spikes, and in Indonesia’s case a big state intervention program was organized. These instruments are of limited use in view of complex outside linkages which can only be addressed through joint central bank and regulatory action, the authors advise. The outstanding market size for the nine countries tracked increased 12 percent to $6.5 trillion in 2012, due mainly to corporate growth with that category one-third of the amount. Over half the volume is from mainland China with narrow overseas access, and Vietnam and the Philippines rose the most from a smaller base. Government bill and bond activity was flat with reduced sterilization need, with India an exception profiled for comparison purposes where structural changes aided a 25 percent jump. Korea remains the biggest company issuance center at $900 billion, seven times Malaysia’s Islamic-concentrated sum. Thailand added 7 percent in these placements last year and in Indonesia bank subordinated debt and sukuk accounted for one-fifth of them. East Asia’s bond/GDP ratio was 55 percent and international ownership was 30 percent in Indonesia and Malaysia, 15 percent in Thailand and 10 percent in Korea.

For half the group maturities were bunched at the short 1-3 year end, while the Philippines has more liquidity at the 10-year plus 50 percent proportion. Government yield curves moved down outside China which tightened money supply though repo operations. Corporate high-grade fluctuated more than high-yield spreads as trading support was limited. Emerging Asia issuance in major currencies was a record $130 billion in 2012 with the bulk from mainland and Hong Kong, China followed by Korea and Singapore. In January of this year it was $15 billion chiefly from Chinese property companies rushing to finance before stricter bank and tax treatment. The pan-Asian bond index lagged equities with a 7.5 percent gain, with the Philippines the top performer before recent central bank counter-measures against peso appreciation. The offshore renimbi benefited from new Hong Kong prudential rules and opening of the RQFII regime as Singapore initiated a corporate reading to distinctly analyze yuan sentiment.

Bangladesh’s Pesky Post-Independence Shackles

2013 March 20 by admin

Bangladeshi shares were alone in MSCI frontier Asia losses through February, as both major political parties united in condoning massive protests shutting Dhaka and other cities against the “lenient” life sentence for an Islamic leader convicted of crimes during the independence war with Pakistan four decades ago. Participants have demanded the death penalty and advocate curbs on the biggest fundamentalist grouping which is an ally of the opposition BNP. The confrontation came after intense negative international publicity over garment factory fires with substandard working conditions, and a year into an IMF arrangement which was recently modified after missed targets. In the last fiscal period economic growth was 6.5 percent on 7.5 percent inflation, as the budget gap was 4 percent of GDP. On the external front, gross reserves reached $12.5 billion but the non-concessional borrowing cap was breached with new energy and infrastructure debt with the currency “broadly stable” against the dollar, according to the Fund’s recent snapshot. Electricity and fertilizer subsidies are due for removal and medium-term tax revenue is seen at 12.5 percent of GDP after VAT law passage. State-owned firms will be audited, and the government will distinguish between its ownership and oversight functions for commercial banks as stock market exposure is limited to one-quarter of regulatory capital. Electronic trading was introduced for Treasury bonds and Sukuk rules will be modernized. New loan classification and provisioning guidelines went into effect, and with recent cases of fraud and misconduct the central bank assumed power to remove chief executives. After taking a Russian commercial credit for nuclear power development, sovereign bond issuance may soon follow, with an official committee charged with analyzing and verifying debt sustainability.

Sri Lanka already embarked on that path to great success and its rating was just affirmed after demurring on another IMF program. GDP growth for 2013 is set again at 6 percent as inflation remains in single digits. The central bank has reversed course and loosened slightly but heavy T-bill placement will be needed once more to cover the persistent budget hole, with the foreign ownership ceiling at 12.5 percent. Currency depreciation should help exports but the current account deficit will be around 4 percent of output. Banks may tap the international bond markets in the near future, and FDI should exceed 2012’s $1 billion as agricultural drought ends and tourism training efforts are realized. However the Rajapaska administration goes before the UN Human Rights Council in March for its treatment of rebel Tamils during the civil war amid allegations of fresh harsh behavior toward the courts as a chief justice ruling against the family was summarily dismissed. Lawyers protested the move and the political opposition condemned “violations” of the constitution and rule of law. Colombo is to host the Commonwealth summit in the coming months where freedom in the Anglophone world is celebrated with often muffled cheers.

Malaysia’s Opposition Challenge Churn

2013 March 18 by admin

Malaysia stocks stayed lethargic pending imminent elections, where the opposition three-party alliance headed by former Prime Minister Anwar with one-third of seats vowed to “conquer” the dominant National Front with its anti-corruption employment creation platform. It plans to add a million jobs through reduced immigrant labor reliance mainly from Indonesia and to end racial discrimination against ethnic Indians and Chinese. Under its leadership government contracts would no longer be reserved for Malay-owned firms under longstanding preferences. The ruling coalition remains ahead in opinion surveys although it may suffer further losses after 2008’s surprise debacle. Domestic demand from infrastructure and consumer spending will again bring 5 percent GDP growth this year, at the cost of a chronic fiscal deficit hurtling toward the overall informal 55 percent of output public debt cap. Food and fuel subsidies have been untouched and the project pipeline under the signature Economic Transformation Program has propelled fixed investment to almost 30 percent of GDP. Double-digit annual credit expansion chiefly for personal and mortgage borrowing has raised the outstanding amount to 115 percent of GDP and disintermediation toward private bonds has been notable particularly in the fixed-rate sukuk market. Banks have been big buyers of the paper to keep business relationships and diversify assets, as they also extend their networks regionally. Government-linked funds like Khazanah hold large banking and unit trust stakes and promote tax incentives for Islamic finance. Bank capital adequacy was 15 percent and non-performing assets were under 3 percent according to the latest yearly figures. Deposits cover 85 percent of total funding and ringitt accounts do not operate offshore except in the Labuan island center, which has an active takaful insurance segment. The securities regulator honors IOSCO principles and has recently added frameworks for ratings agencies and investment advisers as the RAM now grades ASEAN and global issuers alongside its domestic franchise. In a financial system review just published the IMF and World Bank urge insolvency law passage in the absence of a formal re-organization process, as well as clarification of government guarantees for infrastructure debt which pose contingent budget liabilities.

Indonesian stocks have fared better through February despite a similar combination of credit and election jitters in addition to corporate governance and balance of payments woes. The Bumi saga in London reached a crossroads as the Bakrie family slate of directors was approved, defeating a challenge from the Rothschild consortium. The terms of trade shock has subsided as commodity exports pick up, but weakness has dropped the rupiah toward 10,000 to the dollar. Despite 5.5 percent GDP growth on solid domestic support foreign investors have trimmed bond positions on the continued inability to remove fuel subsidies taking one-tenth the budget. The Finance Minister who endorsed reform has been nominated for central bank governor in a move seen to appease vested business and voter interests he confronted too clearly.

India’s Superrich Irreconcilable Ironies

2013 March 15 by admin

Indian share foreign institutional investors who have been heavy net allocators joined domestic counterparts as chronic sellers in blasting the next fiscal year budget outline, where Finance Minister Chidabaram proposed a 20 percent surcharge on high-income taxpayers to fund a 15 percent social spending increase within the 5 percent of GDP deficit target. Economic growth for the latest quarter at 4.5 percent was the slowest in a decade, although modest improvement in food inflation allowed the central bank to tweak the benchmark interest rate 25 basis points. The trade gap hit a record $20 billion in January as the current account shortfall is stuck at 4-5 percent of output. After missing this year’s goal privatization proceeds will again be limited as recapitalization of state banks proceeds to meet Basle standards. Guidelines have been finalized for new licenses likely to go to arms of family-run conglomerates, as foreign banks like Barclays and RBS pare networks under continued constraints. Private Axis Bank prepared a $1 billion offering which may now be available on a third stock exchange, MCX-SX, which will trade a comprehensive product range, including derivatives. On the fixed-income side interest rate swaps have been popular with a gross notional value outstanding of almost $700 billion, drawing official reservations about the innovation in the aftermath of a ban on offshore “participatory notes.” In the February budget non-resident taxation which can apply retroactively as in the Vodafone case was left an open question, stifling a rebound the first two months on the Mauritius bourse.

 Politics overshadowed the exercise with the approach of 2014 elections as the Congress party finally tapped Rahul Gandhi as his mother’s successor to lead its campaign. He has been a lackluster speaker and his effort was squashed recently in Gujarat state with a resounding victory for the opposition BJP. His rhetoric has sharpened with calls for “revolution” through decentralization and transparency which can appeal to middle-class voters who have participated in anti-corruption street protests. In poorer areas the platform stresses more “inclusive” growth and citizen protection. Andhra Pradesh in the south is a battleground, where the micro-finance sector has been reformed after farmer suicides under harsh collection methods. A lending rate cap was imposed which keeps the current rate at 25 percent versus the 40-percent plus level two years ago. With the transition doubts money continues to pour into gold which represents a large import chunk and has maintained value in rupee terms as compared with constant exchange rate fluctuations.

Pakistan is also struggling under the weight of leadership instability after another round of terrorist attacks and daily violence heightened rumors of a military takeover prior to upcoming elections. The Supreme Court which continues to spar with the president ordered the prime minister’s arrest on corruption charges. Power shortages are more acute as the rundown of international reserves prompts pleas for IMF program renewal despite lack of tax collection progress especially on wealthy landowners.

Korea’s Wan Warrior Weave

2013 March 6 by admin

Korean President Park was inaugurated as she tapped a dovish think tank head for Finance Minister who may advocate fiscal and monetary stimulus as GDP growth sputters at a 1-2 percent pace on dented domestic and external demand. The stock market was at Asia’s rear on $2.5 billion in foreign investor outflows in January as bonds were jarred as well by official saber-rattling over possible “hot money” taxes to brake currency appreciation now particularly pronounced against the yen on  Japanese prime minister Abe’s ultra-easing thrust. The government also suggested it could limit state bank and company borrowing abroad as a major corporate issuer. The G-20 meeting declaration was mixed on the regional ramifications of Tokyo’s exchange rate policy, as Seoul reported a monthly export decline even though products do not directly compete for global share. Household debt remains high to stifle domestic consumption as the President pledged mortgage relief along with pension and child care support as an immediate budget priority. Heavyweight exchange listings like Hyundai Motor and steelmaker Posco predict double-digit sales declines as the average p/e ratio drops to 8.5, just as the chaebol have been mandated to raise dividends under the new administration’s “economic democracy” campaign. Payouts are roughly half the emerging market norm at 1.5 percent and giants like Samsung sit on large cash reserves. Activist investors have begun to challenge the return in an effort to elevate overall corporate governance, while Samsung executives reply they are saving for acquisitions like recent purchases of European semiconductor producers and for negative won shifts like the 20 percent rise against the yen since last year. The central bank continues to intervene to pre-empt a break through 1000 to the dollar as it points out the anti-inflation benefits ofcurrency strength with CPI under 3 percent. Analysts also cite possible safe haven cross-border channeling for the upward trend as tension with North Korea resumes following missile tests with reach now extending to the Western US. President Park, whose father was a staunch anti-communist general, had indicated potential overtures toward the young leader in Pyongyang during her run which may be indefinitely sidelined with the North’s continued militancy and reported willingness to help other rogue regimes including Syria’s Assad.

Japanese prime minister Abe has been mired in a separate confrontation with China over small disputed islands which contributed to a record trade deficit and last quarter recession. On a visit to Washington he held out the prospect of resolution to safeguard commercial and diplomatic ties as an early cleanout of the central bank board was orchestrated to proceed with expanded asset-purchase plans. Foreign bond buying proposed during the contest for LDP party return has been ruled out in the near term as private sector securities appetite turns to home with expected steeper yields and the upcoming end-March fiscal year traditional repatriation. However both retail and institutional interest is still keen for hard-currency emerging market instruments as Uridashi for the local market should again conquer $20 billion.  

China’s New Year Blast Bleats

2013 February 18 by admin

Chinese shares entered the new year period in bullish spirit up 20 percent from last year’s low, as official GDP growth and PMI indicators returned to the respective 8 percent and 50 percent-plus ranges despite the record central bank cash injections to meet personal holiday and lingering system liquidity demand. In December banks provided only one-quarter of financing now half-controlled on an annual basis by alternative bond, trust and wealth management channels.  The big 4 share of the former which may reach the trillion yuan mark in 2013 has in turn dropped to 40 percent, as second-tier lenders have moved aggressively into high-yield and local government business. 20 provinces again set fixed investment growth targets above 20 percent according to reports as central authorities following the recent leadership reshuffle try to tilt toward consumption support. The central bank has warned of a short-term debt hump equivalent to 50 percent of GDP stemming from the post-crisis stimulus programs along with a maturity mismatch for longer-range infrastructure and housing projects through “shadow” sources in particular. Although declared non-performing assets amount to only 1 percent, total on and off balance sheet exposure could come to several times economic output, analysts calculate. The IMF estimates trust industry size at 5 trillion yuan through a combination of licensed and unmonitored institutions often offering products analogous to the “toxic” collateralized debt obligations which precipitated the 2008 US crash. Banks have packaged such instruments at a multiple of that amount to evade general quotas and specific property company prohibitions. Separate non-payment episodes at trust Three Gorges and Huaxia Bank have highlighted dangers, and brokerages have in turn received almost RMB 2 trillion in accounts from the originators for an additional layer of fiduciary complexity. Local governments have tapped this capacity in hiking 2012 bond activity 150 percent to RMB 650 billion as overall debt topped RMB 9 trillion by private and public tallies. One-third of interest and principal due may have been rolled over as three-quarters of facilities were rescheduled with stricter future guidelines at Beijing’s urging, according to international media.

Corporate bond data trackers classify 75 percent of issuers as government-backed to some degree, and foreign investors prefer these names although they returned to mainland and Hong Kong high-yield real estate developers in January with $3.5 billion through ten placements. Global funds put $550 million in Chinese bonds for the month, half the total for all of 2012. 10-year yields for top-rated firms are near 5.5 percent, and small companies continue to account for less than one-tenth of volume. Without the public guarantee, creditor wariness persists in view of the recent workout experience which imposed large haircuts as in the case of fraud-ridden Sino Forest. In the trust sector, participants with long memories may recall the comparable GITIC saga during the Asia financial crisis which created its own fireworks burning extended hands.

Thailand’s Tentative Tie-Up Traits

2013 February 6 by admin

Thai capital markets continued their Indochina outreach with operations in Laos and Myanmar as the Asean cross-listing platform was also launched and the Bangkok exchange chief previewed a busy IPO backlog. The government in Vientiane plans a baht-denominated issue in the coming months to cover Mekong River power project costs after regulators made non-investment grade sovereigns eligible. Bilateral cooperation already extends to the stock-market with two listings there and to Myanmar’s dormant one, where the Japanese are also assisting with technology needs. At a donor meeting the World Bank agreed on debt arrears clearance as the Asian Development Bank focusing on financial sector modernization resumed lending after decades of absence. Mobile banking may be introduced and mortgage and commercial credit maturity restrictions are due to be lifted. Foreign phone companies have been invited to bid for new licenses as a previous minister responsible for the industry was accused of corruption. The central bank could get autonomy under so-called “stage two” transition changes contained in the aid conference document. The Asean exchanges link will first group 30 stocks in Malaysia and Singapore before Indonesia, the Philippines and Vietnam later join. The full integration deadline is 2015, and index providers have begun to offer regional benchmark products. The trio’s order systems are tied electronically and regulatory harmonization will follow in a later stage. For the Singapore bourse the initiative helped deflect attention from near-recession at home last year on poor construction and manufacturing data. The monetary authority imposed additional property demand measures in an effort to assuage bubble and inflation concerns as the latter cooled to the 2 percent range. Island firms have matched Chinese counterparts in steering FDI to fresh locations including Cambodia, which got $1.5 billion in 2012 beyond the usual garments pillar. The US President recently visited despite the suspension of multilateral support over land grabs and longstanding criticism of the regime’s human rights record.

Former Thai Prime Minister Abisit is under investigation for his alleged abuses during bloody clashes which closed the capital several years ago as domestic demand further improved in Q4 with record car sales on a solid current account surplus. Infrastructure builders and suppliers are to benefit from a $20 billion fixed investment program, with heavyweight Siam Cement a favorite. P/E ratios are at the core universe average, with dividend yields at 3.5 percent. Banks are available in New York through ADRs and ETFs, but double-digit annual jumps in consumer lending have drawn caution with local interest rates on hold and supervisors considering targeted curbs. As a fraction of GDP growth in the segment has been the fastest in the area since 2011, aided by the Yingluck Administration’s immediate household transfer and tax cut spree. Non-personal credit in contrast is sluggish despite post-flood reconstruction requests on soiled portfolio exposure from the disaster.

India’s Tarnished Gold Gifts

2013 January 25 by admin

Indian stocks with deflated valuations attracted a brimming $20 billion in foreign inflows on the same percent MSCI advance in 2012 as the retail and banking sectors were further opened to allay worsening economic indicators. GDP growth is at a decade low around 5.5 percent and the current account gap is at the same extreme as a portion of output on flagging manufacturing and services exports and heavy energy and gold imports. The precious metal demand has spiked despite the softer world price for traditional cultural and inflation hedge reasons, with the wholesale cost index still hovering at 7 percent to prevent decisive central bank easing. To cover the structural trade deficit the inward portfolio investment ceiling has also been raised for government and corporate debt, with FDI at only 1 percent of GDP a meager capital account contribution. Outward FDI has been a different story as Indian companies spent over $10 billion on acquisitions, often citing better prospects  abroad than at home. State oil giant ONGC recently bid for holdings in Kazakhstan as private family groups like Tata argue that damaging domestic policies force them overseas. The recent passage of a bill allowing new banking licenses satisfies a longstanding desire from the conglomerates and also lifts the foreign ownership cap to 25 percent, but approvals may come slowly with existing competitors hit by a wave of non-performing loans requiring workouts, alongside high-profile bankruptcies such as airline Kingfisher. Contingent liabilities could endanger the medium-term fiscal plan to honor legal limits and avoid an immediate sovereign rating downgrade by bringing the fiscal deficit under 5 percent of GDP. The ruling coalition remains reluctant to introduce a general sales tax or further curb food and fuel subsidies before upcoming elections, although advanced technology has aided the push for less fraud-prone direct cash transfers. Rahul Gandhi is set to lead the Congress Party in the next national race but the opposition BJP may pose a strong challenge following the third consecutive win of Gujarat chief minister Modi in December. He regularly holds investor summits to trumpet a business-friendly approach, but involvement in past anti-Muslim violence undermines broader political appeal.

In Indonesia, where shares ended last year barely positive, the 2014 presidential succession derby has already begun with candidates jostling over natural resources control as a wedge issue. The central administration has retaken post-Suharto local prerogative with a set of new mining rules and the decade-old oil and gas law was recently declared unconstitutional. Jakarta’s governor hiked the minimum wage 45 percent after union marches blocked the capital’s main roads. Carmakers could benefit from higher disposable income as consumption continues to support 5 percent GDP growth, while poorer rural areas are dealt a blow from lower coal and palm oil exports to China darkening the current account picture.