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March 18 2014

Commentary by Eoin Treacy

Taking a look at dividend yield in reported FY13 results

Thanks to a subscriber for this report from Deutsche Bank focusing on the Chinese property sector. Here is a section: 

Among the key listed Chinese developers that have yet to announce their FY13 results but will be reporting by the end of March, based on the actual 2012 dividends and our forecasted 2013 dividends, we expect high 2013 dividend yields for R&F, Greentown, Agile and Evergrande. Specifically, at the current share price, R&F is trading at a 2012A dividend yield of 7.8% and 2013E dividend yield of 9.1%. Greentown is trading at a 2012A dividend yield of 7.3% and 2013E dividend yield of 8%. Evergrande is trading at a 2012A dividend of 5.3% and 2013E dividend yield of 7.3% while Agile is trading at a 2012A dividend yield of 8.4% and 2013E dividend yield of 8.7%.

Looking at the information on the short interests on Chinese developers, which are estimates based on DataExplorers and the DB Global Prime Finance team, we found that the size of the cumulative short positions on the China property names, including the high-quality state-owned developers like COLI and CR Land, has recently risen quite sharply. For example, the short interests/positions on COLI have increased 9% month-on-month, and based on our estimates, it would take about 8 days to cover the outstanding short positions. As another example, the short interests/positions on CR Land have increased 37% month-on-month, and based on our estimates, it would take about 11 days to cover the outstanding short positions.

 

Eoin Treacy's view -

The issues China has with overcapacity in the materials sector, a rising tide of defaults in the corporate sector and overbuilding particularly in 2nd and 3rd tier cities are well understood. Considering just how low valuations are, it is reasonable to assume that a good share of the bad news is already in the price. 

However, one of the most compelling arguments for remaining on the side-line remains that we just do not know how large the problem is with bad loans and therefore cannot make a judgement on whether attractive valuations can be trusted. The current devaluation of the Yuan suggests efforts are underway to try and enhance the economy’s competitiveness.
 



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March 07 2014

Commentary by Eoin Treacy

Zombies Spreading Shows Chaori Default Just Start: China Credit

This article from Bloomberg News may be of interest to subscribers. Here is a section: 

Total debt of publicly traded non-financial companies in China and Hong Kong has surged to $1.98 trillion from $607 billion at the end of 2007. Some 63 companies have a debt-to- equity ratio exceeding 400 percent, compared to the average of 73 percent. In latest filings, 351 have negative ratios of earnings before interest, taxes, depreciation and amortization to interest expenses, while 409 have coverage of less than 1.

Renewable energy, materials, household appliances and software companies dominate the rankings.

Premier Li Keqiang is trying to balance efforts to avoid sharper slowdowns in economic growth with steps to rein in debt.

Expansion in gross domestic product is set to cool to a more than two-decade low of 7.5 percent this year from 7.7 percent in 2013, according to the median estimate in a Bloomberg survey.

 

Eoin Treacy's view -

$630 billion in Chinese corporate debt will need to be paid off or refinanced this year and we have just seen the first onshore default. It is a reasonable expectation that more will follow. Until now, investment vehicles have been supported by government largesse and investors have been made whole in the event of trouble. That is simply unsustainable, not least because the debt market is now so large that to continue on that trajectory would eventually bankrupt the country. 



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March 04 2014

Commentary by Eoin Treacy

Xi Jinping Inner Circle (Part 1: The Shaanxi Gang)

Thanks to a subscriber for this informative report by Cheng Li, Director of Research at John L. Thornton China Center, detailing the rise the Xi Jinping and those who have ascended to power with him. Here is a section:

As for the “tigers,” since about a year ago 19 ministerial and provincial-level senior leaders have been arrested, including four members (two full members and two alternate members) of the newly formed 18th Central Committee.51 Many of the arrested leaders have had ties to the country’s most formidable special interest groups like the oil industry, including Jiang Jiemin, the minister who oversaw all major state-owned enterprises (SOEs) under the State-owned Assets Supervision and Administration Commission (SASAC). In addition, 30 executives of SOEs—including 20 CEOs—were arrested in 2013, representing various industries such as energy, transportation, telecommunications, finance, steel, and mining.

Some critics may be cynical about the methods employed in the anti-corruption campaign, which relies more on the CCP’s traditional campaign mechanisms rather than the legal system. Zi Zhongyun, a distinguished scholar and former English interpreter for Mao Zedong and Zhou Enlai, recently wrote that the current anti-corruption campaign could not effectively prevent corruption—not only because there are far too many corrupt officials in the country, but also because such a campaign might lead to power abuse and undermine the role of the legal system and emerging civil society.53 While Zi and likeminded critics have valid concerns, one may reasonably argue that this criticism is unfair on the grounds that one simply cannot expect to establish a legal system in China in a short period of time. The fact is that, as Zi herself recognizes in her article, the campaign has already transformed the behavior of Chinese officials. Also, in the defense of Wang Qishan, Wang himself stated explicitly that the anti-corruption campaign should mainly deal with symptoms (....) now in order to gain the necessary time to find a way to cure the disease (....) in the future.

It should be noted that the Third Plenum resolution did hold out promise for legal reforms, especially greater judicial independence. Under the current system local judges and secretaries of local discipline inspection commissions answer to local party chiefs, who exert political pressure on their decisions. Under the rule of Bo Xilai, for example, Chongqing city’s high court almost completely followed Bo’s orders. Abuse of power and police brutality became rampant in the city. The proposed vertical control of local courts by the national judiciary (and also the vertical control of local discipline commissions by the CCDI) should be seen as an encouraging policy move to prevent power abuse and strengthen the rule of law.

 

Eoin Treacy's view -

The Party Congress currently underway is taking place amid the aftermath of terror attacks and high expectations for reform. This report is a useful primer for how the political establishment is structured and who is in charge of what. 
 

 



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March 03 2014

Commentary by Eoin Treacy

Terrorists changing tactics to create panic among civilians, analysts say in wake of Kunming attack

This article by Zhang Hong for the South China Morning Post may be of interest to subscribers. Here is a section:

The Kunming attack came just days before the opening meetings of the Chinese People's Political Consultative Conference today and the National People's Congress on Wednesday.

Last October, three people died carrying out what Beijing described as a terrorist suicide attack in Tiananmen Square that killed two others and left dozens injured.

Officials blamed the East Turkestan Islamic Movement for the incident, which occurred 10 days before a crucial Communist Party meeting.

"Terrorists are using all means to create widespread social panic … across China," said Pan Zhiping, an expert on terrorism at Xinjiang Social Science Academy. "The timing of the Kunming attack implies the terrorists want to create the biggest impact possible.

"Security is tight in Beijing and Xinjiang and in their surrounding provinces, but Kunming, a city thousands of kilometres away … is less defended. Nobody could have predicted an attack would be staged there."

Eoin Treacy's view -

Events unfolding in Ukraine have stolen headlines, but the mass murder that shook China over the weekend represents an escalation of the terror campaign that many associate with Xinjiang separatists.

The Communist Party’s claim to legitimacy rests on its ability to deliver social stability and improving standards of living. It is reasonable to expect that anyone who wishes to damage the Party would look on the weekend before the opening of the annual congress as an opportune moment to act.

 



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February 25 2014

Commentary by Eoin Treacy

Yuan Drops Most Since 2010 on Speculation PBOC Wants Volatility

This article by Fion Li for Bloomberg may be of interest to subscribers. Here is a section: 

“Compared with a few days ago, chances for a reversal only from a technical point of view look to be smaller,” said Minoru Shioiri, a Tokyo-based manager in the credit and foreign- exchange trading division at Mitsubishi UFJ Morgan Stanley Securities Co. “The move has a lot to do with the onshore fixing. So, rather than a technical story, it’s a question over whether there is any change in the central bank’s stance over the yuan.”

UBS AG said yesterday recent depreciation may suggest the People’s Bank of China is shifting away from allowing a steady pace of gains and this may lead to a reversal of “hot money” inflows.

Investors should buy the offshore yuan at 6.12 per dollar as introducing more volatility into the markets is part of the process to liberalize China’s capital account, said Jonathan Cavenagh, a Singapore-based strategist at Westpac Banking Corp.

“Where I would definitely reset my view is a move above 6.15 per dollar,” said Cavenagh. “That would potentially be a game changer because that’s where you potentially start to move to regions where some of the structured products in offshore yuan start to get stopped out. The move into the 6.15 to 6.20 range is something where I probably have to reconsider my view in a fairly meaningful way.”

 

Eoin Treacy's view -

Introducing greater volatility into the currency markets may be part of the PBoC’s plan to adjust its reliance on foreign capital flows and to cool the expansion of the shadow banking system but it is unlikely to be welcomed by China’s neighbours who are likely to feel a ripple effect. Considering just how large the shadow banking sector has become, it would be rash to expect the Yuan to continue to appreciate as it has done over the last decade since it is no longer in China’s interests to the have the strongest currency in the world. 

 

 



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February 24 2014

Commentary by Eoin Treacy

New PBOC Research Head Is Rising Star in Field

This is an interesting article from CaixinOnline highlighting some new additions to the PBoC’s research team. Here is a section: 

Shortly before Lu's appointment, the central bank named Ma Jun, chief China economist at Deutsche Bank AG, as its chief economist, a document seen by Caixin shows. Ma, 50, is considered one of the most bullish economists among analysts in China.

Sources close to the situation said the two appointments were surprising in that the central bank often fills those positions by promoting insiders. Efforts have continued throughout recent years to bring in talents with more diversified backgrounds, but they were not always successful.

In 2009, for example, some central bankers wanted to invite Ha Jimin, then chief economist of investment bank China International Capital Corp., to head the bank's second department of monetary policy. The proposal fell through because of opposition, the sources say.

An attempt to make Goldman Sachs' ex-employee Fred Hu a deputy governor for the bank also failed, the sources said.

It remains an open question whether Lu's leadership can make the research bureau play a more significant role in deciding monetary policies, analysts say.

Compared with economists in Western central banks and international economic institutions such as the World Bank, research fellows in China's central bank have been largely reduced to a role of assisting their coworkers with policymaking, sources with knowledge of the situation say.

In practice, the research bureau can act on its own initiative and choose research topics, but it often needs to work on projects dictated by other departments, the sources say.

 

Eoin Treacy's view -

Over the years subscribers have kindly forwarded a significant number of reports by Jun Ma, while we was at Deutsche Bank, which can be found in the archive. He was generally cautious of China from 2010 but adopted a more optimistic approach over the last year as valuations improved and the previous lows were approached. 



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February 21 2014

Commentary by Eoin Treacy

Chinese group considers South Africa platinum bids amid strikes

This article by Franz Wild for Bloomberg may be of interest to subscribers. Here is a section: 

China’s Long March Capital Ltd., which partners with Citic Group Corp., is considering buying South African platinum assets after their value was depressed by strikes, the company’s Managing Partner Clement Kwong said.

The company is now reviewing a decision to hold off on purchasing South African platinum assets because of the labor issues, Kwong said in a Feb. 19 interview in Johannesburg. Long March last year partnered with Citic unit Baiyin Non-Ferrous Metal Group Co. Ltd. and China-Africa Development Fund to complete their buy-out of Perth-based Gold One International Ltd. and indirectly acquired a stake in Westonaria, South Africa-based Sibanye Gold Ltd..

“If the industry survives and makes a profit then that would be a good signal to look at investing,” said Kwong, who founded Long March Capital with a partner in 2008. “This last round has repriced these assets down so I think it would be as cheap as it gets.”

 

Eoin Treacy's view -

China has been highly successful in acquiring mining assets at bargain basement prices by following a buy low approach which should be the envy of boardrooms across the mining sector. 

The recent expression of interest in platinum assets highlights the fact that China is now the world’s largest car market and suggests it may also be interested in lead and other industrial metal assets. 

 

 



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February 20 2014

Commentary by Eoin Treacy

Email of the day on emerging markets:

According to yesterday’s [Ed. Tuesday] “Comment of the Day”, “Some bear markets...are occurring in developing countries where governance and politics appear temporarily out of control...Brazil is an example”.   

The noted economist, Frank Shostak, says, “In countries such as Turkey and Argentina a tighter stance by central banks has set in motion an economic bust.
  
Sam Kee Chong in the Malaysia Chronicle recently concluded that, “Indonesia might be heading for the perfect storm...and that the other countries, in the region are vulnerable. 

The above are examples of many analysts alerting us to the emerging markets danger which other economists warn could be the “black swan” that inflicts widespread damage to financial markets in 2014.  It will not be a black swan event as far as FT Money is concerned but your views regarding the severity of the threat, or its imminence, would be appreciated.  

 

Eoin Treacy's view -

Thank you for these informative links and please also see David’s leader on Tuesday, including the last paragraph of his response. In short we can probably expect more volatility in terms of total return from emerging markets than has been the case over the last decade. 

As previous delegates at The Chart Seminar will be aware, we try not to introduce teaching examples of our own but rely on active participation from those present to generate suggestions for instruments of interest to them for us to work with. The Singapore venue for The Chart Seminar last week was notable because the vast majority of delegates were involved in private banking, with the result that in the first day the only examples requested were for currencies. 

This is perhaps not so surprising since the most notable event that has occurred in the region this year has been the pressure experienced by emerging market currencies and the knock=on effect this has had on the region’s stock markets. As a result investors are asking the question whether the bull markets that have prevailed since 2008 are still in force. 
 



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February 17 2014

Commentary by Eoin Treacy

China Stocks Erase Losses YTD as New Credit Increases

This article from Bloomberg News highlights the recent rebound for Chinese shares. Here is a section: 

New local-currency lending was 1.32 trillion yuan, the highest level since 2010. M2, the broadest measure of money supply, increased 13.2 percent from a year earlier last month, according to the central bank. That matched the median economist estimate and compared with 13.6 percent in December.

Record new credit will help the economy to maintain momentum while underscoring challenges for officials trying to limit the risk of financial turbulence from defaults and bad loans.

Eoin Treacy's view -

Uncertainty as to how China is likely to tackle its credit bubble remains a considerable headwind to sentiment improving from the perspective of many foreign investors. However, as we have seen in the cases of the USA and Europe, an issue with credit expansion can go on for much longer than many people expect once it has been identified. 

The nature of China’s credit system is that demand for credit tends to be highest in January so we will not know to what extent credit growth is sustainable until after the first quarter. The administration apparently wishes to tackle the situation but it is taking a long-term perspective; suggesting the muddle through approach taken to date is likely to continue. We will probably have more visibility on this issue once the party Congress concludes next month. 
 

 



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January 24 2014

Commentary by Eoin Treacy

Email of the day on the differing performance of China large cap State Owned Enterprises compared to private sector consumer oriented sectors:

“I remember from one of your recent audios you pointed to the fact that despite the relative lackluster performance of China’s main stock indices there are sectors that are performing well. I came across this presentation that addresses the same: be careful with general index-linked funds & ETFs and look for specific sectors, e.g. healthcare, insurance, railways.”

Eoin Treacy's view -

Thank you for this interesting report from LGT Bank. Here is a section:

Policies are designed to favour the private sector and make the public sector more efficient

In the long term, private enterprises should outperform SOEs.

Most China equity indices are SOE-heavy. Recommend investing in specific reform beneficiaries rather than index-linked ETFs

Banks, property developers and basic resources companies represent by the far the most liquid and largest companies in China and therefore occupy large weightings in various indices. One of the reasons they are so large is because they were among the greatest beneficiaries of China’s initial focus on infrastructure development and export led growth.

 



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January 17 2014

Commentary by Eoin Treacy

ICBC Will Not Repay Troubled China Trust Product, Official Says

This article from Bloomberg news highlights some potentially important developments in China. Here is a section: 

Industrial & Commercial Bank of China Ltd. is rejecting calls to bail out a troubled 3 billion-yuan ($495 million) trust product, a bank official with knowledge of the matter said, stoking concern that the nation’s first default on such high-yield investments may be looming.

ICBC, which distributed the product sold by a trust company to raise funds for Shanxi Zhenfu Energy Group, won't assume primary responsibility after the coal miner collapsed, according to the executive, who asked not be identified while negotiations continue. China's largest bank may be forced to repay investors, most of whom were Beijing-based ICBC's own private banking clients, Guangzhou Daily reported yesterday.

A default on the investment product, which comes due Jan. 31, may shake investors' faith in the implicit guarantees offered by trust companies to lure funds from wealthy people.

Assets managed by China’s 67 trusts soared 60 percent to $1.67 trillion in the 12 months ended September even as policy makers sought to curb money flow outside the formal banking system.

“Nobody wants this default to become a trigger for a financial crisis,” Xue Huiru, a Shanghai-based analyst at SWS Research Co., said of China Credit Trust's product. “Breaking the implicit guarantee may help the long-term development of China's financial system, but the short-term pain would be too much for the economy to take.”

Eoin Treacy's view -

While the Chinese banks maintain listings on both the mainland and Hong Kong, they remain organs of the Chinese administration. Therefore their actions can be interpreted as reflecting the motivations of those in power. The fact that on the one hand the administration has been attempting to clamp down on lending to the property market, while on the other the banking sector has been making abundant use of trusts to increase lending, reflects just the type of contradiction that is inherent in a one party system where politicians are personally enriched by holding sway over the actions of state owned organisations.

 



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January 10 2014

Commentary by Eoin Treacy

Time to catch up; Buy

Thanks to a subscriber for this interesting report from Deutsche Bank. Here is a section: 

First, IPPs are the cheapest power stocks in the world and the cheapest in their 10-year trading history. Second, there will be a potential tariff hike for gas-fired plants. Third, IPPs have scope to raise dividend payout. Fourth, asset injection will return in 2014. After a mediocre share performance despite a strong earnings recovery in 2013, it is time to catch up. We have Buys on all five IPPs with Huadian/Huaneng as top picks given their 1) more attractive valuation, 2) stronger asset injection potential, and 3) more upside from gas plant tariff hike. 

IPPs are significantly undervalued
Following a mediocre performance in 2013 despite 60-156% EPS growth, IPPs are trading at the lowest PE multiples and highest dividend yield over the past ten years. Across the global power utility stocks, China IPPs have the highest average dividend yield and the lowest average PE. Among the China utilities sector, the China IPPs are trading at 6.3x FY14E P/E and 0.9x FY14E P/B vs. Gas at 20.6x FY14E P/E and 2.8x FY14E P/B, Water at 26.9x FY14E P/E and 3.4x FY14E P/B and Wind at 16.2x FY14E P/E and 1.5x FY14E P/B. 

Tariff hike for gas-fired plants; dividend payout to rise
We expect a tariff hike for gas-fired plants to address the gas price hike and supply shortage, which will be particularly positive to Huaneng, Datang and Huadian. With better cashflow and reduced capex, IPPs are likely to raise payouts, such as Huadian and CR Power with payout ratio of 32/33% in 2013. Moreover, IPPs are on the fast track to de-leveraging.

Asset injection is the key theme in 2014
As we have argued, China IPPs uniquely positioned with significant assets at the parentco level that are scheduled to be put into listco over the next few years. For example, at end-2013, Huaneng Group had 137GW vs. Huaneng Power¡¯s 67GW; Huadian Group had 100GW vs. Huadian Power?¡¥s 37GW. In 2013, asset injection was done on a small scale by CR Power and CPI. We expect more scalable injection in 2014 after profitability improves in 2013.

Eoin Treacy's view -

The report quoted above is posted in the Subscriber's Area.

While the mainland¡¯s stock market remains under pressure, the fact that China¡¯s valuations are among the lowest of any major economy suggests that some judicious bargain hunting is likely to be rewarded. As with many of the large cap state owned enterprises, the utility sector has been going through a tough time as it deals with increased regulation and less government support. However if this process of deleveraging is close to ending, there is potential for a rerating of the sector. 
 

 



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January 08 2014

Commentary by Eoin Treacy

China Reverses Console Ban as Gamemakers Wait for New Rules

This article by Takashi Amano for Bloomberg may be of interest to subscribers. Here is a section: 

China took the step as computer games have proliferated well beyond consoles to smartphones and the Internet, so people who want to play games already can in many cases. China had announced last year that the ban would be lifted within the Shanghai free-trade zone, which opened in September.

“The way they are ending the ban gives them a controlled way to let in global leaders to partner with domestic companies,” said Mark Natkin, managing director of Marbridge Consulting Ltd., a market research firm in Beijing. Companies should wait for the release of the rules, which may take another six months, before starting production and hardware sales, he said.

Eoin Treacy's view -

While Tencent Holdings has been among the greatest beneficiaries of China’s appetite for online gaming, the console market has been almost entirely neglected with most people relying on bootlegged versions of hardware to gain access to games. The lifting of the ban on consoles represents a growth opportunity for manufacturers of hardware and associated software titles. A comparison might be Apple’s success in gaining access to the Chinese market and the result this has had on its sales.



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January 03 2014

Commentary by Eoin Treacy

Asian Stocks Fall to Two-Week Low as China Services Gauge Drops

This article by Jonathan Burgos for Bloomberg may be of interest to subscribers. Here is a section: 


China's purchasing managers index for the non-manufacturing sector fell to 54.6 in December, the lowest since August and down from 56 a month earlier, data released today by the National Bureau of Statistics and the China Federation of Logistics and Purchasing showed. A figure above 50 indicates expansion.
"Money managers took profits off the table,"Chris Weston, chief market strategist at IG Ltd. in Melbourne, said by e-mail. "There will be weakness in global cyclicals today in Asia. It's hard to really pinpoint any bright spots."

The China data added to signs of a slowdown in the world's second-largest economy. An official gauge for factory output released Jan. 1 fell more than economists projected to a four-month low. A separate report published yesterday by HSBC Holdings Plc and Markit Economics showed its PMI of Chinese manufacturing slipped to 50.5 from 50.8 in November, matching the median estimate in a Bloomberg survey of economists.

Eoin Treacy's view -

While China's intention to foster a market oriented economy and consider the environment more prominently in planning decisions is to be welcomed, the ramifications for some of the stock market's largest sectors such as banking, materials and building is somewhat uncertain. 

The FTSE/Xinhua A600 Banks Index had been ranging mostly above the 200-day MA following a reversionary move, but broke down three weeks ago and has now returned to retest the July lows. It will need to continue to find support 8000 to check the downward bias and suggest a return to demand dominance. 
 

 



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December 31 2013

Commentary by David Fuller

Xi Says in New Year Address China Will Make Progress on Reform

Here is the opining of this informative report from Bloomberg:

Xi Jinping, delivering his first New Year’s address as China’s president, said the country must press ahead with reforms in 2014 to improve livelihoods and make the country “rich and strong.”

“I firmly believe that new glories will be awaiting the Chinese people,” Xi said in a speech broadcast on state radio yesterday.

China enters 2014 facing slowing economic growth, rising environmental concerns and higher tensions with Japan over a territorial dispute that has damaged a $366 billion trade relationship. Tackling those challenges will be up to Xi, who as head of the Communist Party, military and state has amassed the greatest individual sway over his nation since former paramount leader Deng Xiaoping.

“In 2014 we will make new strides along the path of reform,” Xi said.

A key task will be overseeing the broadest economic reforms since the 1990s which were spelled out at the Communist Party Central Committee’s Third Plenum in November. Shifts include loosening the one-child policy, increasing property rights for farmers and encouraging private investment in more industries.

David Fuller's view -

The world’s second largest economy is clearly undergoing an important transformation process.  An investment decision to buy or sell Chinese stocks is a bet on Xi Jinping, who now has more power than any leader since the shrewd and highly effective Deng Xiaoping.

 This item continues in the Subscriber’s Area.  



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December 27 2013

Commentary by Eoin Treacy

December 20 2013

Commentary by Eoin Treacy

PBOC Adds Funds Amid Worst Cash Crunch Since June: China Credit

This article by Fion Li for Bloomberg may be of interest to subscribers. Here is a section: 

"Tightening financial conditions pose a risk to growth at a time when the economy is already weaker," Greg Gibbs, a currency strategist at Royal Bank of Scotland Group Plc in Singapore, wrote in a note yesterday. "The market is well aware of potential stresses in the Chinese financial sector and, if there are weak points, tightening financial conditions are more likely to weed these out."

China's non-financial companies have a record 2.6 trillion yuan of interest and principal repayments to make next year, and the official China Securities Journal said in a Nov. 26 editorial that higher interest costs may cause a "partial debt crisis to explode."

 

Eoin Treacy's view -

Among Asia recovery candidates both Japan and India have been notable for their outperformance. However, despite a low P/E for the overall market China remains an underperformer. The more disciplined approach adopted by the PBOC and its new found respect for market set rates has had a particular impact on the banking sector. 
 

 



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December 09 2013

Commentary by Eoin Treacy

It is safe go to back in the water

Thanks to a subscriber for this educative report by Christeen So for CCB International which may be of interest to subscribers. Here is a section:

Policy tailwinds. We expect China waste and water names to continue to outperform backed by favorable government policies towards environmental protection. We see China’s waste-to-energy (WTE) market continuing to expand in line with the government objective to lift the WTE-to-total treatment ratio from 20% in 2010 to 35% in 2015F. China’s wastewater treatment (WWT) market is likely to experience a gradual slowdown in new capacity additions as the WWT ratio continues to rise over the medium term; however, tariff hikes should mitigate the effect on earnings.

“Market has yet to factor in potential growth from new markets such as hazardous waste treatment (HWT) and water renovation projects. We believe HWT will become a new important income stream for China’s waste operators given increasing demand for third-party waste treatment and the higher returns it brings (levered IRR: 15-20%) compared with WTE (levered IRR: 10-15%). As China is still behind in its water renovation plans, we expect more investment in this area in the medium term; good news for WWT operators.

“Volume growth from new project wins, collection points growth, and M&A opportunities. We expect waste/waste water volume growth from project wins in both existing and new geographical areas, a rising number of waste/waste water collection points, and large-scale M&A. Watch for established SOE players with strong political connections, experienced management teams, solid“

Catalysts and risks. Near-term catalysts include (1) more lucrative waste/water project wins, (2) faster-than-expected penetration into new business segments, (3) additional supportive policies, and (4) large-scale value-accretive M&A. Downside risks to our view include (1) slower-than-expected new capacity expansion, (2) on-grid tariff, waste tipping fee, and water tariff cuts, and (3) rising interest rates.
 

Eoin Treacy's view -

The changing priorities of the Chinese administration from an outright focus on growth to a more nuanced, human capital, centred approach has obvious benefits for the environmental sector. Water treatment has been a particular beneficiary since China has substantial issues with providing ample water for its growing needs and related shares have rallied impressively. 



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November 29 2013

Commentary by David Fuller

November 28 2013

Commentary by David Fuller

Email of the day (1) - On investing in China

"I was very interested in your views as to China being quite cheap - or at least compared with some well known indices!

"I would be interested in your views of how to enter this market. Many funds and collectives seem to have high annual and initial costs, frequently above 2 or 3 % pa.

"I have been a subscriber for 10 years next month- you and Eoin have become distant but fond (and doubtlessly well off) relatives!"

David Fuller's view -

Thank you for your email and both Eoin and I are honoured to be thought of as 'distant but fond relatives'.



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November 27 2013

Commentary by David Fuller

Biden to Press China on Air Zone as Hagel Reassures Japan

Here is the latest on this political tension, reported by Bloomberg:

Vice President Joe Biden will press Chinese leaders on their intentions in creating a new air-defense zone, as Defense Secretary Chuck Hagel assured Japan of U.S. support and continued military operations in the region.

Biden will use meetings with leaders in Beijing next week partly to express U.S. concern aboutChina's behavior toward its neighbors and seek an explanation of the air zone it claimed over disputed areas of the East China Sea, according to an administration official who briefed reporters today on condition of anonymity to discuss the vice president's plans.

China's establishment of an air zone that includes islands claimed by both Japan and China "is a potentially destabilizing unilateral action designed to change the status quo in the region, and raises the risk of misunderstanding and miscalculation," Hagel said in a call today to Japanese Defense Minister Itsunori Onodera, according to an e-mailed statement by Pentagon spokesman Carl Woog.

The U.S. sent two unarmed B-52 bombers through the disputed zone this week without the advance notice that China has demanded and without incident. South Korea's military sent a plane through the area yesterday on a regular patrol flight, according to NHK, Japan's public broadcasting organization, which cited military sources it didn't name.

ANA Holdings Inc. (9202) and Japan Airlines Co., Japan's largest carriers, ran flights that landed today through the zone without advance notice, the companies said. Peach Aviation Ltd., a low-fare affiliate of ANA, also flew through the area without coordinating with the Chinese.

David Fuller's view -

China's bullying manoeuvre is creating a Keynesian military stimulus in Asia but I do not think it has many allies in this adventure. Worse still for China, it will now have to endure Joe Biden's grins.



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November 27 2013

Commentary by David Fuller

Today's interesting charts

Price charts show you where the money is going.

David Fuller's view -

Germany's DAX Index has risen for nine consecutive weeks and eleven out of the last thirteen weeks. It is also more overextended relative to its 200-day moving average than at any time since this bull market commenced with a weekly upside key reversal in March 2009. The next downward dynamic (see examples following previous overextensions to the upside) will indicate the onset of a corrective phase.



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November 27 2013

Commentary by Eoin Treacy

Currency market gyrations

Eoin Treacy's view -

The US Dollar declined for much of the decade from 2000 as the USA dealt with twin busts and money policy that deliberately targeted a weak currency as a policy objective. The relative attraction of other currency markets was therefore burnished. Investors became accustomed to an environment where currency market and capital market appreciation contributed to total return.



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November 26 2013

Commentary by David Fuller

"China-Japan rearmament is Keynesian stimulus, if it doesn't go horribly wrong"

Here is the opening from this interesting and unsettling article by Ambrose Evans-Pritchard for The Telegraph (UK): 

Asia is on the cusp of a full-blown arms race. The escalating clash between China and almost all its neighbours in the Pacific has reached a threshold. All other economic issues at this point are becoming secondary.

Beijing's implicit threat to shoot down any aircraft that fails to adhere to its new air control zone in the East China Sea is a watershed moment for the world. The issue cannot easily be finessed. Other countries either comply, or they don't comply. Somebody has to back down.

The gravity of the latest dispute should by now be obvious even to those who don't pay attention the Pacific Rim, the most dangerous geostrategic fault line in the world.

Japan's foreign minister, Fumio Kishida, accused China of "profoundly dangerous acts that unilaterally change the status quo".

The US defence secretary Chuck Hagel called it "a destabilising attempt to alter the status quo in the region" and warned that the US would defy the order. The Pentagon has since stated that US pilots will not switch on their transponders to comply, and will defend themselves if attacked. Think about this for a moment.

Mr Hagel asserted categorically that Washington will stand behind its alliance with Japan, the anchor of American security in Asia. "The United States reaffirms its long-standing policy that Article V of the US Japan Mutual Defense Treaty applies to the Senkaku Islands," he said.

Whether China fully believes this another matter, of course. The Senkaku islands offer a perfect opportunity for Beijing to test the resolve of the Obama Administration since it is far from clear to the war-weary American people why they should risk conflict in Asia over these uninhabited rocks near Taiwan, and since it also far from clear whether President Obama's Asian Pivot is much more than a rhetorical flourish.

Besides, Beijing has just watched the US throw its long-time ally Saudi Arabia under a bus over Iran. It has watched Moscow score an alleged victory over Washington in Syria. You and I may think it is an error to infer too much US weakness from these incidents, but that is irrelevant. Beijing seems to be drawing its own conclusions.

Even if the immediate crisis can be defused, we are clearly sliding into a new Cold War. While it is dangerous, it could have paradoxical and powerful side effects. Rearmament lifted the world economy out of slump in the late 1930s, working as a form of concerted Keynesian fiscal stimulus. It could do so again.

David Fuller's view -

The world could certainly use a Keynesian stimulus, although most of us hoped that would be infrastructure redevelopment. However, China has already done that, although perhaps not to everyone's tastes.

I have been concerned for some time about what Ambrose Evans-Pritchard discusses in this excellent article. China is definitely the aggressor in the East China Sea. Its World War II resentment of Japan, while understandable, can also be politically expedient. Moreover, China will not welcome the economic revival and rearmament of its old enemy. China is also testing President Obama. Additionally, due to its disastrous one child policy, China has a growing social issue with over 30 million excess males, who may be regarded as an expendable asset.

We should keep an eye on this situation because if it ever did go horribly wrong, the world's three biggest economies would be involved.



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November 26 2013

Commentary by Eoin Treacy

Atlantis China Fund Newsletter

This note from Atlantis may be of interest to subscribers. Here is a section:

China's growth moderation is on course. The latest IMF forecast suggests that China's GDP growth will fall to 7.3% in 2014 from an estimated 7.6% in 2013. Reducing inequality and gentrification are on top of the government's agenda. We believe this should be accomplished by implementing broad reforms such as financial market liberalisation, effective land management, free labour mobility, broadening of social security net coverage and establishing a well-defined property rights / compensation system on natural resources. In our view, headline GDP rates only matter when it comes to national power as what counts day to day are living standards, i.e. GDP per capita.

Eoin Treacy's view -

One of the reasons democracies tend to persist is because of the institutions normally associated with this form of government. Among these are individual property rights, minority shareholder protections, an independent judiciary, free press and unambiguous law enforcement. Without aspiring to such a framework it is hard to imagine how democracies could persist beyond the short to medium term.



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November 25 2013

Commentary by David Fuller

"Gold No Slam-Dunk Sell in China as Aunties Buy Bullion"

Here is the opening from this informative article from Bloomberg:

Yang Cuiyan, a 41-year-old housekeeper from Anhui province, is one reason China is poised to topple India as the world's top consumer of gold even as investors desert the metal.

"I don't know anything about the stock market and I don't have enough money to buy property, so I figured gold is the safest choice," she said. "I can put it on when I go back home to show everyone that I'm doing well."

Yang, who made the 650-mile (1,000-kilometer) journey to the capital from her rural home to visit relatives and shop, is one of the legions of middle-aged Chinese women, respectfully referred to as aunties, who bought coins and jewelry this year, bringing support to a market shunned by many professional investors who began doubting the metal as a store of value.

Bullion consumption in the world's second-largest economy will surge 29 percent to a record 1,000 metric tons in 2013, according to the median of 13 estimates from analysts, traders and gold producers in China surveyed by Bloomberg News. Demand that may ease 2.4 percent in 2014 from this peak still points to purchases greater than any other nation and more than the U.S., Europe and the Middle East combined.

China's demand for jewelry, bars and coins rose 30 percent to 996.3 tons in the 12 months to September, while usage in India gained 24 percent to 977.6 tons, according to the London-based World Gold Council. India was No. 1 for calendar 2012.

David Fuller's view -

Gold remains in an overall downward trend; Goldman Sachs it talking it lower and western investors and traders are still drifting away from the Total Known ETF Holdings of Gold. However, it is also oversold in the short term and near prior support from the late June low.



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November 25 2013

Commentary by David Fuller

Tim Price: Madness, and sanity

My thanks to the author for his ever-interesting letter, published by PFP Wealth Management. It is posted in the Subscriber's Area but here is a brief sample:

Probably the biggest of those fish is that giant part of the world economy known as Asia. The chart below shows the anticipated growth in numbers of the middle class throughout the world over the next two decades. The solid green circle is the current middle class population (or as at 2009 to be precise); the wider blue-fringed circle represents the forecast size of this population in 20 years' time. The OECD definition of middle class is those households with daily per capita expenditures of between $10 and $100 in purchasing power parity terms.

Note that in the US and Europe, the size of the middle class is barely expected to change over the next two decades. Central and South America, and the Middle East and North Africa, are forecast to grow a little. But one area stands out: the emerging middle class in Asia is forecast to explode, from roughly 500 million to some 3 billion people.

In equity investing, the combination of a compelling secular growth story and compellingly attractive valuations is a very rare thing, the sort of investment opportunity that one might only see once or twice in a generation, if that. But it exists, here in Asia, today. Once again, however, we have to abandon conventional financial thinking in order to exploit it.

David Fuller's view -

This is a very good issue of Tim Prices' letter and I commend it to you.



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November 18 2013

Commentary by Eoin Treacy

Beneficiaries of reforms post 3rd Plenum

Thanks to a subscriber for this timely report by Jun Ma and colleagues at Deutsche Bank which may be of interest to subscribers. The full report is posted in the Subscriber's Area but here is a section

“The mega reform package approved by the 3rd Plenum, which includes 60 measures, is by far the most profound in a decade, if not decades, in terms of scope, depth, and impact. Its aggressiveness even exceeded our very bullish expectation. Emphasizing that the market would play a decisive role in allocating resources, this plan will guide China's second-half journey towards a market-based economy, significantly lift China's growth potential, and help reduce macro risks.

We believe that deregulation which will permit private companies to enter most industries other than those related to national security is the most important reform within the package. Our estimate shows that relative to the reform scenario, deregulation will boost the average annual real output growth of the private sector by 3ppts per year in the coming decade.

The measures to liberalize interest rates and the capital account, granting greater market access to foreign investors, granting farmers the titles of land use rights, as well as resource pricing reform will enhance the efficiency of resources allocation, and speed up the development the service sector. The development of the municipal bond market will help remove a major overhang on banks NPLs. The transfer of SOE shares to the pension fund and raising the SOE dividend payout ratio will help improve pension and fiscal sustainability in the longer run. The two-child policy will help raise long-term growth potential.

Eoin Treacy's view -

What can only be described as a lukewarm response to the initial announcement of policy ambitions following the plenary session of China's parliament turned to enthusiasm on Friday as some of the more ambitious objectives were revealed. These are now being hailed as the most extensive reforms in decades and are likely to prove a catalyst for investor interest in the stock market.

Two of the most important moves relate to the banking sector and the one child policy.



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November 18 2013

Commentary by David Fuller

China's Bold, Contradictory Reform

Here is the opening to this interesting editorial from Bloomberg

Call it policy presentation with Chinese characteristics. After the meeting of its leadership last week, China's Communist Party issued a muddled communique that aroused no great excitement. Then, on the weekend, well ahead of the usual schedule for such announcements, the party released a longer follow-up statement worth getting excited about.

It's radical stuff -- in principle, if not (yet) in policy. Maybe China's new president, Xi Jinping, aspires to be another Deng Xiaoping after all.

The "Decision on Major Issues Concerning Comprehensively Deepening Reforms" was nothing if not wide-ranging. Tucked inside it were the biggest headlines, so far as many foreign observers are concerned: China's notorious one-child policy is to be softened, and the system of arbitrary confinement to "re-education" in labor camps, a tool of political repression, is to be ended.

Most of the statement, though, is devoted to a comprehensive list of economic and financial reforms. This emphasis is deliberate: "The reform of the economic system is the focus of all the efforts to deepen the all-round reform." Many of the proposals echo the long-standing recommendations of pro-market advocates at home and abroad.

The statement calls for China's financial sector to be liberalized. There will be new private banks, as well as further moves toward exchange-rate flexibility, market-determined interest rates and capital-account convertibility. The blueprint calls for price reforms in water, energy, transportation and telecommunications. Farmers will be given new property rights, including the right of succession and the ability to sell shares in their land or use it as collateral. The system of household registration, which controls workers' movement from countryside to city, will be eased (though curbs on migration to the biggest cities will remain).

David Fuller's view -

Bloomberg's second paragraph above summarises the reaction of numerous China watchers. Many of us hoped for another Deng Xiaoping when Xi Jinping was first appointed. He had more power than his immediate predecessors but the new President obviously did not have Deng's political stature. Consequently he had to negotiate his way and has successfully done so, judging from this abridged 60-point document.



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November 13 2013

Commentary by Eoin Treacy

China Vows Bigger Role for Markets as Party Closes Policy Summit

This article from Bloomberg covers the main points relating to the end of China’s third plenum. Here is a section

China’s leaders are under pressure to revamp the nation’s finances as swelling local-government debt highlights the risk of a buildup of bad loans and state businesses’ access to bank funding crowds out small firms. Today’s document didn’t discuss specific issues such as regional borrowing, interest rates or the one-child policy, while referring generally to giving farmers more property rights.

“It’s going in the right direction is the most you can say,” said Louis Kuijs, chief China economist at Royal Bank of Scotland Group Plc in Hong Kong. “Even though some of the phrasing is new, the ideas are not so new.”

The communique, published by the official Xinhua News Agency, reiterated the role of state ownership while saying development of the non-public sector will be “encouraged.”

That emphasis “probably precludes drastic state-owned enterprise-related reforms,” said Kuijs, who previously worked for the World Bank in China.
 

Eoin Treacy's view -

The announcement following the weekend’s policy summit has underwhelmed markets. This is particularly noteworthy because high level officials had taken such pains to hype the reform agenda ahead of the meeting. What is perhaps most important is that while a greater role for markets has been advocated, nothing specific has been mentioned about reform of the state owned enterprises (SEO) sector. These companies remain the personal fiefdoms of individual party cadres and represent a barrier to greater competition and efficiency. (Also see Comment of the Day on October 29th).



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