China Economy Megathread

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Ccs: Feb 25, 2011

So right now there's 4.88 yuan to 1 CAD, last year it was near 6, and has been going down for the past few years as yuan increases. The CAD recent fall is really what pushed it under 5 it seems. So if I'm planning on living in Canada for the rest of my life, exchanging yuan to CAD now is probably the time do so?

# ? Mar 2, 2016 23:39

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# ? May 21, 2024 04:29

Ceciltron: Jan 11, 2007; Text BEEP to 43527 for the dancing robot!; Pillbug

Ccs posted:

So right now there's 4.88 yuan to 1 CAD, last year it was near 6, and has been going down for the past few years as yuan increases. The CAD recent fall is really what pushed it under 5 it seems. So if I'm planning on living in Canada for the rest of my life, exchanging yuan to CAD now is probably the time do so?

Do it right now you dummy, even if the canadian dollar goes down, you will use it to buy canadian goods during your canadian life.

# ? Mar 2, 2016 23:45

Myriarch: May 14, 2013

Grundulum posted:

The yen seems to be strengthening against both the dollar and the euro. Maybe a sign of something?

The yen is probably undervalued right now simply because Japan is the only country to have gone all in on currency war competitive devaluation while everyone else blinked (likely because the USD exploded at the same time and thats what central bankers care more about). So unless you think Abe is going to try another round of currency war (a significant possibility if he doesn't get voted out) it's probably not a bad idea. The investment climate won't necessarily get better in Japan, but the equilibrium value of the yen should be stronger and there is little bubble risk there.

# ? Mar 3, 2016 00:10

namaste friends: Sep 18, 2004; by Smythe

What's up guys, got some good news about China for you all.

http://on.ft.com/1pbOZgj

quote:

Chinese exports fell by far more than expected last month, and when measured in renminbi terms by the most on record.

Exports fell 25.4 per cent year-on-year in February in US dollar terms, compared to the 14.5 per cent drop economists were expecting and a 11.2 per cent drop the previous month.

That is only a nudge over the worst slump on record, in May 2009, when exports contracted 26.4 per cent.

Imports fell 13.8 per cent, also worse than the 12 per cent economists were expecting but less than the 18.8 per cent drop in January.

When measured in renminbi terms, however, exports fell by a record low, of 20.6 per cent compared to the 11.3 per cent slump economists were expecting and a 6.6 per cent drop in January. Imports fell 8 per cent, slightly better than the 11.7 per cent economists were expecting and less than the 14.4 per cent drop in January.

lol whoops I mean bad news

# ? Mar 8, 2016 07:19

Zarin: Nov 11, 2008; I SEE YOU

Cultural Imperial posted:

What's up guys, got some good news about China for you all.

http://on.ft.com/1pbOZgj

lol whoops I mean bad news

I'd wonder if looking at Chinese exports could be a leading indicator of the health of the global economy (or, at least, the US), but May 2009 was already deep into the recession. If China is hitting May 2009 numbers and we aren't panicking, then it probably doesn't work as a litmus test for the rest of the world.

Have we really spread our production across enough countries that China doesn't move the needle a whole lot on consumer goods anymore?

# ? Mar 8, 2016 08:35

Tupperwarez: Apr 4, 2004; "phphphphphphpht"? this is what you're going with?

you sure?

Zarin posted:

I'd wonder if looking at Chinese exports could be a leading indicator of the health of the global economy (or, at least, the US), but May 2009 was already deep into the recession. If China is hitting May 2009 numbers and we aren't panicking, then it probably doesn't work as a litmus test for the rest of the world.

Have we really spread our production across enough countries that China doesn't move the needle a whole lot on consumer goods anymore?

I work in shoes, and most of the work has been shifted to Vietnam, with some operations in India/Bangladesh. The same goes for some types of apparel as well. Not sure about consumer electronics though, pretty sure that Shenzhen is still the big swinging dick for electronics assembly.

# ? Mar 8, 2016 08:40

Myriarch: May 14, 2013

The other thing is that all those commodity based countries used to use the money they got from selling commodities to China to buy Chinese goods, and that isn't happening anymore.

# ? Mar 8, 2016 08:45

icantfindaname: Jul 1, 2008

I guess China thinks it can simply avoid Japan's fate by just posting fake GDP numbers and hoping nobody notices?

Myriarch posted:

The other thing is that all those commodity based countries used to use the money they got from selling commodities to China to buy Chinese goods, and that isn't happening anymore.

India, Bangladesh, Vietnam, etc, aren't commodity export countries and never have been

Zarin posted:

I'd wonder if looking at Chinese exports could be a leading indicator of the health of the global economy (or, at least, the US), but May 2009 was already deep into the recession. If China is hitting May 2009 numbers and we aren't panicking, then it probably doesn't work as a litmus test for the rest of the world.

Have we really spread our production across enough countries that China doesn't move the needle a whole lot on consumer goods anymore?

Pretty much. I think most of the export products that are crashing are basic construction materials one stage up from raw materials, stuff like steel, concrete, etc. China still isn't nearly as heavy on high value manufacturing of electronics, appliances and capital goods as like Japan or Germany are

icantfindaname fucked around with this message at 12:07 on Mar 8, 2016

# ? Mar 8, 2016 12:03

Murgos: Oct 21, 2010

Is there anyway to tell if the last two weeks of apparent semi-stability in the Shanghai Composite Index is due to gov't shenanigans or is it actually quieting down?

# ? Mar 8, 2016 16:46

Freezer: Apr 20, 2001; The Earth is the cradle of the mind, but one cannot stay in the cradle forever.

IMO the Chinese stock marked has been dicked over so thoroughly the government that it has ceased to be a meaninful indicator of anything. Anti-sell laws, huge participation by government funds, trading laws changing on the fly, etc. It's about as reliable an indicator as the official GDP growth figures.

# ? Mar 8, 2016 18:19

CommieGIR: Aug 22, 2006; The blue glow is a feature, not a bug; Pillbug

Freezer posted:

IMO the Chinese stock marked has been dicked over so thoroughly the government that it has ceased to be a meaninful indicator of anything. Anti-sell laws, huge participation by government funds, trading laws changing on the fly, etc. It's about as reliable an indicator as the official GDP growth figures.

At this point the Government saying anything is more likely to induce panic among shareholders and traders.

# ? Mar 8, 2016 18:54

My Imaginary GF: Jul 17, 2005; by R. Guyovich

CommieGIR posted:

At this point the Government saying anything is more likely to induce panic among shareholders and traders.

Not if they say what their intentions are for 5-6 months before they undertake an action. In the civilized, democratic world, we call that 'signaling'

Of course, I don't very much expect Chinese bureaucrats to know how to signal. Hell, just look at how they manage traffic lights:

https://m.youtube.com/watch?v=M2HuoV2S62w

China's economy, run by and for the Communist party and not the people of China.

The solution is clear: down with the party, up with Taiwan's reconquest.

# ? Mar 8, 2016 19:05

menino: Jul 27, 2006; Pon De Floor

My Imaginary GF posted:

Not if they say what their intentions are for 5-6 months before they undertake an action. In the civilized, democratic world, we call that 'signaling'

Of course, I don't very much expect Chinese bureaucrats to know how to signal. Hell, just look at how they manage traffic lights:

https://m.youtube.com/watch?v=M2HuoV2S62w

China's economy, run by and for the Communist party and not the people of China.

The solution is clear: down with the party, up with Taiwan's reconquest.

Yeah that's a great example, point to a municipal example and generalize it to the entire Politburo. You loving hack.

# ? Mar 8, 2016 19:51

Fojar38: Sep 2, 2011; Sorry I meant to say I hope that the police use maximum force and kill or maim a bunch of innocent people, thus paving a way for a proletarian uprising and socialist utopia

also here's a stupid take
---------------------------->

menino posted:

Yeah that's a great example, point to a municipal example and generalize it to the entire Politburo. You loving hack.

Tell me more about the technocratic capabilities of the Chinese Communist Party.

# ? Mar 8, 2016 19:53

menino: Jul 27, 2006; Pon De Floor

Fojar38 posted:

Tell me more about the technocratic capabilities of the Chinese Communist Party.

So you agree pointing to a traffic light to generalize to the capabilities of the party is a good example? Tell me more about not understanding how examples work.

# ? Mar 8, 2016 19:55

StandardVC10: Feb 6, 2007; This avatar now 50% more dark mode compliant

Fojar38 posted:

Tell me more about the technocratic capabilities of the Chinese Communist Party.

It's MIGF. You don't want to die on this hill.

e: that goes for the other guy too

# ? Mar 8, 2016 20:19

My Imaginary GF: Jul 17, 2005; by R. Guyovich

menino posted:

So you agree pointing to a traffic light to generalize to the capabilities of the party is a good example? Tell me more about not understanding how examples work.

Let me explain something to you, menino. This business of political graft requires a certain amount of finesse. The rot starts at the bottom and flows all the way up. Why have one-second traffic lights? Because your city party bosses need to collect bribes to pay to their county party bosses to pay to their district county bosses. Who cares whether the expenditure on the traffic light is sustainable, or whether the infrastructure will be utilized rather than ignored? The money keeps on flowing up, and in China, that's all that matters.

# ? Mar 8, 2016 20:31

menino: Jul 27, 2006; Pon De Floor

My Imaginary GF posted:

Let me explain something to you, menino. This business of political graft requires a certain amount of finesse. The rot starts at the bottom and flows all the way up. Why have one-second traffic lights? Because your city party bosses need to collect bribes to pay to their county party bosses to pay to their district county bosses. Who cares whether the expenditure on the traffic light is sustainable, or whether the infrastructure will be utilized rather than ignored? The money keeps on flowing up, and in China, that's all that matters.

What sort of deep, soul-level boredom do you struggle with on a day to day basis that compels you to spend so much time on crafting an online persona that, despite having its own flimsy internal stylistic logic, is completely wrong about so many issues?

# ? Mar 8, 2016 20:38

icantfindaname: Jul 1, 2008

menino posted:

So you agree pointing to a traffic light to generalize to the capabilities of the party is a good example? Tell me more about not understanding how examples work.

Doesn't the federal/national CCP have very little control over many of the actions of the provincial and local party apparatus? I know Xi's trying to change that but that's how it worked for 40 years as far as I was aware. Most actual governing and administration is done at that level, and even if the national CCP is competent ( :laffo:

) the local organization out in the boonies isn't. That's a totally real and legitimate critique

icantfindaname fucked around with this message at 20:44 on Mar 8, 2016

# ? Mar 8, 2016 20:42

Murgos: Oct 21, 2010

icantfindaname posted:

Doesn't the federal/national CCP have very little control over many of the actions of the provincial and local party apparatus? I know Xi's trying to change that but that's how it worked for 40 years as far as I was aware. Even if the national CCP is competent () the local organization out in the boonies isn't, and that is a very real and legitimate critique

Roads to nowhere, new buildings that can't support their own weight, entire empty cities.

# ? Mar 8, 2016 20:46

menino: Jul 27, 2006; Pon De Floor

icantfindaname posted:

Doesn't the federal/national CCP have very little control over many of the actions of the provincial and local party apparatus? I know Xi's trying to change that but that's how it worked for 40 years as far as I was aware. Most actual governing and administration is done at that level, and even if the national CCP is competent () the local organization out in the boonies isn't. That's a totally real and legitimate critique

Yeah I agree. But that's a pretty standard Chinese refrain for years: "Tian Gao Huang Di Yuan" the mountains are high and the emperor is far away. Nobody should be basing their opinions of Beijing's forward guidance on markets based on the competency of some local potentate in Guangdong. It's a ridiculous example.

# ? Mar 8, 2016 20:47

OXBALLS DOT COM: Sep 11, 2005; by FactsAreUseless; Young Orc

icantfindaname posted:

Doesn't the federal/national CCP have very little control over many of the actions of the provincial and local party apparatus? I know Xi's trying to change that but that's how it worked for 40 years as far as I was aware. Most actual governing and administration is done at that level, and even if the national CCP is competent () the local organization out in the boonies isn't. That's a totally real and legitimate critique

Yeah the central government is a joke most of the time unless they decide to focus their attention on you in one of the periodic anti-corruption probes they do to try and make the regular people think they're accomplishing something. Then they come in and clean house and straight-up execute people.

# ? Mar 8, 2016 20:49

ocrumsprug: Sep 23, 2010; by LITERALLY AN ADMIN

menino posted:

Yeah I agree. But that's a pretty standard Chinese refrain for years: "Tian Gao Huang Di Yuan" the mountains are high and the emperor is far away. Nobody should be basing their opinions of Beijing's forward guidance on markets based on the competency of some local potentate in Guangdong. It's a ridiculous example.

Can we base our opinions of Beijings forward guidance on markets based on their forward and previous guidance of the market? It doesn't really stack up favourably to the 1 second traffic light tbqh.

# ? Mar 8, 2016 20:50

icantfindaname: Jul 1, 2008

Mange Mite posted:

Yeah the central government is a joke most of the time unless they decide to focus their attention on you in one of the periodic anti-corruption probes they do to try and make the regular people think they're accomplishing something. Then they come in and clean house and straight-up execute people.

But it doesn't actually matter if the central government is competent because they don't actually run most of the country

# ? Mar 8, 2016 20:55

Murgos: Oct 21, 2010

icantfindaname posted:

But it doesn't actually matter if the central government is competent because they don't actually run most of the country

If no one is going to make capital investments in your country because of the policies of your central government then I don't see the difference.

# ? Mar 8, 2016 21:15

Krispy Wafer: Jul 26, 2002; I shouted out "Free the exposed 67"
But they stood on my hair and told me I was fat; Grimey Drawer

icantfindaname posted:

But it doesn't actually matter if the central government is competent because they don't actually run most of the country

It's just odd that a country that controls so many aspects of their citizens' lives has so little control over huge swaths of day to day operations. Tons of effort blocking internet sites or propping up economic vanity projects, very little effort keeping plastic out of milk or making buildings that can withstand minor earthquakes.

# ? Mar 8, 2016 21:28

Fojar38: Sep 2, 2011; Sorry I meant to say I hope that the police use maximum force and kill or maim a bunch of innocent people, thus paving a way for a proletarian uprising and socialist utopia

also here's a stupid take
---------------------------->

Krispy Kareem posted:

It's just odd that a country that controls so many aspects of their citizens' lives has so little control over huge swaths of day to day operations. Tons of effort blocking internet sites or propping up economic vanity projects, very little effort keeping plastic out of milk or making buildings that can withstand minor earthquakes.

The entire thing is one colossal propaganda scam. They build giant useless vanity projects because it's sexy and looks impressive and makes newspapers write "The Chinese Century?" underneath pictures of them. Safely feeding and sheltering people isn't sexy.

# ? Mar 8, 2016 21:29

My Imaginary GF: Jul 17, 2005; by R. Guyovich

Fojar38 posted:

The entire thing is one colossal propaganda scam. They build giant useless vanity projects because it's sexy and looks impressive and makes newspapers write "The Chinese Century?" underneath pictures of them. Safely feeding and sheltering people isn't sexy.

It is to me, god damnit. You should be making your graft off contracting construction to safe food shelters to your family by marriage, not wholesale stealing the cash and building a cement facade with no reinforcement that'll topple over in a 3.0 earthquake.

# ? Mar 8, 2016 21:49

Ccs: Feb 25, 2011

Would that you were a Chinese government policy-maker.

# ? Mar 9, 2016 01:01

Oracle: Oct 9, 2004

My Imaginary GF posted:

It is to me, god damnit. You should be making your graft off contracting construction to safe food shelters to your family by marriage, not wholesale stealing the cash and building a cement facade with no reinforcement that'll topple over in a 3.0 earthquake.

You don't understand Chinese culture. 5000 years of history. Please stop hurting the feelings of the Chinese people.

# ? Mar 9, 2016 19:35

My Imaginary GF: Jul 17, 2005; by R. Guyovich

Oracle posted:

You don't understand Chinese culture. 5000 years of history. Please stop hurting the feelings of the Chinese people.

What's there that I don't understand? Horsearchers came in, kicked Chinese rear end and beheaded local nobility, promoted the middle-managers who actually ran poo poo while intermarrying with 'em, and reformed the bureaucracy until poo poo became stagnant enough that the next set of horsearchers came in and kicked Chinese asd.

# ? Mar 10, 2016 00:05

Fojar38: Sep 2, 2011; Sorry I meant to say I hope that the police use maximum force and kill or maim a bunch of innocent people, thus paving a way for a proletarian uprising and socialist utopia

also here's a stupid take
---------------------------->

My Imaginary GF posted:

What's there that I don't understand? Horsearchers came in, kicked Chinese rear end and beheaded local nobility, promoted the middle-managers who actually ran poo poo while intermarrying with 'em, and reformed the bureaucracy until poo poo became stagnant enough that the next set of horsearchers came in and kicked Chinese asd.

*stares blankly for 40 seconds.*

Did you know that China has 5000 years of history and culture?

# ? Mar 10, 2016 00:07

Mercury_Storm: Jun 12, 2003; *chomp chomp chomp*

Holy poo poo :lol:

# ? Mar 10, 2016 00:24

My Imaginary GF: Jul 17, 2005; by R. Guyovich

Fojar38 posted:

*stares blankly for 40 seconds.*

Did you know that China has 5000 years of history and culture?

No why?

# ? Mar 10, 2016 00:59

WorldsStongestNerd: Apr 28, 2010; by Fluffdaddy

My Imaginary GF posted:

What's there that I don't understand? Horsearchers came in, kicked Chinese rear end and beheaded local nobility, promoted the middle-managers who actually ran poo poo while intermarrying with 'em, and reformed the bureaucracy until poo poo became stagnant enough that the next set of horsearchers came in and kicked Chinese asd.

5000 yrs summed up. The most succinct description of China ever written. Close thread.

# ? Mar 10, 2016 22:36

EasternBronze: Jul 19, 2011; I registered for the Selective Service! I'm also racist as fuck!

Don't forget to ignore me!

Horse Archers are pretty badass if you get Parthian Tactics plus all the Blacksmith upgrades.

# ? Mar 10, 2016 23:28

I would blow Dane Cook: Dec 26, 2008

quote:

Getting Money Out of China: The Reality Has Changed
By Dan Harris on March 10th, 2016 Posted in China Business
China is putting foreign currency outflows under a magnifying glass

China is putting foreign currency outflows under a magnifying glass

Got a call the other day from a U.S. law firm that frequently uses our China lawyers to consult on litigation matters involving Chinese companies. The law firm was initially calling to see about our serving a Chinese defendant in a products liability action.

First thing we did was to tell them how until recently we had a 100% success rate in serving Chinese companies with process via the Hague Convention, but that our strong sense was that �the rules on that had changed.� We explained how China right now is making great efforts to prevent foreign currency from leaving the country and the possibility of a Chinese company losing a lawsuit outside China meant the possibility of foreign currency needing to leave China. And for that reason, we have over the last few months been encountering China service of process issues where none existed previously.

The above is just one of the many ways the rules of conducting business with China (legal business in the above instance) have changed due to China�s efforts to block or at least slow down a foreign currency exodus.

We first wrote about China�s newish foreign currency restrictions in Getting Money out of China: What the Heck is Going on? In that post (written on January 14), we wrote how �in the last week or so, our China lawyers have probably received more �money problem� calls than in the year before that. And unlike most of these sorts of calls, the problems are brand new to us. It has reached the point that yesterday I told an American company (waiting for a large sum in investment funds to arrive from China) that two weeks ago I would have quickly told him that the Chinese company�s excuse for being unable to send the money was a ruse, but with all that has been going on lately, I have no idea whether that is the case or not.�

We then said that the common theme we were detecting was that �China banks seem to be doing whatever they can to avoid paying anyone in dollars.� We then listed how the following examples we were seeing and hearing about :

1. Chinese investors that have secured all necessary approvals to invest in American companies are not being allowed to actually make that investment. I mentioned this to a China attorney friend who says he has been hearing the same thing. Never heard this one until this month.

2. Chinese citizens who are supposed to be allowed to send up to $50,000 a year out of China, pretty much on questions asked, are not getting that money sent. I feel like every realtor in the United States has called us on this one. The Wall Street Journal wrote on this yesterday. Never heard this one until this month.

3. Money will not be sent to certain countries deemed at high risk for fake transactions unless there is conclusive proof that the transaction is real � in other words a lot more proof than required months ago. We heard this one last week regarding transactions with Indonesia, from a client with a subsidiary there. Never heard this one until this month.

4. Money will not be sent for certain types of transactions, especially services, which are often used to disguise moving money out of China illegally. This is not exactly new, but it appears China is cracking down on this. For what is ordinarily necessary to get money out of China for a services transaction, check out Want to Get Paid by a Chinese Company? Do These Three Things.

5. Get this one: Money will not be sent to any company on a services transaction unless that company can show that it does not have any Chinese owners. The alleged purpose behind this �rule� is again to prevent the sort of transactions ordinarily used to illegally move money out of China. Never heard this one until this month.

Then again exactly a month later, we wrote Getting Money out of China by Losing in Arbitration about a company that wanted to use our law firm to plot out a fake U.S. arbitration that it would lose so it could then get a large sum of money out of China as payment on the arbitration award. The Wall Street Journal then interviewed me on this incident for its own story, China Capital Flight 2.0: Lose A Lawsuit On Purpose, which in turn was picked up by the Chinese media and Internet and pretty much went viral from there.

Not much has changed.

Earlier this week, Canada�s National Post did a story, Crackdown on Chinese capital flight �will impact� local real estate, quoting me on how China�s crackdown on foreign currency outflows would necessarily impact the influx of Chinese real estate buyers in Vancouver:

Much of that money was destined for hot West Coast real estate markets from Vancouver to Los Angeles. In Vancouver it�s debated whether President Xi Jinping�s government can stop the flood.

Seattle lawyer Dan Harris �� an expert on facilitating trade with Chinese businesses � said that since January, China has aggressively clamped down on capital flight.

Harris said U.S. realtors are calling his firm more and more often for help in getting cash out of China for luxury home sales that were easily completed in the past.

�That will impact real estate in Vancouver and Seattle,� Harris said in an interview.

�If anyone thinks the Chinese government will not stop people from sending $3 million out to buy a house in Vancouver? Wow. I don�t know what they know that I don�t.�

Harris said Chinese companies seeking to invest in North American real estate started having trouble about three months ago as business transfers were examined more closely.

Yesterday, in Chinese Consumers Race to Buy Dollars as Yuan Slides [subscription is required, but the full article is here in the Australian Business Review] the Wall Street Journal wrote again on how China�s crackdown on foreign currency flows is impacting international business transactions. The article starts out by affirming exactly what our China lawyers have been hearing and been saying: that Beijing is telling China�s banks and others to slow down the foreign currency outflow. In other words, China�s laws on the books have not changed, but its on the ground reality has:

Chinese officials are trying anew to slow an unprecedented money exodus from the country, clamping down on individuals seeking to flee the yuan and making life tougher for companies that need to trade the currency for US dollars to do business.

China�s foreign-exchange regulator in recent months has deployed a new system to monitor individual purchases of foreign funds and has asked banks to reduce foreign-currency transactions.

It has summoned bankers to its offices to give guidance and has grilled them when foreign-exchange activity spikes, according to executives at Chinese and foreign lenders.

Banks, in turn, have increased scrutiny of foreign-currency transactions by businesses ranging from Chinese entrepreneurs investing abroad to companies paying overseas bills.

The article then provides the following examples of companies having troubles due to China�s foreign currency clampdown:

A European chemicals manufacturer (presumably its China WFOE) was delayed in obtaining US dollars in Shanghai, threatening its deadline for an overseas licensing payment.

The Bank of Tianjin is having trouble getting funds from mainland investors for a planned Hong Kong public stock offering.

A water-treatment company struggled to withdraw $US2000 ($2690) for an engineer to travel to the US.

A Chinese company was having problems wiring $US15 million to a Hong Kong company that for two years has been helping the Chinese company buy equipment for a South American factory.

This foreign currency clampdown is apparently working as �economists say tightened capital controls are one reason China�s foreign reserves fell only $US28.6 billion in February, less than a third the drops of the two previous months.�

The WSJ article ended with this fascinating/scary statistic:

�If 5 per cent of China�s 1.4 billion people used their full quotas [USD$50,000 in funds allowed to leave China each year], the $US3.5 trillion in foreign-currency demand would drain its �[China�s] reserves.

China�s new restrictions on foreign currency outflows are literally changing the way our China attorneys practice law in the sense that we now account for this on any transaction that will involve money flowing from China to some other country. I do not want to get specific on what we are doing but I can say that we are now always looking at whether the money can come from somewhere other than China and, equally importantly, we are also always looking to write our contracts so as to minimize China currency blocking triggers.

What are you seeing out there?

http://www.chinalawblog.com/2016/03/getting-money-out-of-china-the-reality-has-changed.html

# ? Mar 11, 2016 08:12

McGavin: Sep 18, 2012

You know what will fix China's economy? Doing what Japan did in the '90s.

quote:

China just made a move to tackle the biggest threat to its economy, and it reeks of desperation

This is usually the last stop before bankruptcy.

Chinese officials have told Reuters that they will start allowing commercial banks to swap nonperforming loans in super-indebted companies for stock.

That move is usually called a debt-for-equity swap.

From Reuters:
The new rules would reduce commercial banks' non-performing loan (NPL) ratios, and free up cash for fresh lending for investment in a new wave of infrastructure products and factory upgrades that the government hopes will rejuvenate the world's second-largest economy.

This is really striking. Nonperforming loans surged to a record high in 2015 of about $614 billion. Unproductive companies in struggling industries � mostly state-owned enterprises (SOEs) � continue to borrow, though, to pay back older loans.

This is dragging down the entire economy, and the government has little choice but to confront it. Until it does, China will not manage its transition from an investment-based economy to one based on domestic consumption. It will have to keep financing itself with debt.

This swap is meant to free up cash that can be invested in increasing productivity. That sounds good, but here's why it also looks desperate.

In 1999
China dealt with overwhelming corporate debt in 1999, about $200 billion worth of it. To solve the problem, the government just created a bunch of "bad banks" � which were really massive asset managers � to restructure the debt and sell it off. In a typical Chinese twist, those firms bought debt from corporates at full value.

That's a pretty sweet deal if you can get it, people.

And for a while that seemed like it was doing OK. Despite everything, the asset managers were able to eke out a profit on the debt through debt-for-equity swaps and other restructuring.

Then that stopped, and now the head of China's biggest bad bank is asking for help because it's drowning in NPLs.

Lai Xiaomin, CEO of China Huarong Asset Management Co., asked for a lifeline at China's National People's Congress this week, according to the WSJ. He's a delegate.

"The depreciating trend of bad assets not only poses a rising risk for asset management companies in acquiring assets, but also increases the difficulty of bad-asset disposal," Lai said.

He told Reuters that he's cheered up by the possibility of these swaps.

Another thing about this is that if it's done properly, then it can't be done in great size. And if there's anything we know about Chinese corporate debt, it's that there is a large quantity of it.

True, by removing nonperforming loans from the books, the move will also free up cash that had been set aside as a buffer in case the loans defaulted. But equity is risky, and banks can't take on too much of that kind of risk.

Here's HSBC (emphasis added) referring to how much could be swapped before capital buffers, or Tier 1 capital, are depleted:

The big 5 banks have 1.8ppt and mid-sized banks have 0.5ppt buffer to capital requirement, assuming they keep Tier-1 at 0.5ppt above required. This implies potential room to do a one-off swap 2.2% and 0.6% of loans in the extreme case of completely depleting Tier-1 ratio buffer.

That's not going to really tackle this problem, but every little bit helps, right?

The Japan structure
Not if it creates a structure that will ultimately do more harm than good. That's what Bank of America analysts are worried about in this case.

Chinese banks aren't legally allowed to own stakes in nonfinancial companies. The government is going to make a special dispensation in this case, but should it?

"By giving banks more 'flexibility' in dealing with their NPLs, we suspect that it may cause a more rapid accumulation of bad debt," the analysts wrote.

"This is using liquidity to paper over solvency issue in our view. As a result, we consider this unconfirmed new policy, if it comes to pass, to be a long term negative for the market, and particularly for banks and the Asset Management Companies (AMCs), aka the bad banks (due to reduced business scope). In the long term, we are also concerned about the potential forming of a banking-industrial complex in China."

Bank of America went on to say that it was a system like this that contributed significantly to the Japanese economy's loss of "vitality." If you know anything about Japan, you'll know that is an understatement.

There's another thing
Swapping debt for equity means that the banks will either be more exposed to China's equity markets, or have illiquid stakes in private companies they'll struggle to get rid of.

The government has never been shy about the fact that it controls the equity market. When China's stock market crashed twice during summer 2015, the government went in and kicked out the short sellers and collected scalps.

Even when stocks are rising, Beijing flexes some control and keeps new issuers from flooding the market.

That said, value is value. Thursday's trading day was a perfect example of this. The government did not intervene in the market toward the end of the day, and the market closed down 2.2% on the news that the government would try to cool property prices in Shanghai for the first time since 2012.

Analysts from Jefferies also blamed another signal of deflation, as the country's producer price index (PPI) came in down 4.9%.

"Either way the key read through from today was that when the market was allowed to trade on fundamentals then support was not apparent, despite the continued optimism towards fiscal support measures," the analysts wrote.

So there is some risk. We have to hand it to the Chinese government for introducing some moral hazard into the equation, but that's what it is � a hazard.

# ? Mar 11, 2016 19:04

Krispy Wafer: Jul 26, 2002; I shouted out "Free the exposed 67"
But they stood on my hair and told me I was fat; Grimey Drawer

McGavin posted:

You know what will fix China's economy? Doing what Japan did in the '90s.

A lost decade is only bad until you look at the alternative. At some point a decade of no-growth sounds better than a deep depression.

# ? Mar 11, 2016 19:23

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# ? May 21, 2024 04:29

Fojar38: Sep 2, 2011; Sorry I meant to say I hope that the police use maximum force and kill or maim a bunch of innocent people, thus paving a way for a proletarian uprising and socialist utopia

also here's a stupid take
---------------------------->

A decade of no-growth means that China is going to have to eat crow regarding a lot of their announced ambitions.

# ? Mar 11, 2016 19:28

The Something Awful Forums > Discussion > Debate & Discussion > China Economy Megathread

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