Posts Tagged ‘China’
China invested $1.5bn in Algeria in a decade
Sunday, April 14th, 2013
China invested $1.5bn in Algeria in a decade (via AFP)
Beijing has invested more than $1.5 billion (1.1 billion euros) over the past decade in Algeria, where 50 top Chinese companies and 30,000 workers are based, media reported on Sunday. By the end of 2012, China’s total investments in the North African country over the past decade reached $1.5 billion…
Tags: Algeria, China, Investment
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China’s Uncertainties Won’t Stop Renminbi’s Rise
Tuesday, April 9th, 2013
by Hayden Briscoe, AllianceBernstein
Recent data releases and the transition to new political leadership have created some uncertainty about China’s short-term economic outlook. While positive growth surprises are unlikely in 2013, we still think nothing can stop the long-term appreciation of China’s currency, the renminbi (RMB).
The reason we expect the RMB to continue to appreciate lies in the strength of the structural, as distinct from cyclical, factors which should continue to support it in the medium to long term. The currency’s prestige, tradability and valuation bolster our expectations that the RMB will:
- Appreciate by 2%?3% a year on average, just to keep pace with the country’s persistent trade surpluses, and by up to 5% a year once economic rebalancing is factored in
- Become fully convertible by the time the current five-year economic plan expires in 2015—much faster than widely expected
- Emerge as a core reserve currency, especially in the Asia-Pacific region and other emerging markets
China is the second-largest economy in the world. It’s also one of the most dynamic, with the gap between the Chinese and US economies in purchasing power parity terms expected to close in just a few years (Display). Global trade flows don’t yet reflect this reality and continue to be settled mostly in US dollars.
But there are signs of change. In July 2010, the Chinese government began a move to internationalize the currency by opening an offshore currency (CNH) market based in Hong Kong. Taiwan followed recently, and Singapore and London are next on the list. This will help facilitate RMB trade settlements in time zones around the world.
The proportion of China’s global trade settled in RMB has grown to 11% and continues to rise. China’s banks are supporting the trend through the provision of trade finance: letters of credit denominated in the onshore currency (CNY) now account for the third-largest share of the global total, behind US dollars and euros and ahead of yen. By 2015 one-third of China’s exports are likely to be denominated in RMB, with annual trade-settlement volume expected to hit nearly US$2 trillion, according to HSBC.
RMB-denominated trade flows are increasing in strategically important markets, in Africa and Latin America in particular. They’re also rapidly becoming institutionalized. To date, 20 central banks have agreed on CNY swap lines with the People’s Bank of China (PBOC) totaling RMB2 trillion or US$320 billion.
Portfolio flows are another potential driver of the RMB’s internationalization, as China’s capital markets open up. For example, the Chinese government bond market is capitalized at around US$2.5 trillion. It’s the third largest in the world, equivalent to the German and French bond markets combined. If included in a traditional bond index, investors would be forced to commit 10%?12% of their fixed-income allocation to Chinese government bonds. This, together with the continuing strength of overseas direct investment into China, further facilitates the RMB’s internationalization.
We expect China will do what it can to make full internationalization of the currency a reality. This will include maintaining the RMB’s credibility as a steadily appreciating currency. Given that the RMB’s appreciation sharply lags the US$2.5 trillion growth in China’s foreign exchange reserves since 2005 (Display), we think this is a realistic goal.
The RMB already fulfills two of the three criteria necessary to become a reserve currency—the size of the underlying economy and the credibility of the currency itself. It is progressing steadily towards fulfilling the third criteria, which is openness and financial-market depth. Internationalizing the currency is one of the goals under the country’s five-year plan and, in early September 2012, Dai Xianglong, a former PBOC governor, said that China could liberalize its capital account as early as 2015. While the precise timing will depend somewhat on global economic and financial-market conditions, we think the RMB is likely to be internationalized much faster than widely expected.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Hayden Briscoe is Director—Asia-Pacific Fixed Income at AllianceBernstein
Copyright © AllianceBernstein
Tags: China, Currency, Yuan
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Emerging Markets: Proceed with Caution (Gibley)
Thursday, April 4th, 2013
April 3, 2013
by Michelle Gibley, CFA, Director of International Research, Schwab Center for Financial Research
Key points
• Emerging markets have great promise—but we see constraints on future growth in large EM economies, and stocks have underperformed recently.
• Meanwhile, inflation is stubbornly high in several large countries, which could result in monetary tightening that further slows growth.
• We are cautious on emerging markets as an asset class, and see better opportunities in developed markets such as Europe and Japan.
The large emerging-market economies of Brazil, China and India have run into growth, inflation, and structural challenges. Combine that with a potential peak in commodity prices that could damage heavy commodity exporters such as Brazil, South Africa, Russia, Indonesia and Chile, and we see reason to be cautious on emerging markets (EM) as an asset class.
High economic growth doesn’t assure strong stock performance
Just five years ago, emerging markets, including the BRIC sub-group (Brazil, Russia, India and China) showed great promise. Chinese and Indian incomes were growing; Brazil and Russia boasted abundant and valuable natural resources; and low government debt and high levels of foreign exchange reserves in many emerging markets seemed to pave the way for rapid growth.
Emerging-market growth steps down
Source: FactSet, IMF. Estimates used after vertical line are as of Oct. 2012, World Economic Report database.
Unfortunately, growth rates have taken a noticeable step down, and emerging-market stocks have underperformed over the past two years. Some investors have held on to emerging-market allocations on the premise that the growth outlook for these countries remains above that in the developed world.
Paradoxically, higher economic growth doesn’t always equate to the best investment returns—academic research suggests no clear correlation. While stronger economic growth creates the potential for greater sales growth, high earnings per share and dividend growth don’t necessarily follow. Profits can suffer if wages rise faster than productivity increases. Weak corporate governance can reduce returns when profits are expropriated rather than passed along to shareholders. Additional capital can be needed to sustain high growth, which can reduce shareholder returns.
The role of expectations and valuations is also very important. High growth expectations can be accompanied by high valuations, resulting in future underperformance—the good news is priced in. We believe that missed growth expectations in emerging markets are the likely culprit for the underperformance over the past two years.
Emerging market growth may have difficulty improving
So are expectations now low enough to get in? We view valuation as an important basis for future performance, but not the only factor. We are cautious on emerging markets (EM) as an asset class due to growth constraints for 60% of the weight in the universe, as defined by the MSCI Emerging Market Index. We believe addressing these constraints could involve difficult transformations or decisions by policymakers in the largest countries.
• A combination of stagflation and structural issues in the large emerging market economies of Brazil, China and India, which represent 40% of the MSCI Emerging Market Index.
• Commodities are potentially peaking, which represents roughly 20% of the MSCI Emerging Market Index, excluding Brazil (included above).
China: Still growing, but sources are suspect
Construction spending has been the primary driver of China’s economic growth in recent years, but it was fueled by a massive issuance of debt, which grew at 30% of GDP for four straight years. That rate of growth can’t continue forever, so we think property and infrastructure construction will likely slow from the rapid pace of the past. Additionally, the overhang of debt could result in a credit crunch that reduces growth for the overall economy.
China’s government is trying to transition to a more consumer-led economy, which will likely be an eventual positive for consumer spending—but we could see policy mistakes and uneven economic progress along the way. It’s much harder for a government to control consumer spending than it is to order new infrastructure construction or command a state-owned company to build another factory. Wages are rising, which benefits consumers, but sales and labor productivity are slowing, constraining corporate profits. Corporations have had difficulty with pricing power.
Additionally, China has a host of challenges related to the growth of its shadow banking sector. See more in “China’s Hidden Risks: Shadow Banking and US Delisting” and “Avoid China – Subprime-Like Bubble Brewing.”
China’s debt-fuelled growth potentially unsustainable
Source: FactSet, People’s Bank of China, Bloomberg. In current dollars using the December 31, 2012 exchange rate. Total credit as measured by total social financing. As of January 29, 2013.
Brazil: Stressed consumers and government bureaucracy
Brazil’s economy relies heavily on consumers, who represent 60% of GDP—and right now, consumers are challenged by inflation and high levels of household debt.
Inflation in Brazil accelerated to 6.3% in February and has exceeded the central bank’s 4.5% target for more than two years. The country’s tight labor market could further propel inflation. With flagging productivity gains and low unemployment, employers won’t find it easy to get more productivity out of the existing workforce or hire lower-wage workers—which means that rising wages may be next. This is good for workers, but often leads to accelerating inflation.
Additionally, the rapid growth in consumer credit that helped to fuel Brazil’s economy in recent years may now be waning. Brazil’s households spend roughly 20% of their disposable income servicing debt, compared to 14% at the peak for the US consumer in 2007, according to Capital Economics. With consumers spending so much money servicing debt, there’s little disposable income left over for new consumption.
Brazil’s consumers are tapped out on credit
Source: FactSet, Banco Central do Brasil, Bloomberg. As of March 15, 2013. *Household debt is the sum of consumer loans outstanding and housing loans outstanding.
On the business side, government bureaucracy and increased interference in the private sector has created a difficult operating environment—particularly for the two largest stocks in the Bovespa Index, as well as utilities and banks. For example, the government limited the price Petrobras could charge for petrol fuel in order to dampen inflation—but this reduced profits for the oil company. Meanwhile, Brazil’s central bank has pursued a somewhat volatile monetary policy. It has overshot at times, creating volatility in both growth and inflation, and has instituted controls that limit foreign investment.
India: Reforms needed, but hopes fading
Economic growth in India has roughly halved from the 9-10% range in the late 2000s to a 4.5% annualized rate as 2012 ended, well below the country’s 8% growth goal. From a funding perspective, India suffers from both a large fiscal deficit and the need for foreign investment due to low savings rates. Therefore, reforms to reduce fiscal spending and attract investment are important to reinvigorate growth.
India’s fiscal deficit expected to worsen before it improves
Source: FactSet, Bloomberg, India Central Statistical Organization. Estimates used after vertical line are provided by India Central Statistical Organization. As of March 15, 2013.
The fiscal budget released in February 2013 was a disappointment for investors hoping for reforms. The budget projected optimistic revenue increases and placed a greater tax burden on corporations, but lacked reforms to spending, preserving populist measures such as costly fuel, food and fertilizer subsidies. Reforms to open the economy to competition announced in 2012 were a positive first step, but momentum has stalled and the possibility of progress ahead of elections in April 2014 is fading.
Meanwhile, inflation is stubbornly high due to swings in food prices, which constitute a large portion of consumer spending. This volatility is the result of supply bottlenecks that stem from insufficient power and warehouse facilities, low agriculture yields, an inefficient public food-distribution system and dependence on the unpredictable monsoon season for irrigation.
Commodity prices may be peaking
As emerging-market economies continue to build out infrastructure and housing, they’ll support demand for commodities such as industrial metals and construction materials. However, the pace of demand growth is likely to slow. China constitutes 40% of demand for many commodities right now, and we expect slower growth in future demand from China as construction of infrastructure and property slow. We don’t see any countries that could replace China as a major commodities consumer—both Brazil and India are potential candidates, since they appear to need large investments in infrastructure, but government bureaucracies and lack of funding are barriers to progress.
Revenues for commodity producers are a function of both demand (where we expect slower volume gains) and prices. Prices of some commodities may have difficulty increasing, as demand growth in the past was met with significant increases in supply. Stagnant commodity revenues could be a challenge to economic growth for the commodity-oriented emerging economies of Brazil, South Africa, Russia, Indonesia and Chile.
Commodity prices have yet to gain traction
Source: FactSet, Commodity Research Bureau. As of March 15, 2013.
Monetary policy may tighten
In Brazil, central bank chief Alexandre Tombini said in February that he was “uncomfortable” with current inflation levels and that the bank will not hesitate to raise rates. At its March 6 meeting, the central bank removed the language (used since October) that it would maintain monetary policy for a “prolonged period of time,” suggesting it has shifted its priority from encouraging growth to fighting inflation. Brazil was the first major emerging-market country to ease in August of 2011, and its moves could be reflective of broader trends.
Inflation still a concern in Brazil and India
Source: FactSet, IBGE, Indian Ministry of Labor. As of March 15, 2013.
In China, Governor Zhou of the People’s Bank of China (PBoC) noted in March that China should be on “high alert” as inflation could accelerate later this year. As a result, monetary policy in China is now in “neutral” territory, and the next move for the PBoC is more likely to be tightening than easing.
Attractive valuations, but disappointing earnings
In a fourth straight quarter of disappointing results, more than 59% of companies in the MSCI BRIC Index reported quarterly earnings that trailed analyst estimates, while profits rose less than 1%, according to Bloomberg. Earnings estimates for emerging markets may still be overly optimistic, as economic growth continues to come in below expectations.
Consumers in some countries (such as Brazil) and other borrowers (such as local governments in China) appear tapped out on credit, and without credit to help fuel consumption we may see slower economic growth. Additionally, rising labor costs in many emerging markets could put a damper on corporate profits. While valuations appear attractive relative to historical averages, lower growth and potentially unmet estimates will likely necessitate lower valuations until these trends turn around.
Investment implications
As long as China’s economic reacceleration continues, emerging-market investments could benefit in the short term. However, we believe longer-term investors may want to consider re-orienting international exposure away from China and emerging markets and toward developed international markets. Earnings in non-US developed markets such as Europe and Japan have been cut quite dramatically, and economic data has shown steady (albeit modest) improvement. Additionally, valuations in Europe and Japan look low relative to historical averages, so stocks in these markets could be a relative bargain.
***
Important Disclosures
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers are obtained from what are considered reliable sources. However, accuracy, completeness or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 21 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.
The MSCI BRIC Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the following four emerging market country indices: Brazil, Russia, India and China.
The Bovespa Indexis comprised of the most liquid stocks traded on the Sao Paulo Stock Exchange, and serves as the main indicator of the Brazilian stock market’s average performance.
Copyright © Charles Schwab and Co.
Tags: Brazil, BRIC, BRICs, China, Emerging Markets, India, Russia
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Why China is Tunneling a Mind-Boggling 800 Miles in 2 Years
Friday, March 22nd, 2013
by Frank Holmes, U.S. Global Investors
Would it surprise you to discover that China is planning to add 800 miles to its subway system over the next two years? That’s the distance equivalent to building a network from Dallas to Chicago in less time than the U.S. Congress can resolve a budget!
In 2015, when the infrastructure build-out is complete, China’s subway track alone will be a mind-boggling 1,900 miles, according to JP Morgan.
The Asian giant has been in the midst of constructing the world’s largest transportation system, laying mile after mile of high-speed rail and subway track. According to the World Metro Database, Beijing and Shanghai currently have the longest metro and subway systems, with about 275 miles each. The city of Guangzhou in China also falls in the top 10, with 144 miles of rail, beating Paris’ network length of 135 miles.
This ambitious program is part of the pragmatic solution to help 1.3 billion residents move around the country efficiently and reduce the increasing problem of air pollution due to car emissions in big cities including Beijing.
The circulating reports and photos of Beijing’s smog have recently become a dark cloud hanging over the country’s remarkable achievements, but it’s not a new issue. In the winter, smog conditions can seem much worse. Pollutants tend to linger when the air is heavier and colder compared to lighter, warmer air during the summer. In addition, the city is located near the Gobi Desert and has always been subject to sand and dirt storms, even back in the days when it was called Peking.
The U.S. experienced similar sand storms during the Dust Bowl in the 1930s, which caused catastrophic ecological and agricultural damage to the American prairies and made the economic impact of the Great Depression much worse. Sixty-five percent of the topsoil was blown away and millions of people were left homeless.
Industrialization in Beijing has certainly aggravated the matter, but Beijing is not the first city suffering from its horrible haze. The London smog of 1952 caused 12,000 total deaths, resulting in the Clean Air Act of 1956, and according to the U.S. Environmental Protection Agency, Manhattan suffered particularly poor air quality in the 1960s, affecting the eastern edge of the U.S.
Because of the government’s concerted effort to encourage consumption and help its residents achieve a higher standard of living in previous five-year plans, new cars congested the roads as fast as they were paved. Over the past decade, sales accelerated from less than 5 million vehicles in 2002 to nearly 20 million in 2012. About 114 million automobiles are now registered to Chinese residents, with ownership exceeding 1 million across 17 Chinese cities.
As we’ve discussed many times, the country is also the world’s largest energy consumer, with a huge dependence on fossil fuels, especially coal. You may think that the country’s use of coal would be the single largest factor driving air pollution, but, in Beijing, emissions from vehicles make up a bigger percentage. One-fifth of the fine particulate matter, which is made up of nitrates and sulfates, organic chemicals, metals and dust particles, comes from automobile and truck emissions in the city, according to JP Morgan. Across the entire country, automobiles cough out 27 percent of total nitrogen oxide emissions.
With residents dealing with increasing cancer-causing pollutants and vehicle congestion on roads, public discontent is rising, “adding particular urgency to causes such as environmental protection and public sector reform,” says JP Morgan.
China’s government policies were already addressing air pollution by “requiring thermal power plants to install desulphurization systems and progressively increasing vehicle-emission standards,” according to the research firm. As one recent example, last May, I discussed Beijing’s additional subsidies devoted to energy-efficient products, including fuel efficient cars, LED lighting, and high-efficiency motors.
This year, leaders appear ready to continue these environmental priorities. In comparison to last year’s budget, a larger portion of government spending will go toward environmental programs. While other areas will see a decrease in spending compared with last year, spending on environmental protection is projected to grow nearly 19 percent, says JP Morgan.
With a concrete plan and a budget in place, it all boils down to execution and enforcement. And in March, the once-in-a-decade transfer of power became official, as the National People’s Congress in China elected Li Keqiang as premier and Xi Jinping as president.
Xi now holds the three most powerful titles in elite Chinese politics: the Secretary General of the Party, the Chairman of Military Commission and President of the Nation. This “triple-power strength” positions him as an ideal reformer for China. He may likely have little interference from former leaders, giving him a freer hand to tackle some of the growth challenges in China today, including reforms to improve environmental protection.
We look forward to watching these leaders in action.
Copyright © U.S. Global Investors
Tags: 800 miles, China, subway
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China’s Next Stop
Monday, March 18th, 2013
China’s Next Stop
March 15, 2013
By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors
Would it surprise you to discover that China is planning to add 800 miles to its subway system over the next two years? That’s the distance equivalent to building a network from Dallas to Chicago in less time than the U.S. Congress can resolve a budget!
In 2015, when the infrastructure build-out is complete, China’s subway track alone will be a mind-boggling 1,900 miles, according to JP Morgan.
The Asian giant has been in the midst of constructing the world’s largest transportation system, laying mile after mile of high-speed rail and subway track. According to the World Metro Database, Beijing and Shanghai currently have the longest metro and subway systems, with about 275 miles each. The city of Guangzhou in China also falls in the top 10, with 144 miles of rail, beating Paris’ network length of 135 miles.
This ambitious program is part of the pragmatic solution to help 1.3 billion residents move around the country efficiently and reduce the increasing problem of air pollution due to car emissions in big cities including Beijing.
The circulating reports and photos of Beijing’s smog have recently become a dark cloud hanging over the country’s remarkable achievements, but it’s not a new issue. In the winter, smog conditions can seem much worse. Pollutants tend to linger when the air is heavier and colder compared to lighter, warmer air during the summer. In addition, the city is located near the Gobi Desert and has always been subject to sand and dirt storms, even back in the days when it was called Peking.
The U.S. experienced similar sand storms during the Dust Bowl in the 1930s, which caused catastrophic ecological and agricultural damage to the American prairies and made the economic impact of the Great Depression much worse. Sixty-five percent of the topsoil was blown away and millions of people were left homeless.
Industrialization in Beijing has certainly aggravated the matter, but Beijing is not the first city suffering from its horrible haze. The London smog of 1952 caused 12,000 total deaths, resulting in the Clean Air Act of 1956, and according to the U.S. Environmental Protection Agency, Manhattan suffered particularly poor air quality in the 1960s, affecting the eastern edge of the U.S.
Because of the government’s concerted effort to encourage consumption and help its residents achieve a higher standard of living in previous five-year plans, new cars congested the roads as fast as they were paved. Over the past decade, sales accelerated from less than 5 million vehicles in 2002 to nearly 20 million in 2012. About 114 million automobiles are now registered to Chinese residents, with ownership exceeding 1 million across 17 Chinese cities.
As we’ve discussed many times, the country is also the world’s largest energy consumer, with a huge dependence on fossil fuels, especially coal. You may think that the country’s use of coal would be the single largest factor driving air pollution, but, in Beijing, emissions from vehicles make up a bigger percentage. One-fifth of the fine particulate matter, which is made up of nitrates and sulfates, organic chemicals, metals and dust particles, comes from automobile and truck emissions in the city, according to JP Morgan. Across the entire country, automobiles cough out 27 percent of total nitrogen oxide emissions.
With residents dealing with increasing cancer-causing pollutants and vehicle congestion on roads, public discontent is rising, “adding particular urgency to causes such as environmental protection and public sector reform,” says JP Morgan.
China’s government policies were already addressing air pollution by “requiring thermal power plants to install desulphurization systems and progressively increasing vehicle-emission standards,” according to the research firm. As one recent example, last May, I discussed Beijing’s additional subsidies devoted to energy-efficient products, including fuel efficient cars, LED lighting, and high-efficiency motors.
This year, leaders appear ready to continue these environmental priorities. In comparison to last year’s budget, a larger portion of government spending will go toward environmental programs. While other areas will see a decrease in spending compared with last year, spending on environmental protection is projected to grow nearly 19 percent, says JP Morgan.
With a concrete plan and a budget in place, it all boils down to execution and enforcement. And this week, the once-in-a-decade transfer of power became official, as the National People’s Congress in China elected Li Keqiang as premier and Xi Jinping as president.
Xi now holds the three most powerful titles in elite Chinese politics: the Secretary General of the Party, the Chairman of Military Commission and President of the Nation. This “triple-power strength” positions him as an ideal reformer for China. He may likely have little interference from former leaders, giving him a freer hand to tackle some of the growth challenges in China today, including reforms to improve environmental protection.
We look forward to watching these leaders in action.
China: Beyond the Miracle (Larry Kantor)
Sunday, March 10th, 2013
by Larry Kantor, Head of Research, Barclays,
China has become a key locomotive for global growth, in many ways taking over the role traditionally played by the United States in business cycles. It is now the world’s second largest economy, and has grown much faster than any other major economy over the past couple of decades. China’s role as a key driver of global growth brings with it increased scrutiny by investors and economists: a significant slowdown in China – never mind a collapse – would have significant implications for economies and financial markets around the world. This was most recently seen in 2012, when slower economic growth – fostered in large part by policy tightening to alleviate inflation pressures and structural imbalances – generated fears of a “hard landing” that served as a headwind to financial market performance for much of last year.
The extremely rapid growth in China – as welcome as it has been during an otherwise disappointing recovery from the Great Recession – represents the first stage of development in the evolution of the economy from closed to open, from fully controlled to market, and from agrarian to industrial. This initial stage is already giving way to a new phase of slower, more sustainable growth, with different drivers. It is critical for the global economy and financial markets that China’s transition is managed in a way that allows the necessary adjustments to happen gradually and without de-stabilizing effects.
The Beyond the Miracle series – written by Barclays Yiping Huang, Jian Chang and Steven Lingxiu Yang and launched in September 2011 – carefully analyzes the transition that China is undergoing from various perspectives, and also discusses the economic and financial market implications. It argues that China will successfully make the transition from ‘economic miracle’ to normal development in the next decade (Chapter 1). But there is an important caveat: China must embark on a multi-pronged set of reforms if the country is to move to a slower, more sustainable growth rate that deemphasizes trade, construction and investment and instead places a greater weight on consumer spending as a source of growth.
Each chapter provides an in-depth analysis of the task at hand – from financial reform (Chapter 2), to housing reform (Chapter 3), to the pivotal role of consumption in rebalancing China’s economy (Chapter 4). For China to avoid becoming a source of inflation in the future, its monetary policy-making, too, will need to be reformed (Chapter 5). China’s ageing population will also mean an end to its surplus of cheap labor, heralding a new era of rapidly rising wages (Chapter 6). In turn, this could put additional pressure on the country’s fiscal outlook, as it seeks to meet growing pension liabilities (Chapter 8).
These challenges notwithstanding, the Beyond the Miracle series is optimistic on the outlook for China. It argues that the Chinese economy is in the middle of a major and broad-based structural transformation that will lead the country to a more sustainable growth potential of 6-8%, from a double-digit pace previously. As China continues to grow and upgrade, its outward direct investment should rise quickly (Chapter 7). And by narrowing the technological gap with the advanced economies, China should be able to avoid the “middle income trap” and graduate to the global high-income group within the next decade (Chapter 9).
China’s Beyond the Miracle series is ambitious, both in scope and depth. Given the critical role now played by China in the world economy and financial markets, I highly recommend it as essential reading for investors, as well as anyone interested in current and future economic and market trends.
Everything you wanted (and need) to know about China but were afraid to ask…
The full 316-page epic series below…
Barclays China Beyond the Miracle – The Complete Series by abcabc123123xyzxyz
Surge In Chinese Exports “More Curse Than Blessing” SocGen Says
Friday, March 8th, 2013
The main news overnight was the Chinese February trade balance, which if the past several years were any indication, would have been a deficit in keeping with the cyclical economic weakness resulting from the Chinese Lunar New Year. Surprisingly, instead of a deficit, as SocGen explains Chinese exports came in massively above expectations in February, while imports were on the weak side. The strength of exports was bewildering, especially when it was, to a large part, a result of strong exports to the G2.
Specifically, China’s exports increased 21.8% in February, massively above expectations of a 8.1% rise, and despite the late timing of the Spring Festival. Hence, export growth in January and February was sharply up to +23.6% from +9.4% in Q4 2012, very much at odds with the lack of improvement in Korean and Taiwanese exports during the same period. China’s export data depicted a very different picture of the global trade from that indicated by others’ figures.
And while exports were soaring, for reasons largely unknown as neither key trading partners US or Europe recorded a spike in Chinese imports, China’s imports contracted a whopping 15.2% Y/Y in February, much more than street estimates of a -8% drop. Combining January and February figures, imports grew 5% yoy, moderately faster than the 2.7% in Q4. The far slower pace of import growth confirms pervasive skepticism toward the Chinese recovery. Import volume growth of many major commodities decelerated.
SocGen summarizes that as a result of the strangely strong exports, China’s trade balance recorded the first February surplus in three years of USD 15.3bn, while forecasters looked for a deficit of -6.9bn. The trade surplus in the first two months was much higher at USD 44.4bn, compared with a deficit of USD 4bn during the same period in 2012, which points to a significant positive contribution from net exports to Q1 GDP growth.
Because while goalseeked Chinese GDP will surely benefit from today’s trade data, in the zero sum trade world, where unlike global monetary easing where at least for now the whole world can have a free lunch (until such time as the bill comes due), China’s GDP gain is its trading partners’ GDP loss. Especially if those partners are desperately crushing their currency with every possible monetary intervention.
Sure enough, SocGen’s conclusion is in line with these thoughts, and explains why today’s superficially bullish data is really quite bearish:
Scepticism towards China’s export data will certainly rise again. The bewilderingly solid export data might be the result of disguised capital inflows, as exporters could overstate export amount in order to move more yuan into the mainland. But we do not want to jump to any conclusion at the moment, as there is no clear evidence to either support or dispute such a statement.
However, if these figures were indeed close enough to the actual situation, we think such strong exports may turn out to be more of a curse than a blessing for China. Against the backdrop of a meagre global recovery and heightened concerns over potential currency wars, China’s bi-lateral trade surplus with the US, as suggested by Chinese data, reached a record high in four years; and China snatched market shares from neighbours. None of these will be the most welcomed development. Particularly, there is evidence that the People’s Bank of China has been intervening to keep the yuan from appreciating.
All this means that with imports due to surge in the coming months, and with rising commodity price inflation on the horizon, the global reflation party has at most a few more months to run before China, once more, is forced to tell the G-7 printers to pull the plug on this latest reflationary effort as it slams China head on (as it did previously in 2011, whose carbon copy 2013 has been so far, to the dot).
As for the US, which is implicitly on the other side of China’s gains, a record high trade surplus with the US, means a record high trade deficit from the side of D.C. – something which means either someone is openly making up data, or that Q1 GDP in the US is about to be hit with a sledgehammer following a surge in the March trade deficit.
Out With the Dragon In With the Snake (Holmes)
Monday, February 11th, 2013
Out With the Dragon In With the Snake
02/08/2013
By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors
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During this Chinese New Year, more than a billion people will be welcoming in the Year of the Black Water Snake, celebrating with family and friends all week long. The previous Year of the Black Water Snake was in 1953, which was when China launched its first Five-Year Plan and the average annual income for a family in the U.S. was about $4,000.
As the Dragon took its last breath of the year, it exhaled plenty of fire into China: Looking at year-over-year data as of the end of January, new bank loans, passenger car sales and exports all rose while inflation was slightly lower. Imports of key commodities we track, crude oil, aluminum and copper, were also exceptional, with month-over-month increases of 6 percent, 4 percent and 3 percent, respectively.
Increasing money supply and easing policy in China have also helped to breathe life back into China’s equity market. Below is an update of the chart we showed Investor Alert readers back in October when the venomous sentiment toward China was at extreme levels. We believed Chinese stocks were significantly undervalued compared to emerging markets and that its equities were due for a rebound. I indicated that an increase in money supply would be the needed oxygen for an equity resurgence.
Over 2013, we expect the government to continue its accommodative efforts, which should reinforce the equity rally. In addition, the new pyramid of power is focused on growth, as it seeks to improve and reform policies that will provide its residents with opportunities and social security, increase incomes and raise standards of living, which should encourage domestic consumption.
Growth is set to be considerable over the next several years: Jefferies Equity Strategy team anticipates that China’s GDP will grow at a compound annual growth rate of 6.9 percent and by 2025, will almost equal that of the U.S.
In addition, China’s GDP per capita is projected to climb to about $18,000 on a purchasing power parity and domestic consumption is likely to make up a larger portion of its GDP, jumping from about 49 percent in 2012 to 73 percent of GDP by 2025, says Jefferies.
To achieve these goals, there needs to be significant reforms to promote a “new urbanization.” While China has been anticipating the rise of urbanization by building out the country’s infrastructure of medical services, housing, water, high speed rail system, and roads, the mobility of many residents remains restricted by its internal residence status, called the hukou (pronounced “who-cow”).
First put into place in 1958, the hukou system was a means of controlling migration throughout the country. It designates where a person or household may reside by geographic area. According to J.P. Morgan’s Jing Ulrich, “the system’s primary function was to maintain a sufficient agricultural labor force, while preventing excessive strain on urban resources.”
Under this registration system, if a resident does not have an urban hukou, the family has no access to social benefits such as free education, health care and pensions that are provided to permanent residents of that city.
Tags: China, Chinese Stocks, year of the snake
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India’s African “Safari”
Tuesday, December 4th, 2012
Submitted by Sudha Ramachandran via The Diplomat,
Although its interests in the continent are broadly similar, India’s engagement with Africa differs significantly from China. Will it prove sustainable?
India’s engagement with Africa has grown remarkably over the past decade.
Trade with Africa jumped from U.S. $3 billion in 2000 to $52.81 billion in 2010-11 and is expected to exceed $90 billion by 2015. India has emerged as Africa’s fourth largest trade partner, after the European Union, China and the United States. Its cumulative investment in the continent exceeded $35 billion in 2011 in industries diverse as energy, pharmaceuticals, agriculture and telecommunications.
Close ties between India and Africa are not new. Trade has flourished between East Africa and India’s west coast for centuries. India also supported Africa’s struggle against colonial rule and apartheid, and its freedom movement inspired the anti-colonial struggles of African countries, Ruchita Beri, an expert on India-Africa relations at the Institute for Defence Studies and Analyses (IDSA) in New Delhi told The Diplomat. Throughout the 1960s and 70s, India worked closely with the newly liberated African countries to forge common positions on global issues.
However, New Delhi’s interest in Africa waned in the 1990s. With the end of the Cold War, India was preoccupied with mending relations with the West and establishing ties with the newly independent former Soviet republics in Central Asia. As a result Africa moved to the margins of India’s foreign policy.
Rapid economic growth and soaring energy requirements, however, forced India at the turn of the new millennium to rethink its neglect of Africa.
India imports 70% of its oil, much of it from the politically volatile Middle East. Finding new suppliers to diversify its oil sources is crucial to its energy security and Africa is an attractive option.
Besides oil, Africa is rich in gold, diamonds, platinum, copper, manganese and uranium. India’s diamond-cutting industry – the world’s largest – depends on rough diamonds from Africa, while uranium in Niger, Uganda and Tanzania is vital for India’s nuclear power industry.
There are other reasons too for India’s renewed interest in Africa. Africa is rich in votes at the UN General Assembly, which India needs when it pushes for a seat in the Security Council. Realization of its strategic ambitions too hinge on cooperation with Africa. India is keen to assert its naval power across the Indian Ocean from Africa’s east coast to the western shores of Australia. This has prompted it to step up naval cooperation with Africa’s Indian Ocean littorals like Seychelles, Mauritius and Madagascar. Tackling problems like piracy off Somalia’s coast too requires India to work with Africa.
India’s interest in Africa is thus multifaceted although its focus is on the economic dimension.
Historically, India was active in Africa’s Anglophone countries and in East Africa. It was the large Indian diaspora in countries like Kenya, Tanzania and Mauritius that facilitated close economic relations. Over the past decade, however, India is looking beyond East Africa. With oil and other natural resources emerging as key drivers of its engagement, West Africa and South Africa are the focus of its attention. Nigeria’s immense oil wealth has contributed to its emergence as India’s top trading partner in Africa, accounting for roughly 30% of India’s trade with the continent.
India’s imports from Africa consist mainly of primary commodities (91% of its imports from Africa in 2010). Oil accounts for 61% of Africa’s exports to India. The continent also provides a market for India’s manufactured goods – over two-thirds of African imports from India are manufactured goods such as pharmaceuticals, machinery and transport equipment.
The domination of oil and natural resources in India’s imports from Africa and of manufactured goods in its exports to the continent has drawn criticism that India is indulging in a “neo-colonial grab” for Africa’s resources. Critics liken its trade with Africa to that which the European powers engaged in with their colonies.
“This is an uninformed view,” argues HHS Viswanathan, a distinguished fellow at the Observer Research Foundation in New Delhi and India’s former ambassador to Nigeria and Cote d’Ivoire. “Africa of today is not the same as during colonial times. When countries exploit the resources of Africa today, the terms are set by the African nations and not by outsiders. The deals are mutually beneficial.”
Echoing this view, IDSA’s Beri said that India’s relationship with Africa is “not a one-way street,” with benefits flowing to one side only. “India is sharing its own development experience with Africa,” she said. It was its services sector that spurred the Indian economy and India is now helping Africa achieve a similar growth by building its services sector.
“Capacity building is an important component of India’s engagement of Africa,” says Aparajita Biswas, head of the Department of African Studies at the University of Mumbai. India is supporting institutional capacity building at the pan-African, regional and bilateral levels. It is setting up scores of institutions in areas as diverse as food processing, agriculture, textiles, weather forecasting and rural development. A pan-African e-network linking schools and hospitals across Africa with top institutions in India will make Indian expertise in healthcare and education accessible to the African people.
Illustrating the mutually beneficial nature of India’s ties with Africa, an official in India’s Ministry of External Affairs (MEA) drew attention to training in diamond cutting, polishing and grading that India is providing to the people of Botswana. “While India’s diamond cutting industry has benefitted from Botswana’s diamond roughs, India is enabling Botswana to move up the value chain in the diamond business,” he pointed out.
Similarly, while Africa provides a major market for India’s pharmaceutical industry – 14% of India’s $8 billion pharmaceutical exports in 2009 went to Africa, “the role it has played in controlling the spread of HIV/AIDS and other diseases by making treatment affordable cannot be ignored,” the official said. Besides pharma companies like Ranbaxy are not just selling to Africa but have set up production facilities there.
India’s investments in African land have drawn criticism too. It has been accused of engaging in a “land grab,” especially in Ethiopia where Indian companies like Karturi Global, one of the world’s largest exporters of roses, have leased vast tracts of land to cultivate cash crops. This could undermine Africa’s food security, critics charge.
“Land grab is too strong a term” to describe Indian companies’ cultivation on Africa’s land, counters Viswanthan, “So far, the projects have benefitted both parties,” he says. However, he cautions that such projects have to be “constantly monitored for any adverse effects on local food security.”
Parallels are often drawn between India and China’s African “safaris.” Indeed, their trade with Africa has grown at similar rates; India’s at a compounded annual growth rate of 24.8% and China’s at 26.3%. More importantly, access to natural resources and especially oil is the main driver of both Asian giants’ engagement of the continent.
There are important differences though. For one, India’s footprint in Africa is small compared with that of China. Take their role in Africa’s trade for instance. In 2011, India accounted for 5.2% of Africa’s global trade compared with China’s 16.9%. Besides, unlike China’s investment in Africa, which is led by state-owned companies, Indian investment is mainly driven by the private sector. In another contrast with Chinese companies, India hires local laborers while many Chinese companies bring Chinese laborers to their projects in Africa.
Indian officials admit that China’s aid-for-oil strategy, which involves extension of soft loans for massive infrastructure projects in return for African oil, used to impress them as it helped Beijing secure deals in its favor, according to the MEA official. This prompted India to follow the Chinese strategy in some countries where it was seeking oil deals. However, India was unable to match the aid the Chinese offered. It underscored the need for an approach that built on India’s strengths, which ultimately resulted in India focusing on capacity building in Africa.
India is upbeat over its relations with Africa. It has reason to be. With regard to oil for instance, not only has its access to African oil grown significantly – Africa now accounts for 20% of India’s fuel imports – but also it has been successful in acquiring equity in African oilfields, observes Viswanathan.
The question is how secure are its investments in Africa? Its experience in Sudan underscores the need for caution. ONGC Videsh Ltd (OVL), the overseas unit of India’s state-run Oil and Natural Gas Commission, invested $2.5 billion in oil exploration and production in an undivided Sudan. This investment came under threat with South Sudan’s secession from Sudan in 2011, with three OVL blocks in the Muglad Basin straddling the border between the two Sudans and one entirely in South Sudan. This situation became especially precarious earlier this year when Sudan forced South Sudan to halt oil production, resulting in massive losses for OVL.
As for allegations of neo-colonial exploitation, these have been leveled largely by the western media. Will such a view eventually be echoed by Africa, potentially jeopardizing India’s presence there?
India hopes that its capacity building, people-centric approach and efforts to build a sustainable partnership with Africa will keep such allegations at bay.
A Tale of Two BRICs — India Surges While China Struggles
Friday, November 30th, 2012
Back-to-back days of 1.5%+ gains pushed India’s stock market to a new 52-week high today. As shown in the first chart below, the chart pattern couldn’t look any better for the India’s Sensex.
At the same time, China, India’s BRIC brother, made a new 52-week low today. As shown below, the chart pattern can’t get any worse for China’s Shanghai Composite.
The chart below shows just how long China’s stock market has been struggling. Back in late 2008, both China and India made their financial crisis lows at the same time. Both indices bounced 100%+ very quickly off of the lows, but the two countries have seen their stock markets take very different paths since late 2009. India has hung in there and is currently up 125% off of its lows, while China is now up just 13.95% from its low made back in October 2008. How much further will China fall before it finally sees some kind of sustained rally?
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Tags: BRIC, China, chindia, India
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