These days I can't read the financial press without a lot of something far stronger.
Chinese Economics Thread
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These days I can't read the financial press without a lot of something far stronger.
A couple of related news items from Reuters:
, by Fayen Wong and Randy Fabi, 21 May, 2012:
Not surprising when this is considered:
, by Fayen Wong and Jane Lee, 18 May, 2012:
While the sellers are undoubtedly unhappy that the buyers are deferring or even defaulting on some of their contracts, the news is not all bad. At least some of the FX reserves have been turned into massive stockpiles of useful commodities. We'll see how long it takes for commodity prices to stabilize, if they stabilize, one way or the other. QE3 (amongst other things) could really through a monkey in the wrench if it were to materialize.
Dip buying on deck?
, by Fayen Wong and Randy Fabi, 21 May, 2012:
Not surprising when this is considered:
, by Fayen Wong and Jane Lee, 18 May, 2012:
While the sellers are undoubtedly unhappy that the buyers are deferring or even defaulting on some of their contracts, the news is not all bad. At least some of the FX reserves have been turned into massive stockpiles of useful commodities. We'll see how long it takes for commodity prices to stabilize, if they stabilize, one way or the other. QE3 (amongst other things) could really through a monkey in the wrench if it were to materialize.
Dip buying on deck?
Equation
Lieutenant General
I hope those infrastructure is put more into the western part China and the rural areas.
escobar
Brigadier
Blaming stagnant overseas demand seems like an easy excuse for China’s frustrating Q1 economic data, since the global outlook won’t improve for a while yet. In the meantime, the nation could do more to embrace a wake-up call it is currently ignoring.
China’s state-owned enterprises are hurting the economy. Not only do SOEs get favorable treatment in securing bank loans, causing vast sums to be misallocated to an unproductive sector of the economy, but they are often free of responsibility and do not need to concern themselves with the law of the market.
That has a detrimental effect on the more productive private sector, which is the biggest employer and main driver of growth, and which does have to abide by the market.
Government patronage is an implicit life-saving tool for state firms, for whom bankruptcy appears to be an ever more remote issue. A recent local government’s move to spare an SOE from becoming China’s first ever bond defaulter typifies this problem, as Reuters reports:
The Chinese official was adamant the city of Weifang would keep its rayon factory open noting that local authorities had just stepped in to help the plant's owner repay $60 million in commercial paper.
The bailout averted what would have been China's first ever bond default and was good news for domestic bond investors, who were reassured that in China even mid-sized state-owned firms can count on "too-big-to-fail" treatment.
SOEs are often poor performers, which means they often need government support to keep going.
The World Bank cites studies showing that average return on equity - even for state firms that do turn a profit - is lower than for the non-state sector. As China's economy slows and the cost of capital rises, the inefficiency of many state firms may again become a burden on the state, pulling investment away from areas of the economy where it could be more productive.
So why not let them default? It might do good for some, especially those that do have strong underlying businesses. Well, local governments bail out regional SOEs to save face and secure officials’ political performance. In Chinese politics, reputation is more important than effective business operations.
Effort is rarely taken to try to cover up this aspect. As in the Weifang case:
The rescue notwithstanding, the synthetic fibre maker's ordeal resembled a bankruptcy in everything but name. The hallmarks were all there: a sea of unpaid debts, a contest between creditors over who gets paid, and a potential takeover by stronger rivals.
The market adjusts its decisions, therefore, increasingly less on the basis of economic law. Bond investors have begun noticeably to look beyond credit ratings, favoring debt from state companies compared to similarly rated paper from private firms.
Thanks to state intervention in the economy local governments can step in to rescue troubled SOEs. Much of their emergency tools are funded by borrowing, but how much debt can China handle? And how sustainable is the so-called “China model”? I remain neutral.
In conclusion, to reference Reuters, the murky political involvement in saving Shandong Helon is not a positive sign for a country that must heavily on small, private-sector firms for future growth, as investments in infrastructure and basic industry yield diminishing returns.
When i first read this news my response was no no no no no no no no. China's economy has been growing too fast for too long and needs to cool down and rebalance. In order for the global economy to rebalance the West needs to get rid of its massive debt burden and China needs to shed it's excess capacity in production. Both these things require a painful process called bankruptcy. But neither side is willing to do this. I'm one of the few people who actually believe that the current slowdown in China is good for China in the long run and good for the rest of the world as well. But most of the analysts and the media and the Chinese government apparently disagree. China already has an enormous debt overhang from the last stimulus and now there going to ad more on to it with this round of stimulus. And what are they going to do when this round of stimulus wears off ? Do another one ? These are short term solutions that doesn't solve the long term problems of the economy. And the story below shows you part of that problem. It seems that the SOE's in China are playing the same role as the banks in the West. And who will have the balls to take them on ? Because of there protected status they are going to control ever larger portions of the economy and in the short run they are only going to grow bigger at the expense of every one else. That means they are only going to grow in importense and power and will be harder and harder to take on.
If the definition of insanity is doing the same thing but expecting a different result then all of the worlds leaders are looney's that belongs in a asylum.
America: print to spend and tax cuts for the rich.
China: infrastructure
Japan: deficit spending and keep interest rate at zero.
Europe:... well only god knows what Europe is doing.
Well at least when the collapse comes no one will be alone, misery loves company and there is enough space for everyone in the abyss.
escobar
Brigadier
China can now bypass Wall Street when buying U.S. government debt and go straight to the U.S. Treasury, in what is the Treasury's first-ever direct relationship with a foreign government, according to documents viewed by Reuters.
The relationship means the People's Bank of China buys U.S. debt using a different method than any other central bank in the world.
The other central banks, including the Bank of Japan, which has a large appetite for Treasuries, place orders for U.S. debt with major Wall Street banks designated by the government as primary dealers. Those dealers then bid on their behalf at Treasury auctions.
China, which holds $1.17 trillion in U.S. Treasuries, still buys some Treasuries through primary dealers, but since June 2011, that route hasn't been necessary.
The documents viewed by Reuters show the U.S. Treasury Department has given the People's Bank of China a direct computer link to its auction system, which the Chinese first used to buy two-year notes in late June 2011.
China can now participate in auctions without placing bids through primary dealers. If it wants to sell, however, it still has to go through the market.
The change was not announced publicly or in any message to primary dealers.
"Direct bidding is open to a wide range of investors, but as a matter of general policy we do not comment on individual bidders," said Matt Anderson, a Treasury Department spokesman.
While there is been no prohibition on foreign government entities bidding directly, the Treasury's accommodation of China is unique.
The Treasury's sales of U.S. debt to China have become part of a politically charged public debate about China's role as the largest exporter to the United States and also the country's largest creditor.
The privilege may help China obtain U.S. debt for a better price by keeping Wall Street's knowledge of its orders to a minimum.
Primary dealers are not allowed to charge customers money to bid on their behalf at Treasury auctions, so China isn't saving money by cutting out commission fees.
Instead, China is preserving the value of specific information about its bidding habits. By bidding directly, China prevents Wall Street banks from trying to exploit its huge presence in a given auction by driving up the price.
It is one of several courtesies provided to a buyer in a class by itself in terms of purchasing power. Although the Japanese, for example, own about $1.1 trillion of Treasuries, their purchasing has been less centralized. Buying by Japan is scattered among institutions, including pension funds, large Japanese banks and the Bank of Japan, without a single entity dominating.
Granting China a direct bidding link is not the first time Treasury has gone to great lengths to keep its largest client happy.
In 2009, when Treasury officials found China was using special deals with primary dealers to conceal its U.S. debt purchases, the Treasury changed a rule to outlaw those deals, Reuters reported last June. But at the same time it relaxed a reporting requirement to make the Chinese more comfortable with the amended rule.
Another feature of the U.S.-China business relationship is discretion: The Treasury tried to keep its motivation for the 2009 rule change under wraps, Reuters reported.
Documents dealing with China's new status as a direct bidder again demonstrate the Treasury's desire for secrecy -- in terms of Wall Street and its new direct bidding customer.
To safeguard against hackers, Treasury officials upgraded the system that allows China to access the bidding process.
Then they discussed ways to deflect questions from Wall Street traders that would arise once the auction results began revealing the undeniable presence of a foreign direct bidder.
"Most hold the view that foreign accounts only submit 'indirect bids' through primary dealers. This will likely cause significant chatter on the street and many questions will likely come our way," wrote one government official in an email viewed by Reuters.
In the email, the official suggested providing basic, general answers to questions about who can bid in Treasury actions.
"For questions more extensive or probing in nature, I think it prudent to direct them to the or Treasury public relations area," the official wrote.
The granting to China of direct bidder status may be controversial because some government officials are concerned that China has gained too much leverage over the United States through its large Treasury holdings.
For example, economist Brad Setser, who is a member of the National Economic Council and has also served on the National Security Council, has argued China's large Treasury holdings pose a national security threat.
Writing for the Council on Foreign Relations in 2009, Setser posited that China's massive U.S. debt holdings gave it power over U.S. policy via the threat of a swift, large sale of U.S. debt that could send the market into turmoil and drive up interest rates.
But Treasury officials have long maintained that U.S. debt sales to China are kept separate from politics in a business relationship that benefits both countries. The Chinese use Treasuries to house the dollars they receive from selling goods to the United States, while the U.S. government is happy to see such strong demand for its debt because it keeps interest rates low.
A spokesman for the Chinese embassy in Washington did not respond to calls and emails seeking comment.
The United States has, however, displayed increasing anxiety about China as a cybersecurity threat. The change Treasury officials made to their direct bidding system before allowing access to China was to limit access to the system to a specially designed private network connection controlled by the Treasury.
China is among the most sensitive topics for bankers and government officials who court the country as a financial client because of its size and importance, and none would agree to comment on the record for this story.
A former debt management official at the Treasury who did not want to be identified said that as China's experience in the U.S. Treasury market has deepened over time, Chinese officials may have felt more comfortable taking the reins in the management of their holdings.
Their request to bid directly, in his view, came from a confidence that their money managers could buy U.S. debt more efficiently on their own than through Wall Street banks, which can often drive up the price of Treasuries at an auction if they know how much large clients are willing to pay. Such a practice that is not specifically illegal, though most traders would deem it unethical.
Evidence of China's growing sophistication as a money manager in the U.S. markets is clear in its expansion of operations in New York. Its money management arm, the State Administration for Foreign Exchange (commonly called SAFE), has an office in Midtown Manhattan and a seasoned chief investment officer -- former Pacific Investment Management Co derivatives head Changhong Zhu -- in Beijing.
A woman who answered the phone at SAFE's New York office said no one in the office was authorized to talk to the media.
escobar
Brigadier
"Made in China" has created miracles. Now, can "Remanufactured in China" achieve the same glory? Remanufacturing is an advanced mode of the recycling economy. Through lot production by professional repair of used car parts, engineering machinery, and machine tools, remanufacturing can save energy by 60 percent, materials by 70 percent, cost by 50 percent, and emission into the air by 80 percent, while the quality and performance of the remanufactured products are as good as, if not better than, new products. Developing remanufacturing is of great significance energy conservation and environment protection; moreover, it is an important impetus for promoting the upgrade of the manufacturing and modern service industries and the reform of the economy. China's remanufacturing is materializing, with energetic development prospect.
Enterprises: eager to try and act
What really encouraged Ge Hong, deputy secretary general of China Internal Combustion Engine Industry Association (CICEIA), was that: in the internal combustion engine remanufacturing industry development seminar organized by CICEIA in 2011, the 70 chairs in the meeting, originally considered sufficient, were not enough. "More than 100 people took part in the meeting. Those who didn't grab a seat just stood in the back until the end of the meeting", said Ge Hong, "It reflects that people are paying more attention to remanufacturing and that market demand is increasing".
From March 19 to 23, 2012, a survey team led by Ge Hong conducted a survey in 8 major internal combustion engines remanufacturing enterprises in 6 cities in 5 provinces. According to Ge Hong, there are currently 3 types of internal combustion engine remanufacturing enterprises in China: manufacturer service providers, upgraded extensive repair enterprises, and industrial chain of manufacturing base. "Generally speaking, China's internal combustion engine remanufacturing industry possesses an excellent foundation for industrial development; remanufacturing enterprises have established numerous characteristic products and technologies and the recycling system is improving. Some production capacity has been established", said Ge Hong in conclusion of their survey.
Nonetheless, some key technology standards still need to be improved, the industrial support system is incomplete, and industrial administration and polices need to be updated. These are some of the problems that are impeding the thriving development of the internal combustion engine remanufacturing industry. "Enterprises, in particular, should make continuous effort to improve technology system and standard system, enhance discipline, carry out stringent requirements, and promote the standardization of the remanufacturing market", appealed Ge Hong.
Remanufacturing of internal combustion engine possesses a very important position in the remanufacturing sector. It can reflect the development status of the entire industry. Currently, China possesses a remanufacturing capacity of an aggregate of 230,000 units of automobile engine, transmission, steering gear, and power generator. Besides, China's automatic nanometer particle recombination brushing electroplating, among other technologies, has reached international advanced standard.
According to survey, friction and erosion cause about 10 percent of GDP loss in China every year. The number is 4 or 5 percent in developed countries. In face of the gigantic development space, many companies are, as Ge Hong describes, "rubbing their fists and wiping their palms and eager to start action".
Pattern: Chinese characteristics possess advantages
It's necessary to have a clear understanding of the concept of remanufacturing before we can establish a remanufacturing pattern with Chinese characteristics. Professor Yi Xinqian, consultant and director of the expert commission of the Maintenance and Remanufacturing Division of China Construction Machinery Association, says that, take engineering machinery as an example, many companies are beginning to take action, but they don't have a very clear understanding of the concept of remanufacturing, frequently mixing the concept of remanufacturing with machinery repairing.
From the perspective of consumers, remanufacturing has not yet gained extensive recognition in society. A survey shows that only 10 percent of the people who are surveyed understand clearly the remanufacturing of car parts, and 45 percent know nothing about it, with many holding suspicious or even denying attitude towards remanufactured products. This somewhat reflects the public's lack of professional understanding of remanufacturing. "Only by making manufacturers and consumers correctly aware of remanufacturing can the development foundation for the remanufacturing industry be consolidated", said Yi Xinqian.
For remanufacturing companies, they also need to establish the idea of collaboration. "General parts of engineering machinery are manufactured by specialized enterprises. Therefore it is neither possible nor economic for a single enterprise to remanufacture whole engineering machine. Developing remanufacturing industrial cluster is a good option", said Yi Xinqian.
Presently, Wuhan has already established China's first remanufacturing base that features engineering machinery. It attracts companies of engineering machinery remanufacturing, parts and accessories production, and storage and logistics, forming an industrial cluster of engineering machinery remanufacturing.
Policy: thorough optimization centering on the industry
In 2008, the National Development and Reform Commission approved 14 enterprises, including Dongfeng Cummings and Weichai Power, to be the pilot companies of the car parts remanufacturing industry; in 2009, the Ministry of Industry and Information Technology designated 35 enterprises and industrial cluster regions to be the first pilots for the remanufacturing of electro-mechanical products; in 2010, 11 ministries and commissions, including the National Development and Reform Commission and the Ministry of Science and Technology, published the Opinions on Promoting the Development of the Remanufacturing Industry; in 2011, the Outline of the 12th Five-Year Plan passed by the National People's Congress listed the remanufacturing industry as one of the key projects of the recycling economy. In September 2011, the National Development and Reform Commission issued the Notice on Deepening Work of Remanufacturing Pilots, making it clear that the products category and pilot range will be further expanded, policy support will be enhanced, and the formulation of Remanufacturing Products Catalogue will be accelerated
Currently, industrial associations are playing a vitally important communication role in promoting the development of the remanufacturing industry. Yi Xinqian points out that, on one hand, industrial associations introduce the government's policy and procedures about the development of the remanufacturing industry to enterprises, guiding them to choose the correct technology path and direction; on the other hand, industrial associations also help enterprises to seek help from universities, colleges, and research institutes regarding technology problems that enterprises come across, facilitating the integration of production, academy, and research.
"With support from every side, enterprises should also enhance their responsibility", said Yi Xinqian with sentiments, "Enterprises engaged in remanufacturing should have strong social responsibility, and have a firm grasp of the profound significance of this industry on the development of the economy and society".