China’s Richest Man: Capital Markets suck in China

When people’s options to invest have been restricted via financial repression measures such as taxes and capital and currency controls, and when people savings are being surreptitiously taxed via inflation for the benefit of the political class, and likewise given the above political conditions when people have been unwittingly drawn to yield chasing or inflation hedging dynamics via property bubbles which “perhaps is the largest in human history”, one can’t help but partly commiserate with this striking comment from the richest man in China

From the Wall Street Journal:

China’s richest man has a strong statement for those looking to invest: “The capital markets suck in China.”

Zong Qinghou climbed his way to the top of the list of China’s wealthiest by amassing a fortune of $12.6 billion through his privately listed beverage empire Hangzhou Wahaha Group Co. On Tuesday, he made clear he didn’t gain his wealth through the country’s stock market.

“When the ordinary people invest in it, the market should reward them with some benefits. But it does not,” Mr. Zong said on the sidelines of China’s annual parliamentary session, taking aim at speculators he says ruin the stock market for others. “The speculation has totally cheated ordinary investors of any benefits.”

The sentiment of the billionaire, who is also an NPC representative, speaks volumes about the state of the country’s capital markets, highlighting the monumental obstacles investors face in China as they look for places to park their money in hopes of a return.

Yet his comment does not say on what motivates people to speculate and by what mechanism such rampant speculation morphs into boom bust cycles. Instead he mistakes interpreting symptoms as “insider trading” as the disease.

Shifting culpability to the public seems typical of political agents. Mr. Zong hasn’t just been a “rich” businessman but a representative of China's legislative body, the National Public Congress, thus a likely political entrepreneur.

In reality, since no one knows the future, everyone speculates. Such knowledge problem includes, or most importantly, applies to politicians.

And Mr. Zong doesn't need conspiracy theorists, global central bankers have been the biggest manipulators (insider trading) of the marketplace.

In addition, in 2004 there had been 942 publicly listed state owned enterprises (SoE), 52 of which had been directly owned by local governments (OECD). Mr. Zong can start looking for his "insider" bogeyman from them.

Nonetheless, when capital markets, not limited to China, are being propped up, manipulated or subjected to political interventions, to borrow Mr. Zong's fitting comment, they "suck". 

China’s New Loans Unexpectedly Surged in May

Some good news in China.

From Bloomberg,

China’s new loans exceeded estimates in May and more money went into longer-term lending, signaling support for investment projects that may help to prevent a deeper economic slowdown.

Local-currency lending was 793.2 billion yuan ($125 billion), the People’s Bank of China said on its website yesterday. That was the most on record for the month of May and more than analysts’ 700 billion yuan median forecast. Loans extended for a year or more accounted for 34 percent of the total, up from 28 percent in April.

Premier Wen Jiabao’s efforts to engineer a resurgence in the world’s second-biggest economy may be aided by the jump in lending and signs of resilience in exports. At the same time, industrial-output growth was close to the lowest since 2009 in May, indicating additional measures will still be needed after last week’s interest-rate cut.

“Over the past several months, investors have been concerned that a large share of loans was for short-term financing, and hence would not help boost growth as much as large investment projects,” said Zhang Zhiwei, the Hong Kong- based chief China economist at Nomura, who previously worked for the International Monetary Fund. “The rising share of medium and long-term loans in May helps address this concern.”

HSBC Holdings Plc (5) said new loans may surge to as much as 1 trillion yuan this month. Nomura’s Zhang said the proportion of longer-term lending remains “relatively low” and has room to rise as banks lend more to infrastructure projects.

‘More Impressive’

M2 money supply grew 13.2 percent last month from a year earlier, compared with an estimate of 12.9 percent, yesterday’s report showed. The gain was 12.8 percent in April. New lending was up from 681.8 billion yuan in April.

“The lending figures are all the more impressive because loan growth in the first half of the month was reportedly extremely weak,” said Mark Williams, an economist at Capital Economics Ltd. in London who formerly advised the U.K. Treasury on China. “These figures point to a sharp rebound in lending in late May and suggest that banks and borrowers have responded rapidly to the government’s new emphasis on supporting growth.”

The nation’s top economic planning agency, the National Development and Reform Commission, is speeding approvals for investment projects. Baosteel Group Corp. and Wuhan Iron & Steel Group last month secured permission to build factories after previous delays caused by overcapacity concerns.

Efforts to bolster growth also include reductions in bank reserve requirements and delays in tightening rules for lenders’ capital. China has no plan to introduce stimulus on the scale unleashed during the global crisis in 2008, according to the state-run Xinhua News Agency.

While this may put a floor on the current downdraft, it is not clear where the bulk of the longer-term lending is coming from.

Since there has been NO declared fiscal stimulus (YET) while the private sector seems on a lull, signs are that most of these growth emanates from state owned companies (SOEs), such as Baosteel Group Corp. and Wuhan Iron & Steel Group.

If this is true then China’s stealth stimulus have been redirected to SOEs.

Up to what extent will this covert stimulus be? That should be the main question.

China’s shadow banking system from SOEs, local and regional government agencies have already been faced with huge loans of questionable quality to the tune of $1.7 trillion. The implication is that China’s government will either tolerate further inflation of her existing bubble or that such dramatic (but desperate) moves may be symbolic—engineered to spur a bandwagon effect to fire up ‘confidence’ or perk up the ‘animal spirits’—and thus be limited.

Like how global financial markets initially responded to announcement of Spain’s bailout, where embattled bulls surged out of the gate but whose rally eventually foundered as reality sunk in, short term spikes—from bailouts or as the above account—should be reckoned as knee jerk reactions rather than sustainable trends.

Further vigilance is required. Pay close heed to the Shanghai index, the yuan and the commodity markets/currencies.

China’s State Driven Bubble

Who is responsible for inflating China’s Bubble?

Her Government.

This from the New York Times, (bold emphasis mine)

All around the nation, giant state-owned oil, chemical, military, telecom and highway groups are bidding up prices on sprawling plots of land for big real estate projects unrelated to their core businesses.

“These are the ones that have the money to buy the land,” says Prof. Deng Yongheng at the National University in Singapore. “Because in China, it’s the government that controls the money supply and the spending.”

By driving up property prices, the state-owned companies, which are ultimately controlled by the national government, are working at cross-purposes with the central government’s effort to keep China’s real estate boom from becoming a debt-driven speculative bubble — like the one that devastated Western financial markets when it burst two years ago.

Land records show that 82 percent of land auctions in Beijing this year have been won by big state-owned companies outbidding private developers — up from 59 percent in 2008.

This is looking very much like the transitioning phases of the Austrian Business Cycle...

(all charts from World Bank China’s Quarterly report and IMF’s People’s Republic of China: 2010 Article IV Consultation)

From the rapid expansion of circulation credit….

to exploding money supply growth…

mostly directed at future oriented capital structure in this case, real estate.

Frothy real estate markets…

….the deepening exposure by the banking system to the property-real estate sector.

Add that to the Chinese government’s crowding out of the private sector by her state owned enterprises bidding up on land, which worsens the bubble conditions and fosters systemic malinvestments.

And most importantly, artificially suppressed interest rates have been crucial to these dynamic.

Well, since bubbles come in phases, muted inflation hasn’t YET been much of a factor in pressuring interest rates higher.

So perhaps the bubble will persist.

This reminds me of Ludwig von Mises who once wrote, (emphasis added)

The popularity of inflation and credit expansion, the ultimate source of the repeated attempts to render people prosperous by credit expansion, and thus the cause of the cyclical fluctuations of business, manifests itself clearly in the customary terminology. The boom is called good business, prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression. People rebel against the insight that the disturbing element is to be seen in the malinvestment and the overconsumption of the boom period and that such an artificially induced boom is doomed. They are looking for the philosophers' stone to make it last.

In fullness of time, China’s policies of turning stone into bread (philosophers' stone) will end in tears.

For now, party on!