China is bracing for its second bond default by a central government-owned company, offering one of the biggest tests yet of Beijing’s willingness to impose market discipline on lossmaking state groups.
A unit of one of the elite club of 112 big enterprises directly owned by the central government, China National Erzhong Group employed a workforce of more than 13,000 in 2012, when it had assets of Rmb25bn. But a slowing economy saddled with industry overcapacity has hobbled the heavy industry group, leading to losses of Rmb8.4bn in 2014.
Its looming default comes just a week after Beijing unveiled guidelines for an overhaul of state-owned enterprises aimed at improving their financial performance. SOEs control broad swaths of the economy but are heavily indebted and trail their privately owned counterparts in efficiency and profitability.
China National Erzhong Group, which makes smelting and forging equipment for use in the power generation and aviation sectors, is a case in point. A subsidiary was delisted from the Shanghai Stock Exchange in May after four straight years of losses.
“Under the influence of the macroeconomic environment, the demand for the company’s main products remains depressed, and our industry is suffering from severe overcapacity, making competition unusually fierce and causing the price of our products to slide lower,” Erzhong said in a filing late on Monday.
The company suspended trading of Rmb1bn in five-year notes sold in 2012, citing “uncertainty” about whether it could meet a Rmb56.5m ($8.9m) interest payment due next week.
Chinese businesses are increasingly investing in the U.S. The amount invested rose to a record high in the first half of this year, thanks largely to the real estate and financial sectors.
Of course, there are no guarantees that the growth will continue. Washington is believed to be preparing to impose economic sanctions on China, in retaliation for a series of cyberattacks on the U.S., which suspects Chinese government involvement.
According to Rhodium Group, a U.S.-based research firm, Chinese investment in the U.S. for the first six months this year came to $6.35 billion, a 51% jump from a year earlier. Of the 88 direct investment deals in acquisitions and investments in factories and other facilities, the biggest was the purchase of the renowned Waldorf Astoria hotel in New York, worth $1.95 billion, by Anbang Insurance Group.
Commercial properties and hotels were the major target of the Chinese acquisitions. The financial and insurance sectors followed. During the period, Fosun International acquired a 20% stake in U.S. insurer Ironshore. Billionaire Guo Guangchang, who heads the Shanghai-based conglomerate, is known to be an admirer of Warren Buffett.
Investment in information technology has also remained positive, including deals by internet giants, such as Alibaba Group Holdings and Tencent Holdings, as well as venture capitalists. These businesses tend to buy IT startups.
Over the last 20 years, the world economy has relied on the Chinese economic growth engine more than it would like to admit. The 1.4 billion people living in the world’s most populous country account for 13% of global GDP, which is significant no matter how it is interpreted. However, in the commodity sector, China has another magnitude of importance. The fact is that China consumes mind-bending amounts of materials, energy, and food. That’s why the prospect of slowing Chinese growth is likely to continue as a source of nightmares for investors focused on the commodity sector.
China’s economic structure trending to positive direction
H1 jobs data proves China growth in reasonable range
China will promote reform and restructuring
China will also enhance targeted control
China is prepared to take pre-emptive measures
Now we’ve had the story on China changing the way they calculate GDP, we should keep our ears open for any subtle changes in rhetoric from China’s bigwigs. So far we’ve had a couple of remarks on this “downside pressure”
The US Federal Reserve risks triggering “panic and turmoil” in emerging markets if it opts to raise rates at its September meeting and should hold fire until the global economy is on a surer footing, the World Bank’s chief economist has warned.
Rising uncertainty over growth in China and its impact on the global economy meant a Fed decision to raise its policy rate next week, for the first time since 2006, would have negative consequences, Kaushik Basu told the Financial Times.
His warning highlights the mounting concern outside the US over the Fed’s potential “lift-off”. It follows similar advice from the International Monetary Fund where anxieties have also grown in recent weeks about the potential repercussions of a September rate rise.
That means that if the Fed’s policymakers were to decide next week to raise rates they would be doing so against the counsel of both of the institutions created at Bretton Woods as guardians of global economic stability.
Such a decision could yield a “shock” and a new crisis in emerging markets, Mr Basu told the FT, especially as it would come on the back of concerns over the health of the Chinese economy that have grown since Beijing’s move last month to devalue its currency.
When it comes to crisis, SocGen notes that there is an abundance of case studies; and against the backdrop of the uncertainty shock delivered by China and the subsequent market tumult, market participants have been looking to the history books for clues as to what could happen next. While individual crises create their own risks, SocGen warns, the overriding risk is that markets are taking less comfort today from the idea that central banks may step in with further QE-style liquidity injections to save the world.
Running low on monetary policy ammunition
Before considering the individual risk scenarios, an overriding risk is that markets are taking less comfort today from the idea that central banks may step in with further QE-style liquidity injections. We see this as a reflection of two factors.
First, the tremendous amounts of liquidity injected to date have produced less-than-spectacular economic results. This also fits the findings of academic literature suggesting diminishing returns from subsequent rounds of QE.
Second, central banks have clearly become more concerned about the potential risks to financial stability from indefinitely inflating asset prices, suggesting that they may be slower to step in.
This raises the important question of how policymakers would respond to new downside shocks. Fiscal expansion in the advanced economies, and not least infrastructure investment, would be our advice, but in a downside risk scenario, we fear that this tool is likely to be deployed all too slowly and central banks be further overburdened.
Given the strong demand fundamentals, particularly out of China, gold should go higher but as ever there is a risk of selling in the futures market leading to weakness in the short term as traders follow momentum and ignore fundamentals.
This demand continues and is being bolstered by official Chinese demand. The People’s Bank of China (PBOC) added another 15.98 tonnes of gold in August – at the same time its foreign exchange reserves fell a whopping $94 billion. The Chinese continue to diversify out of the dollar and into gold.
China’s reserves fell over double what they did in July to $3.56tn vs $3.65tn prior,the largest drop on record
SDR reserves 10.53bn vs 10.46bn prior
Gold reserves 61.8bn vs 59.24bn prior
IMF reserves 4.73bn vs 4.37bn prior
A fall had been expected on the back of China selling USD’s to prop up the Yuan. Intervention was expected to be anywhere from $122-170bn in August but that’s likely to be lower now we’ve had the reserve numbers. China ahs also been sellers of their treasury holdings to balance some of the move
Last month, Dalian Wanda, one of the most outward facing corporates in China, bought the organiser of the Ironman triathlons from a US private equity firm for $650m.
Meanwhile, Anbang Insurance, another company with similar global aspirations, looked less likely to succeed in its courtship of the Portuguese authorities in the hope of purchasing the remnants of a troubled financial conglomerate in Lisbon — precisely because the Chinese already have purchased so many assets there. At the same time, Chinese tourists continue to flood destinations like Japan, purchasing luxury goods which have become ever more inexpensive as a result of the steady appreciation of the Chinese currency, with the intention to sell them back home for a tidy profit.
It is hard to know what represents prudent diversification and what constitutes capital flight on the part of Chinese groups and wealthy travellers. But for those who track capital outflows from China, the distinction does not much matter. In the four quarters to the end of June, such outflows, (which do not include debt repayment) have totalled more than $500bn according to data from Citigroup. China’s mountain of foreign reserves, once around $4tn, are now down to less than $3.7tn and are expected to drop further to $3.3tn by the end of the year, Citi calculates.
Not long ago, it seems that the world was awash in cheap dollars. Many of those cheap dollars could be traced to the generous monetary policies of the Federal Reserve. But many of them also came from the mainland as Chinese recycled their dollar earnings from the sale of exports abroad. Chinese capital flowed into everything from farms in Africa to ports in Sri Lanka and Pakistan, to dairies in New Zealand, energy firms in Canada and Treasuries in the US.