China – No Pain No Gain

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Monday was a busy day so I managed to copy and paste some interesting data produced by ForexLive.

“Foreign Direct Investment in China dropped 1% instead of rising the predicted 5% that economists expected.

In China, foreign direct investment refers to the accumulated foreign investment in domestic companies or entities in a given year.

Services sector rise is notable as it now accounts for 70.4% of all FDI with investment in high-tech services up to 94.7% yy.

These highlights are not pretty – the chart from from the release from ForexLive tells it all.

+6.0% prev
Yuan 56.77 bln ($8.89bln)
Jan-May yy +3.8%
Yuan 343.55 bln ($54.19bln)
Services sector +7%, yuan 241.8bln #($38.2bln)
Mfg sector fell 3.2% in the Jan-May period, with the number totalling 28.8% of FDI.

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Chart courtesy of ForexLive.

That chart says it all – not pretty and a precursor to share market upheaval.

When one looks at foreign investment – one has to do so against the backdrop of the industry in which the investors are seeking – seems ‘service sector’ received favorable response.

Corporate debt in China is high – ridiculously high – especially in the manufacturing sector – the debt fueled growth of these companies meant that sooner or later the debt situation had to be addressed.

The People’s Bank of China did propose a debt for equity swap – I had written about this in a blog – that it would not work.

It cannot work – mismanagement and malinvestment will continue unless a process of weak and debt laden companies – any idiot management – are liquidated (no pun intended seeing I am discussing China) – and the stronger entities acquire the good assets – in so doing transforming production to suit the current economic climate.

Yes – it is a dog eat dog world – strongest do survive – restructure – and usually continue to do so within the business cycle – yes – debts have to be written off by the Banks.

Any advanced economy cannot support malinvestment and debt in a deflationary trend – the market forces destroy incompetence.

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Well it seems that last weekend – yes a tad late – catching up on my reading – during the Lujiazui Forum – an annual finance forum – in Shanghai – it appears a lot is to change.

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From the South China Morning Post in Hong Kong:

China hints at bankruptcy rules for finance sector.

“Mainland authorities have signaled they are ready to accept the threat of volatility from financial institutions going bankrupt, with official calls for an orderly way to let failed players go bust.

Central bank deputy governor Zhang Tao said on Sunday that ensuring the stability of the financial sector did not mean protecting every institution against failure.” (1)

That in itself – was good news – but ‘lo and behold’ there is more.

The article includes the following excerpt:

“Those institutions that need to be restructured should be restructured, and those doomed to go bankrupt should do so under the discipline of market forces,” Zhang said at the Lujiazui Forum in Shanghai.”

In another article in the Shanghai Daily

Tighter scrutiny call at finance forum

“Tighter scrutiny of the financial sector amid the challenges of global economic growth and China’s financial reform was one of the themes that emerged during the Lujiazui Forum in Shanghai yesterday.”

“Four top-level officials, including Xiang Junbo, chairman of the nation’s top insurance regulator, spoke during the morning session of the two-day meeting, discussing China’s approach in developing a more reasonable financial market under supply-side reforms.”

“China has established a relatively complicated financial system with diversified products,” Zhang Tao, deputy governor of People’s Bank of China, told the forum. “But the general level of our financial services still has much room for improvement, as we should face and solve the structural weakness shown by some specific sectors.”

Zhang spoke about the financial macro prudential management mechanism in cooperation with the government’s plan of leveraging down and capacity elimination, and highlighted the necessity of bringing in financial innovations such as peer-to-peer lending and equity crowd funding into the mechanism. New financial technologies brought explosive development in China’s Internet financial sector, providing services for broader investors, Zhang said.

“Financial innovation itself is affirmative, but at the same time, we should not overlook the risks hiding behind, which calls for further regulation and management to catch up with the pace of sector’s development,” he said. (2)

Then – in the same paper – we had the former Deputy Governor of the PBOC, Wu Xiaoling.

Gaining without any pain seems ‘illusionary’

No pain, no gain — that’s what a former Chinese central bank official emphasized yesterday at the Lujiazui Forum as she cautioned China’s policy-makers that it’s time to halt uncalled-for support for certain sectors and let the market play its role.

With China’s real economy remaining sluggish and domestic consumers shifting their demand to overseas, the Chinese government has been accelerating its efforts since last year to combat overcapacity in sectors such as steel and encouraging new industries such as innovation to be the catalyst to revive the economy.

Such change hurts but the pain is a necessary process as Wu Xiaoling, former deputy governor of the People’s Bank of China and now dean of the PBC School of Finance at Tsinghua University, said in a panel discussion on supply-side reforms, financial innovation and macro prudential regulations at the forum.

“Monetary stimulus or credit easing is not a long-term plan,” Wu said. “It’s illusionary for someone to imagine a bright future without growing pains.”

Two things that hit me over these articles:-

Firstly foreign investors – let us say speculators – ‘will’ be in the crosshairs and stand to lose a lot of money and then – the change of direction – No Pain No Gain is exactly what China needs to mature in all sectors of the economy.

Time will tell – in the meantime some pain for a lot of foreign investors.

Interesting times indeed.

1. http://news.forexlive.com/!/china-fdi-may-yy-10-vs-50-expected-20160612
2. http://www.scmp.com/news/china/economy/article/1973857/china-hints-bankruptcy-rules-finance-sector
3. http://www.shanghaidaily.com/nation/Tighter-scrutiny-call-at-finance-forum/shdaily.shtml
4. http://www.shanghaidaily.com/business/finance/Gaining-without-any-pain-seems-illusionary/shdaily.shtml

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