China is not a “bubble economy”, but facing challenges

China is not a “bubble economy”, but it is an economy prone to bubbles. There is a big difference.

Over the last decade many have predicted imminent doom for China. They have been wrong. China’s economy has kept growing in the wake of the west’s financial crisis. Despite this, risks have mounted. Rising wages and commodity prices are fuelling inflation. High food prices hit the poor hard. China has faced several challenges over recent decades, and come out on top. Its institutions and policy tools have worked well. Now, its immediate challenges are more intense than ever.

First, the need to rebalance its economy is greater than before. It is always quoted by Chinese policymakers. China must shift from investment and exports towards consumption. This domestic imbalance has not improved in the last two years.

The global recession showed China can no longer rely on selling low value-added goods to heavily indebted western consumers. Labor dividend is diminishing in China as some other neighbor countries like Vietnam, Cambodia are expected to take the place of China to become the manufacturing center of the world in next couple of decades.

Excessive investment, which has soared to 44 per cent of GDP, is prone to booms and busts by many economies. The animal spirits driving investment can change abruptly, if productivity disappoints, growth expectations dip or the cost of funding rises.

Second, private sector economy is booming in China and it makes government difficult to control. China has to find a way to balance the booming regional economies, alongside the growing private sector, and its SOE-led economy.

Third, China’s vulnerability arises from its under-developed financial sector. Saving rate is still high. Besides the traditional cultural reason, there are limited options for household savings: low interest-bearing bank accounts; equities, where governance concerns persist; or real estate, where prices are already sky-high in many cities. The lack of an adequate social safety net and the need to pay for education and healthcare also stress the problem.

China is developing its financial sector, but not fast enough to keep pace with its economy. Although its bond market has grown over the last decade, from $202bn to $2,700bn, corporate bond issuance remains low. China needs deeper and broader domestic capital markets to efficiently use its high domestic savings and to absorb increasing inflows.

The other sources of China’s instability are its low interest rates and weaker than needed currency. China needs to avoid the lethal combination of cheap money, leverage and one-way expectations, particularly in property, that hit the west. These factors make the economy prone to bubbles and raise the risk of a near-term setback – either as the bubble bursts or, more likely, as policymakers act.

If there were a setback, the market impact would be significant. There would be much comment about China’s growth being a bubble. That would be wrong. China’s growth is for real. Any slowdown would be temporary and present a buying opportunity. It would highlight that the business cycle exists in China, and that while the trend is up, one should expect setbacks along the way.

Top China banker warns on asset bubbles

Some China top bankers said China needs an “urgent” tightening of monetary policy to prevent the huge stimulus measures introduced this year from inflating stock and property bubbles.
Monetary policy must not neglect asset-price movements. Therefore it is urgent that China shifts from a loose monetary policy stance to a neutral one.

China’s stimulus measures could amount to 15-17 per cent of GDP this year if government-induced bank lending is taken into account – by far the largest among major economies. With China’s economy growth reached 8.9% in the third-quarter, it increases pressure on the stimulus end.

The Chinese government has used its control over the banks to engineer a massive increase in lending this year, with new loans in the first nine months of the year 149 per cent higher than last year at Rmb8,650bn ($1,260bn). Much of this investment has gone into infrastructure projects. The M2 measure of money supply is up 29.3 per cent, year on year.

The giant investment program has polarized critics, with some predicting inflation and warning that excessive bank loans were causing sharp rises in share and property prices, while others have argued the lending binge would exacerbate over-capacity and encourage deflation.

The State Council, China’s cabinet, gave its first clear hint before the publication of third-quarter GDP figure that it was considering a tighter monetary policy when it said that policy should focus both on managing inflationary expectations as well as securing stable growth – the first time it has mentioned inflation since the global economic crisis hit China last year.

Usually this is the first thing you would expect the authorities to say before they begin to moderate policy. But the timing of any increase in interest rate is hard to predict.

Beijing Stimulus Damage

China’s vaunted stimulus package has exacerbated structural imbalances in the economy and may delay the country’s transition to a more sustainable growth model, according to some leading economists.

Most analysts regard the $585bn plan as an appropriate response to the crisis, and say it pulled the economy out of what could have been a much deeper slump.

However, as the effects of the stimulus fade, some now say the response was too aggressive and that the government’s focus on an unprecedented credit exp­ansion and a massive infrastructure boost has aggravated stark economic imbalances.

The economy’s structural problems have been made worse by the stimulus program. While there are resurgent asset bubbles in the stock and property markets and the fact that most of the stimulus had gone to the state sector, smaller private enterprises, which create the most jobs, however had been left largely to fend for themselves.

The stimulus package was a response to a crisis rather than aimed at rebalancing China’s growth model. In the short term, this stimulus and monetary policy are perpetuating the imbalances.

A report published on Friday by the McKinsey Global Institute points out that 89 per cent of the entire stimulus package is devoted to infrastructure investment such as roads and railways, while only 8 per cent is allocated to supporting consumption.

Private consumption in China has declined sharply as a share of overall gross domestic product since the mid-1980s, accounting for only 36 per cent – the lowest ratio of any major economy, reflecting China’s reliance on investment as its main growth driver.

And according to this report, today’s low consumption share is systemic, and China will not be able to tackle this issue without comprehensive reform that includes structural change.

China’s economic growth profile has been very employment-light and there is a need to rebalance investment away from the traditional emphasis on heavy industry and infrastructure towards smaller, private enterprises, especially in the services sector.

World Stock Market Leader - China

China’s stock market has foreshadowed moves in global equities the past two years. It peaked on Oct. 16, 2007, two weeks before the MSCI All-Country World Index. The Shanghai index fell 72 percent from its 2007 high and bottomed on Nov. 4, 2008, four months before the MSCI index. The Chinese measure reached its 2009 high on Aug. 4, seven trading days before the global index.

People are hanging their hopes on China pulling us out of a recession. China’s growth looks great, but things may be a bit overstated. There has been a lot more integration of global markets over the past couple of years.

The focus of global markets is what’s happening in China. But in the current stage, China will have to remove liquidity from the market, and it’s likely that commodities will suffer and it means worse sentiment towards risk in general.

Can new lending drive China economy freely?

China’s new lending doubled in May and industrial output and retail sales climbed more than economists estimated as government stimulus spending revived the world’s third-biggest economy.

New loans jumped to 664.5 billion yuan ($97 billion) from 318.5 billion yuan a year earlier. It add to accelerating fixed-asset investment and surging auto and property sales in signaling that the government is successfully countering a slump in exports. Record lending is stoking concern that China’s recovery may come at the expense of inflating asset bubbles and adding to banks’ bad loans. The pace of bank lending is dangerous and the risks include inflation, bad loans and economic volatility.

But the recovery is still fragile since this is an economy that is increasingly reliant on public demand. Aside from private residential property investment, private demand remains soft.

On the other hand, the rapid growth of credit should be regarded as a warning sign. In china, nearly always when we have financial difficulties at banking institutions, it’s preceded by rapid growth in lending.

The credit boom may help to end declines in consumer prices, however, inflation may bounce back faster than economic growth.

China tempts consumers with discounts

China is offering consumers a 10 per cent subsidy for buying new television sets, washing machines, air conditioners and computers, in a sign that the government remains wary over the prospects of an economic rebound.

The government will earmark Rmb2bn ($292m) for the new program, the State Council, the country’s cabinet, said on Tuesday. The plan allows consumers in nine of China’s wealthiest cities and provinces, including Beijing, Shanghai and Guangdong, to claim 10 per cent of the purchase price of the new electrical goods if they turn in the old one for recycling.

The plan differs dramatically from an earlier “home appliances to the countryside” program under which Beijing encouraged rural dwellers to buy electronic goods.

That program has already boosted revenues and earnings, but it was slow to take off since it requires consumers to prove their status as rural residents, and only a certain range of low-end products selected by the ministry of commerce in several rounds of bidding are eligible. The new measure, is designed to kick-start buying as quickly and easily as possible as it does not mention any conditions and focuses on big cities with affluent consumers and well-developed retail networks.

Several bits of macroeconomic data indicated over the past two months that the Chinese economy was bottoming out, including the China Purchasing Managers’ Index which showed positive readings for two consecutive months in March and April. However, the optimism was further cooled by the shock announcement last week that China’s exports had dropped by another 22.6 per cent in April compared with the same month last year after the pace of decline had slightly slowed to 17.1 per cent in March.

Thus, in order to make up for the continued lack in export demand, China would need an even stronger push to domestic consumption.

Regarding to the auto industry, government would expand an existing program aimed at encouraging owners of old, less fuel efficient vehicles to trade them in for new vehicles. The alternative may be to introduce lease policy in the automobile market. The January stimulus package in 2009 for the auto industry, which also included a cut in small car purchase taxes, has boosted Chinese auto sales to record levels in the past two months, but government officials are understood to be concerned that the impact of that program may start to fade in the months to come.

China & Russia oil deal

China just made a deal with Russian on $25bn oil purchase for over 20 years. That solves a chunk of China’s long term supply problem.

In return for its $25bn worth of loans, China will get a total of about 2.2bn barrels of oil over 20 years. Including interest at 5%, that equates to a price of $17.40 per barrel over the period, a bargain when the longest NYMEX futures contract, for December 2017, sells at $73.22.

The contract covers about 8% of China’s current oil imports, which are expected to increase sharply in coming years. The Chinese authorities regard long-term oil supplies as a key matter of national security, and are not prepared to rely more than modestly on the international spot market. Hence in recent years, Chinese oil companies have invested in a number of African countries to line up supplies, and have lengthy discussion with the other oil-rich countries.

Given its energy concerns, a 20-year contract with the erratically governed Russia could be regarded as only moderately risky. Russian oil companies may be less likely to default on a deal with China, which takes a strong stance in most international matters, than they would be on an equivalent obligation to the more passive EU, for example.

On the other hand, Russia gets the capital needed to upgrade its oil industry and established a long-term relationship with a large and growing customer. And even the low price of this contract probably represents a profit given Russia’s low extraction costs. It also provides guaranteed demand in the event of an oil glut.

This looks like a win-win deal for both sides.

China needs time to complete transition, if it will

Now the trade pattern for China is very interesting. With sharp decline in export and import, China’s trade surplus for January was a mind-blowing $39.1bn, just under November’s all-time high of $40.1bn. In comparison, in the first half of 2008 China’s average monthly trade surplus was an already high $16.7bn. In the second half it surged to $32.9bn.

The global economy is experiencing a sharp contraction in demand – which must be “shared” among all of the world’s producers. The decline in Chinese exports means that Chinese producers, of course, are absorbing part of that contraction; but the bigger decline in imports means that Chinese consumers are contributing a greater amount to the contraction in global demand.

What does it mean? It means the net result is non-Chinese producers must absorb more than 100 per cent of the contraction in demand from non-Chinese consumers. So no doubt we hear a lot of talks attacking the China trade and associated finance policies.

For China policymakers, they would nonetheless like nothing more than to see China increase consumption sharply. To that end they have unveiled a fiscal stimulus package and forced banks to expand lending at a pace so rapid – January’s new loans equaled one-third of all new loans in 2008 – it will almost certainly lead to a sharp rise in non-performing loans. However, the problem is that its weak consumer base make it very difficult for China’s fiscal stimulus to cause a rapid net increase in consumption. The most possible problem is that China will continue to export huge amounts of overcapacity into a world struggling with collapsing demand.

This can easily lead to worsening trade friction. Already Asian countries from India to Indonesia are squabbling fiercely over Chinese exports and western economies from France to the US are veering towards protection.

But trade war is not the solution. Threatening China with trade sanctions if it does not rapidly reduce the rising overcapacity it is forcing on to the rest of the world will not work. There is very little Chinese policymakers can do in the short run without causing a collapse in the export sector and a rise in unemployment so rapid that it could lead to social instability.

Again, my view is the world must recognize that China can adjust, but it cannot adjust immediately. It will take several years to do so, and will require significant changes in its financial system, in its political system and in its development model. To that end large economies need to work out a plan in which China is given a reasonable amount of time to make what will inevitably be a difficult transition. As part of the plan, the US, Europe and other big economies must assure open markets to Chinese exports.

The world, with US president Barack Obama in the lead, has a tremendous opportunity to help China through a difficult transition and, in so doing, create a new sustainable global balance of payments and a favorable institutional framework that will govern trade and capital relations for decades to come. If not, the advantages trade deficit countries receive from pushing the full burden of adjustment on to trade surplus countries will be overwhelmed by a global environment of deep mistrust and hostility.

This is not the time to attack China. China has a serious overcapacity problem that can best be worked out in global co-operation over years. To demand a quick resolution will bring nothing but trouble.

China has World-Beating Stocks in January

The world’s largest money managers say China’s steepest monthly stock gain in more than a year shows the fastest-growing major economy will avert a recession.

The Shanghai Composite Index, the broadest measure of shares traded on the mainland, rose to the highest in more than a month today after a weeklong Lunar New Year celebration. The gauge advanced 9.3 percent in January, the most among the world’s 10 biggest markets. The index fell 65 percent last year, the worst since at least 1996, data compiled by Bloomberg showed.

Chinese shares rebounded after the central bank lowered interest rates five times since September and the government announced a $584 billion stimulus plan. China’s economy is expected to grow near 8 percent this year even after expanding 6.8 percent in the fourth quarter, the slowest pace since December 2001.

China is going to do what it has to do to keep the economy humming, because of the deep pocket, it can enjoy faster growth than the rest of the world in 2009 and in 2010 as well. So far, China has pressured state-owned banks to increase lending, unveiled the 4 trillion yuan ($584 billion) stimulus package, reduced export taxes and agreed to provide support for 10 industries, through tax cuts and subsidies for steel and autos.

China is considering additional measures to help prevent a slump in economic growth, according to the Financial Times reported today, citing an interview with Premier Wen Jiabao.

Chinese stocks are trading at less than one-third of their peak valuation in January 2008. The Shanghai Composite Index is valued at 15.6 times reported earnings, down from a six-year high of 50 times a year ago. That’s still the highest among benchmark indexes in Asia.

2009 will be a difficult year for stocks. Government stimulus measures are unlikely to offset a contraction in private real estate investment and capital investment for export corporate. China stocks are most likely to be “range-bound” in 2009. Remember the government’s purpose is market stabilization, not market rebound back to the peak.

China Trade Puzzle

Revised figures published this week show that in 2007 China overtook Germany to become the world’s third-biggest economy.

At the start of last year China also looked set to become the world’s biggest exporter, but China’s exports tumbled by 13% in the fourth quarter, leaving them 3% lower in December than a year earlier. Yet, despite weak exports, China’s trade surplus rose to a record $457 billion at an annual rate in the fourth quarter—50% bigger than in the same period of 2007.

Here is the explanation: In the first half of 2008 China’s trade surplus did indeed shrink. But since then, although exports stumbled, its imports fell by much more—down by 21% in the 12 months to December, compared with over 30% growth in the first half. The slump in both exports and imports was exacerbated by the global credit freeze, which has made it harder for buyers to get letters of credit to guarantee payment. Imports were also dragged down by cheaper oil and commodity prices and weaker imports of materials and components used to make exports. Inputs for export processing account for over 50% of China’s total imports, and the sharp fall in purchases suggests that producers expect exports to weaken further.

But a more worrying reason why China bought less from the rest of the world is that its domestic demand has weakened. Consumer spending and manufacturing investment have so far held up reasonably well, but construction—a big user of imported raw materials—has collapsed. The impact of this on imports was exaggerated in the fourth quarter by an aggressive run down of stocks of steel and other materials.

With no end in sight for the rich world’s recession, China’s exports will continue to slide this year. Imports, on the other hand, are expected to grow. Imports of components for assembly and re-export will continue to decline, but once the government’s fiscal stimulus package kicks in, the large planned increase in infrastructure investment will boost imports of raw materials and machinery. If so, China’s trade surplus will shrink in 2009 and, for the first time in years, become a drag on GDP growth.

Another hot spot associated with the export plunge is Chinese currency. It has triggered speculation that the government might try to push down the value of the yuan. However, not only would a yuan depreciation risk provoking a protectionist backlash from America’s new government, it would also do little to help Chinese producers. China’s problem is not competitiveness: its exports are holding up much better than those in South Korea or Taiwan, which fell by 17% and 42% respectively in the 12 months to December, despite weaker exchange rates. The best way for China to support its economy—and to help unwind global trade imbalances—is instead to bolster domestic demand.

One piece of good news this week is that following interest-rate cuts and the government’s scrapping of tight restrictions on bank lending, total bank loans jumped by 19% in the 12 months to December, up from growth of 14% last summer. Thanks to the healthier state of its banking system, China is perhaps the only big economy where credit has heated up rather than frozen in recent months. If sustained, this could help to support domestic spending—and hence imports. China’s economy certainly can not depend on exports over the next year.

Foreign Investors Reduced Holdings of Chinese Banks

Bank of America Corp. sold $2.8 billion of China Construction Bank Corp. shares to boost capital and Hong Kong billionaire Li Ka-shing is raising as much as $524 million in Bank of China Ltd. stock sales.

Before that, UBS AG, Switzerland’s biggest bank, sold its entire stake in Bank of China on Dec. 31, the day a three-year “lockup period” ended.

Investors expect more sales to come as the transactions fueled concern other foreign investors will use their holdings to shore up balance sheets battered by the global credit-market contraction. Bank of America and some other foreign strategic investors are just having too many issues on their home turf, and they have to find a quick way to raise cash.

The Bank of America sale represents 13 percent of its stake in China Construction. Bank of America plans to be “a long-term and significant strategic investor in CCB, it’s believed that Bank of America sold the shares because of its financial situation. Bank of America, the largest U.S. bank, is trying to take advantage of almost $14 billion of paper profits from its CCB stake after paying about $33 billion to take over Merrill Lynch & Co.

So far, those transactions have no clues of bearish views on Chinese banks.

China eyes developed mine assets

China looks set to expand its mining and metals holdings in developed economies, industry analysts and executives claim, as global mining companies in financial distress search for cash-rich, long-term investors.

China has focused its overseas resources acquisitions in the world’s least-developed countries – such as copper concessions in the Democratic Republic of Congo – but could now be poised to expand its reach into Canada, Australia and mining companies in other countries.

Obviously, just as many deep-pocket Japanese companies are beginning a new wave of global acquisition, the Chinese companies realize there are massive opportunities in the market after this financial bloodbath. As I repeated several times, it’s a good time to buy foreign assets in the sake of expanding industry capacity and upgrading structures.

In addition, Chinese state-backed companies have more access to cash than their rivals in other countries, many state-backed companies can take a long-term view on the country’s demand for metals. Although industrial activity is slowing sharply in China, the government will step up spending on infrastructure as part of a fiscal stimulus package.

Some movements are already made. It’s reported that China began to build oil reserve on the wake of commodity slump. Last month, China’s third largest zinc producer, Zhongjin, bought a 50.1 per cent stake in Australian zinc miner Perilya for US$32m. Meanwhile, Chinese aluminium company Chinalco has indicated it might raise its stake in Rio Tinto to nearly 15 per cent.

The deals highlight Chinese companies’ ability in the current market to access developed assets in relatively developed parts of the world. But the Chinese companies should also be aware things have changed.

Buffett and China banks top cash-rich list

Twenty of the largest listed companies in the world are sitting on a combined cashpile of $570bn, demonstrating how some of the world’s biggest groups retain substantial firepower in the current downturn.

However, only 29 of the top 100 global companies by market value have net cash, according to analysis by the Financial Times. But those that do should be in a strong position in a severe downturn that is causing companies to scramble to conserve cash.

The list is led by four financial institutions with Warren Buffett’s Berkshire Hathaway at the top with $106bn in net cash, defined as cash and short-term investments or marketable securities minus debt. Strikingly, the next three positions are filled by Chinese banks with Bank of China, ICBC and China Construction Bank having $101bn, $89bn and $82bn, respectively.

People are divided on what cash-rich companies are likely to do with their money. Some believe that with company valuations at a relative low compared with recent years the time is ripe for acquisitions. If you have the cash, there are some unparalleled opportunities out there. You have rock-bottom prices and some very willing prices.

But some others disagreed and argued obviously the banks are hoarding cash, so why shouldn’t the corporates. Probably both banks and corporates will remain cautious in this global market downturn.

Some cash-rich companies already took actions: Berkshire is one of the exceptions, having already invested in blue chips such as GE and Goldman Sachs. Some other cash-rich companies have looked to take advantage of the relatively low valuations by boosting share buybacks or trying to buy rivals. Microsoft has done both.

However, investors, who were only recently crying out for cash to be returned to them through buy-backs, now care cash position more. They’re being more relaxed with managements in a high net cash position.

China aims to boost consumption

I never thought so-called RMB4000 billion stimulus plan has any meaningful points to current painful China economy, but this time, China government seems to be on the right track.

China’s economic policymakers meet towards the end of every year to establish a broad agenda for the coming 12 months. Yet this year’s conference, which begins on Monday, December 8, is likely to focus on specific policy measures.

When the Chinese government launched a fiscal stimulus package a month ago, it was more a statement of intent than a battle plan. Officials wanted to send a signal that they were taking action.

The “central economic work conference”, as the meeting is known, will give leaders a chance to refine and potentially expand spending plans for the next two years. The government has indicated it will introduce measures to boost consumption.

The initial announcement of the fiscal stimulus was rushed out, officials have acknowledged, because growth in the economy was slowing rapidly. And since the first announcement, the economy appears to have deteriorated further, including a drop in car sales and electricity production in November and reports that exports had decreased for the first time in nearly a decade.

One of the main criticisms about the fiscal stimulus plan is it focuses too heavily on infrastructure. According to the commission, about 80 per cent of the Rmb4,000bn ($581.8bn) investment over two years will be in roads and railways.

Ha Jiming, economist at China International Capital Corporation, an investment bank, said that infrastructure spending would not have as big an impact as it did after the 1997 Asian financial crisis because facilities were much better developed than a decade ago and state-owned companies were no longer such an important part of the economy.

If not carefully controlled, economists warned, infrastructure spending could also stimulate even more investment in the manufacturing sectors which are suffering from over-capacity, such as steel.
Given the concerns about the efficacy of massive infrastructure investment, there is widespread speculation that the authorities will do more to try to boost domestic consumption. That could include raising the threshold for income tax and help for low-income families, as well as accelerating spending on pensions, education and healthcare.

There appears to be a growing consensus within the central government that China has to stimulate domestic consumption more aggressively. The authorities are also under pressure to boost the stock market.

In the fact, this worldwide financial crisis offers an opportunity for China government to adjust the economic development path and solve the deep-rooted social issues. It’s hard to wheel a big train, but we have to.

China Passes Japan as Biggest U.S. Treasuries Holder

China surpassed Japan in September to become the biggest foreign holder of U.S. Treasuries, as foreign investors sought the relative safety of government debt. China leapfrogged Japan, increasing its Treasury holdings by $43.6 billion to $585 billion. Japan, now the second-largest foreign owner of U.S. government debt, reduced its holdings by $12.8 billion to $573.2 billion.

The trend behind it is that China led all foreign official investors in September by posting a net increase in U.S. Treasuries for the sixth month in the past seven. Japan was a net seller of Treasuries for the fourth month in the past six. China’s ownership of U.S. government debt has doubled since July 2005, while Japan’s holdings are down from a peak of $699 billion in August 2004.

It paints a much more positive picture of cross-board investments than expected. China, along with others, is showing more demand than anticipated for U.S. assets. Maybe, I am just guessing that the continuous increase of China’s stake of U.S. Treasuries is under an agreement between Beijing and Washington.

Total net purchases of long-term equities, notes and bonds increased a net $66.2 billion in September from $21 billion the previous month, the Treasury said today in Washington. Including short-term securities such as stock swaps, foreigners bought a net $143.4 billion, compared with net buying of $21.4 billion the month before.

China Life is ready to take actions

I am always feeling that in this financial crisis, some deep-pocket Chinese financial institutions are facing golden, or even once-in-life opportunities to spread business over the world. In the short term you may see some losses and corresponding slowdown in Chinese investment overseas, but I don’t think we should all close our doors because of the risks.

China Life, the world’s largest life assurer, is eyeing overseas acquisitions as it seeks to take advantage of the global financial crisis to gain a foothold in foreign markets.

Liu Lefei, chief investment officer, said the crisis in financial markets was not yet over, but China Life believed the moment to begin making overseas investments was fast approaching. Mr Liu also said they were cautiously but actively looking for M&A opportunities. After doing a lot of research, the opportunities were becoming more and more obvious.

China Life has yet to make any overseas strategic investments, and its investment portfolio is also almost entirely domestic. As China’s largest insurer and a big institutional investor, they had Rmb30.5bn of cash on its balance sheet. So for a such well-funded Chinese financial group, the recent market chaos is seen as a window to make opportunistic investments.

Potential targets were more likely to be small or medium-sized financial groups and could be anywhere in the US, Asia and Europe. China Life has been mentioned as a potential buyer for parts of AIG’s Asia-Pacific business if the troubled insurance group puts the assets up for sale.
Chinese groups made a number of high-profile investments last year in overseas financial groups before the worst of the credit crisis hit the sector.

China Investment Corp bought stakes in Blackstone and Morgan Stanley, which have dropped sharply in value. Ping An made the first overseas investment by a Chinese insurer when it bought a 5 per cent stake in Fortis, which was later partly nationalized. The group booked a Rmb15.7bn ($2.3bn) loss on the Fortis investment.

Due to such big previous overseas investment loss, Chinese officials have signaled that big investments in overseas investment groups were now on hold. However, while there are apparently huge risks lurking in the way ahead, this provides at the same time huge investment opportunities.

Why China Stimulus is necessary

The truth is the world is entering a recession, possibly the worst since the second world war. The open world economy forces every player to act at home and abroad.

In the short term, there is no alternative to another massive fiscal boost, strongly supported by aggressive monetary policy. Forecasters have been downgrading their views of 2009, for both the US and the rest of the world, at an extremely rapid rate (see chart). Last week the IMF reduced forecasts for world economic growth in 2009 from the 1.9 per cent forecast as recently as October to a mere 1.1 per cent. The advanced economies are now forecast to shrink by 0.3 per cent.
Let’s start from U.S. A bigger US fiscal deficit would offset the rise in the desired financial surplus – the excess of income over spending – in the private sector at a time of recession. In the early 1980s, the private sector surplus reached 6 per cent of gross domestic product (see chart). But the US would also probably run a current account deficit of 4 per cent of GDP at high levels of employment. Since the private, foreign and government balances must sum to zero, the fiscal deficit may need to be as huge as 10 per cent of GDP.

Such vast fiscal deficits are only a temporary solution. So how might they end? In the US and other countries with highly indebted private sectors, such as the UK, a return to large private sector financial deficits would be highly undesirable, even if achievable. A vastly better outcome would be bigger savings and a reduction in current account deficits. Thus, the expansion in net exports that has recently been so vital for US growth must continue (see chart).

If the US external correction is to be consistent with global growth, demand must expand vigorously elsewhere, particularly in chronic surplus countries. The new administration should lead the world towards an understanding of a point that concerned John Maynard Keynes: it is hard to accommodate countries with massive and persistent current account surpluses. If that’s the truth, the counterpart will remain in deficits, and if prolonged, almost always lead to financial crises. The way out is for most surplus countries to spend more at home. So the expansion program announced by the Chinese government early this week is a must now, maybe just a beginning.

China’s export slows

Everybody realized that China’s export slows in the worldwide financial turmoil and economic slowdown. Here is the concrete example: overseas orders showed significant decline at the recently concluded Canton Trade Fair, China's largest and most well-known fair for international buyers. The total value of contracts signed at the fair was $31 billion, down 17.5% from the fair held this spring and down 16% from the autumn fair last year. The last time export orders declined was in 2003, when China was hit by the SARS epidemic.

According to a survey at the fair, many overseas customers are concerned about the global economic slowdown, which has led them to either cancel the orders or only make purchases for the short term. Because most of the foreign buyers at the fair placed orders for next spring's delivery, we expect more exporters will find themselves in trouble in 2009.

The other side of the coin is the deteriorating consumption in major importers of China products. In U.S. the October unemployment numbers came out were ugly, showing a loss of 240,000 jobs. But the really bad part was the negative revision to August and September, by a further loss of 179,000. As the unemployment and recession accelerating, U.S. consumers might and are forced to change their consumption behavior. Household debt, including mortgages, skyrocketed from 47% of personal income in 1959 to 117% in the fourth quarter of 2007. It’s predictable that consumption - the strongest U.S. economy drive will cool.

CCB is to launch hedge fund in healthcare

The investment banking arm of China Construction Bank plans to launch a 5 billion yuan ($731.3 million) fund to focus on investments in the country's rapidly growing healthcare sector, state media reported on Tuesday.

According to the official Xinhua News Agency report, Hong Kong-based CCB International is leading the fundraising but has not yet reached the initial target of 5 billion yuan. Once launched, the fund would focus on investments in healthcare-related sectors including pharmacy, medical equipment manufacturing, medical institutions and services. The fund, to be called China Healthcare Investment Fund, would be the first domestic investment fund specialising in investments in China's heathcare industry.

With China's economic growth and aging population, healthcare investments have become a priority of the government. Besides, China's economic boom has resulted in stark health inequity between its urban and rural populations, and health experts have urged the Chinese government to work harder at improving healthcare options for China's rural population. Beijing is reforming its medical and pension system in an effort to bridge this gap between the poor and rich.

In the market, many global private capital investors have already invested large sums in Chinese medical firms in hopes of making hefty profits, and some of them, such as Mindray Medical International Ltd, have successfully listed or expanded abroad.

China and Hong Kong market U-turn?

Before this crisis, I've paid less attention to technical anlaysis. However, in current abnormal enviornment, as fundamentals are ruined, techonical analysis might be a bright spot to read the market.

The following two charts tell us China and Hong Kong markets are about to have a nice rally in short term. Let's see what will happen. Hopefully this signal would help restore the confidence a little bit.