Sunday, July 12, 2015

China links for the day

As the latest chapter of 'Capitalism with Chinese Characteristics', on financial market management, unfolds, a few snippets from the press coverage during the week. From a redacted chapter of a new World Bank report, via FT, on the Chinese state's conflicting roles as owner, promoter, and regulator of the financial system, 
Instead of promoting the foundations for sound financial development, the state has interfered extensively and directly in allocating resources through administrative and price controls, guarantees, credit guidelines, pervasive ownership of financial institutions and regulatory policies.
The recent stock market crash has seen the Chinese government throwing virtually everything to backstop the fall. David Pilling summarized it brilliantly,
Authorities have tried everything bar passing a law stating that stocks can only go up. With each iteration, their measures have looked more desperate. 
The World Bank report had this graphic which highlights the skewed nature of Chinese economic growth, focused more on capital allocation than productivity improvements,


The same FT report has this about the colossal waste laid out by this capital accumulation binge,
About half of all China's fixed asset investments between 2009 and 2013 - equal to about $6.8 trillion - went into "ineffective" projects, according to government research. 
And this in turn has engendered a Ponzi scheme involving banks, corporates (public and private), and savers (whose exposure to the equity markets has expanded dramatically in recent years),
A consequence of the investment boom is that many state-owned enterprises are lossmaking, while state-owned banks have lent excessively to these companies and to local governments. The authorities are urging them to lend more despite the fact that they will never be repaid in full.
Retail investors have been encouraged into investing in the equity markets, often through highly risky margin loans,  
Margin lending, in which investors borrow money from brokerages to buy stocks, soared from Rmb698bn at the end of October to a peak of Rmb2.7tn on June 18. But an unknown amount of grey-market margin lending also proliferated, funded by shadow banks through complex structures known as “umbrella trusts”... Brokerages and fund companies... encouraged the perception that government policies would drive the market higher. Investment storylines talked about “concept stocks” linked to big themes such as state-owned enterprise reform and Mr Xi’s “New Silk Road” infrastructure blueprint for Asia and Europe.

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