Wednesday, July 28, 2010

China : State & Local Owned Enterprises vs Madoff, Ponzi, Enron......

The headline is for sure a little bit "provocative" but at least in part some similarities are difficult to deny.... A nice follow up to Another Reason Why The Chinese Banking Financial Strength Rating Is Just Beating Iceland & Kyrgyzstan..... Looking more & more like an injuste to Kyrgyzstan & Co.....;-)

Die Überschrift ist sicher ne leichte Übertreibung..... Trotz allem kommt man schwer darum herum zumindest in Teilbereichen gewisse Gemeinsamkeiten zu entdecken.....Nette Ergänzung zu Another Reason Why The Chinese Banking Financial Strength Rating Is Just Beating Iceland & Kyrgyzstan..... Inzwischen fast als Beleidigung Islands zu bezeichnen.... ;-)

Just how risky are China’s housing markets? VoxEU
We collected data on all the residential land parcel auctions in Beijing dating back to Q1 2003, and created a constant quality price index for Beijing residential land, controlling for a number of location and site quality variables that are described in Wu et al. (2010).

Figure 5 shows that real, constant quality land values increased by over 750% since 2003 in the Chinese capital, with more than half of that rise occurring over the past two years. Additional regression analysis showed that state-owned enterprises controlled by the central government played a meaningful role in this increase, as prices were 27% higher on the parcels they won at auction compared to otherwise equivalent land sites purchased by other investors.

The role of state-owned enterprises also is potentially worrisome. It could be that these entities are superior investors and are purchasing sites that are of especially high quality in ways that we cannot control for in our empirical analysis. However, it also could be that moral hazard is at work here, as these entities are thought to have access to low cost capital from state-owned banks and may believe they are too big to fail. If this is the driving force, then prices are being bid up as one arm of the government buys from another.
More on the same topic.....

Mehr zum gleichen Thema.....

Meanwhile, in the Chinese property market… FT Alphaville
And once you’ve picked your eyeballs off the floor after seeing that 800 per cent figure, do note the interesting finding about the SOEs.

In particular, the paper says that a ‘meaningful fraction’ of the rise in prices was driven by the few but huge companies backed by central government — ‘central SOEs’. And central SOEs are getting more influential in the market — see chart:

And as the paper continues, by way of explanation:

…Central SOE developers pay high prices relative to the values of nearby housing unit sales prices. That suggests these particular buyers simply pay more and that this does not merely reflect omitted quality effects. Moral hazard arising from these entities believing they are too important to fail, combined with their access to low cost capital from state-owned banks, also could help explain their bidding behavior… It remains an open question as to why central SOE developers became so much more active in housing development over the past few years.

Here Comes The Real Stress: Only 27% Of China Project Loans To Be Repaid In Full ZH
Chinese banks may struggle to recoup about 23 percent of the 7.7 trillion yuan ($1.1 trillion) they’ve lent to finance local government infrastructure projects, according to a person with knowledge of data collected by the nation’s regulator

Local governments set up the financing vehicles to fund projects such as highways and airports due to limits on their ability to directly borrow money. The central government this year restricted borrowing on concern money isn’t being used for viable projects.

Only 27 percent of the loans to the financing vehicles can be repaid in full by cash generated by the projects they funded, the person said

Chinese rating agency criticises … Chinese rating agencies FT Alphaville
July 27 (Bloomberg) — Credit ratings assigned to yuan- denominated bonds issued on behalf of local governments in China are misleading and don’t reflect risks investors face, Dagong Global Credit Rating Co.’s chairman said.

Local government-backed borrowers shop around for the best rankings from Chinese ratings companies and “whoever gives them a better rating gets the business,” Guan Jianzhong, chairman of privately owned Dagong, one of China’s five official ratings agencies, said in a Bloomberg Television interview in Beijing yesterday. “This is very dangerous.”

Needless to say that every large bank has China Inc. as a majority owner.....

Denke man muß nicht extra erwähnen das zudem jeder der großen Banken unter Mehrheitskontrolle des chinesischen Staates steht.....

The PBoC can’t easily raise interest rates M. Pettis / China Financial Markets
One of the problems with a severely repressed financial system, especially one with rapid credit expansion, is that there tends to be a huge amount of capital misallocation supported by borrowing, and in an increasing number of cases it is only the artificially-reduced borrowing costs that allow these investments to remain viable. I worry that even if the PBoC wanted to raise rates, it would not be able to do so without exposing how dependent borrowers are on artificially cheap capital.

Take the most obvious example, the PBoC itself. The central bank officially has about $2.5 trillion in reserves. The PBoC has funded this position with an equivalent amount of RMB liabilities, which makes it very vulnerable to changes in the value of the currency.

Weirdly enough, although the numbers are huge, it has proven difficult to convince anyone that the PBoC is not the richest institution in the world, and that it is actually very vulnerable to big losses

The problem for the PBoC occurs not just because of the currency mismatch but also because it needs repressed funding costs to keep it profitable. How much do the PBoC foreign currency assets earn? I would guess probably between 3% and 4%, maybe less. The RMB funding cost, on the other hand, is roughly between 1.5% and 2.5%. This leaves the PBoC with a net positive carry of between 1% and 2%.

If the RMB appreciates by as little as 2% a year, in other words, the PBoC runs a negative carry on its assets. Every further 1% increase in interest rates, or additional 1% rise in the value of the RMB, then, erodes its capital by at least $25 billion (annually, if it happens through an increase in interest rates).

Many years of very low cost borrowing has created a huge dependency on low interest rates among SOEs, local governments, and other creditors of the bond markets and the banks (not to mention the banks themselves), all of whom are directly or indirectly funded by long-suffering households.

As I discussed in an entry several weeks ago, repressing the interest rate is the equivalent of granting hidden debt forgiveness
Moral Hazard everywhere.....

Moral Hazard wohin das Auge blickt......


ICBC May Raise $6.6 Billion, Adding to China Bank Share Sales
ICBC’s offer brings to more than $60 billion the amount China’s five largest banks are raising after a record $1.4 trillion in lending last year put pressure on capital levels.

Bank of China Ltd. has also said it plans a CNY60 billion rights issue in Shanghai and Hong Kong and China Construction Bank Corp. is planning a CNY75 billion rights issue in both markets
I assume the term "Drop in the bucket" fits perfectly....

Denke die Bezeichnung "Tropfen auf den heissen Stein" dürfte passen....

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