Wed Jan 7th, 2009 at 02:36:59 PM EST
Nekkid "Bad [FDI] News Out of China"
Read a collection of finance advisories for Westworld institutional investors. Notice the conspicuous absence of named foreign banks operating as their agents ("cross-border capital flow") and supercilious substitution of "hot money" for "speculation" arising from liberalization of money marketing required of China by free trade agreements. Pettis and Wright -- apparently close personal friends of Setser-- attribute a (unofficial)(foreign currency) "reserve" bubble to Chinese criminals packing euros and USD like Columbian coke mules, because apparently the authors prefer, actually, not estimating legitimate "cross-border" commercial banking and brokerage activities apart from Anglo treasury swaps. And sales to PRC state-owned suckers, of course, that demonstrate national obligations or political subjugation to aliens.
There is no technical definition of hot money and of course, with much of it entering the country illegally, it is tough to measure, but it is possible to obtain through proxies for speculative inflows and to track their change over time. In every case the proxy, however it has been derived, shows a startling increase over the past 12 months. [noooo, three years] The fact that in recent months the authorities have taken increasingly desperate measures to staunch the inflows confirms this interpretation of soaring hot money proxies.
Because they know the PRC restricts renminbi (once, briefly distinguished ForEx Certificates, now de facto convertible certificate) and corporate equities trade by broker license and by share class (HK, Shanghai, and Shenzen exchanges) and purchase of domestic assets such as real estate and yuan. Yuan not renminbi is the currency in circulation.
Foreign households (individuals) trading yuan, jiao and fen denominations in-country? No, I don't think so. Foreign households trading renminbi in open market? Yes, perhaps in shares of ETF vehicles marketed by commodity arbitrageurs but not likely. Chinese households converting yuan to renminbi to trade in open market? Through their retail Barclays or Citibank broker? Possible, but who's counting?
Back to Nekkid who also linked to this presumed sympathetic commentary: Oh, btw, the damage is done. Olympics are over! Boils are weeping! Time to exit!
And separate from the flight of hot money, we may be seeing a reversal of FDI investment as newly needy multinationals unload their stakes in Chinese companies to shore up their balance sheets, as Bank of America has. ...
As it happens Bank of America and UBS headline today's news. Merrill Lynch, FRB primary dealer and recently acquired BoA brokerage unit handled the placements. Understanably, the US-based financial services firm is dumping 52.6B, or 13%, of its shares in a JV known as China Construction Bank Corp. valued at HKD 3.92 each --that is neither euro or USD or remnibdi, signaling doubt in appreciation of the currencies. UBS sold its entire stake in Bank of China "31 Dec, the day a three-year 'lockup period' ended."
[Mr] Li's Magnitico [Holdings Ltd] was part of a group of investors led by [bottom-feeding residential RE lender] Royal Bank of Scotland Group Plc that bought 20.9 billion shares in Bank of China in 2005, before the lender went public. Magnitico owned 24 percent of the group, giving it about 5 billion Bank of China shares, according to Bloomberg calculations based on the Chinese bank's 2006 Hong Kong initial share sale prospectus. ...
Bank of America plans to be "a long-term and significant strategic investor in CCB," the U.S. lender said in a November statement. The stock Bank of America bought in 2005 became eligible for sale in October, prompting analysts to suggest the U.S. lender would sell part of its stake. ...
Excellent example of financial capitalists' colonizing tactics, modified shock 'n' awe shall we say: Every territory needs a Millionaires' Club.
Bank of America canceled a December offering partly because of a Chinese securities law banning investors holding more than 5 percent of a locally incorporated, publicly traded company from selling shares within six months of buying the stock, two people familiar with the matter said at the time.
The U.S. bank decided to try again on expectations the rule doesn't apply to Chinese shares traded in Hong Kong, a person with knowledge of the matter said, declining to be identified. Bank of America spokesman Scott Silvestri declined to comment on the latest sale. [emphasis added]
Officially, if I recall correctly, total FDI in any one PRC-domiciled asset is limited to 50% ownership. This constraint may have tightened, if anything, since 2003. Back to motley blogger who's forgotten to mention that Royal Bank of Scotland owns 8.5% of Bank of China and Goldman Sachs, among others, owns 16.5B shares in Industrial & Commercial Bank of China Ltd.
Back to Nekkid's frequently cited "brilliant" editorial on money marketing -- missing the finer points such as USD to EURO rates and either's exchange in renminbi.
ChinaStakes gives an update on the Chinese housing market that makes the US seem almost balmy [meaning, crazy? or placid?]. Note that in China, consumers mortgages are not common [because PRC restricts private credit and investment!] and even when they are used, loan to value ratios are very low, so a fall in real estate prices does not lead to the sort of large scale foreclosures that we see here [too funny]. However, Chinese banks [e.g. People's BoA Branch #25, People's GS Broker #18] are very exposed to developers [e.g. Peoples Blackrock-Archstone #4], and the article discusses how a very high percentage of new development is unsold (enough to constitute a three year overhang in Beijing, for instance).
Sinofile, your "China business matrix," reported bubble remediation strategy as early as Jan 2008. Kiss of death to anticipated rents.
I would be surprised to find an article or power point presentation that reproduced US Housing and Urban Development (HUD) "public-private" partnership benefits in Mandarin. I imagine these would be by now scrubbed by the PRC Google, if not SBA "champions."
Shanghai to stop non-local residents from buying houses to ease housing difficulties for urban low-income families
Xue Jianxiong, director of Youwei Real Estate Research Center, an institute for real estate research, says: "In fact, the purchasing power of foreign investors is focused in the high-end market. As a result, restrictions on foreign investment in real estate speculation will merely stabilize the housing market. But if non-local residents are not allowed to speculate in the real estate market, a vital dampening effect will affect currently excessive demand in Shanghai." ...
He says it can be predicted from this data that Shanghai will create a huge impact on the city's housing market by restraining non-local residents from buying local real estate through the Residence Permit System or other methods.
Who knows what the future holds: Stone-cold confiscation in 2009 or a "repurchase" program funded by official PRC reserves? Perhaps neither. China is doomed.