HOUSING ENSURED: A public rental housing project goes up in southwest China's Chongqing Municipality. The city plans to build nearly 500,000 homes for low-income residents this year (ZHOU HENGYI)
Numbers of the Week
687.3 billion yuan
Net profits of China's 17 listed banks rose 33 percent year on year to 687.3 billion yuan ($104.35 billion) in 2010, said the consultancy firm Ernst & Young.
109.5 billion yuan
Sales revenues in the national program to subsidize rural purchases of home appliances totalled 109.5 billion yuan ($16.9 billion) in the first five months, more than doubling that of last year, said the Ministry of Commerce.
TO THE POINT: The financing vehicles of local governments remain a concern despite government efforts to control their mountains of debt. Mergers and acquisitions are on the rise in the real estate sector as deep-pocketed developers take over financially starved rivals. China snaps up long-term Japanese government debt as the country attempts to diversify its holdings of foreign exchange reserves. Growth in the non-manufacturing sector has slowed, due to a drop in the purchasing managers index in May. Ford Motor aims to expand in China, hoping to cash in on the country's auto market boom. The international accounting firm PwC expects China to become the world's top banking market by 2023.
Commercial banks had disbursed 14.376 trillion yuan ($2.2 trillion) to the financing vehicles of local governments by the end of 2010, said the People's Bank of China, the central bank.
The financing vehicles flourished across the country in 2009 when local governments rushed to borrow money to fund a significant infrastructure building spree. There were at least 10,000 local financing vehicles in the country by 2010, soaring 25 percent from 2008.
"The debt risks are escalating as most of the loans come due during 2011 and 2013", said the China International Capital Corp. Ltd. in a report. "Rubbing salt into the wounds is also rising interest rates."
But Jia Kang, Director of the Research Institute of Fiscal Science, a think tank affiliated with the Ministry of Finance, downplayed the concern, saying the burden remains bearable.
The loans could raise China's debt-to-GDP ratio to around 50 percent, still below the alarm threshold of 60 percent, he said.
Li Yang, Vice President of the Chinese Academy of Social Sciences, agreed. "A serious debt crisis is less likely as the Chinese economy is steering a steady course of growth, and returns from the infrastructures could help cover the debt."
The central bank also pledged to further streamline the financing vehicles and strengthen their standardization and transparency.
"Efforts will also be made to explore alternative channels for local governments to raise financing, such as municipal bonds," the central bank said.
Chinese real estate giants are pushing ahead with mergers and acquisitions (M&As), taking advantage of the financial woes of their smaller rivals.
In the first quarter of this year, 32 M&A deals occurred in the real estate sector, more than tripling that of the same period last year, according to data from the Beijing-based Zero2IPO Research Center. Those deals were worth 8.32 billion yuan ($1.28 billion), soaring 229.1 percent year on year.
In the latest case, the Guangzhou-based EverGrande Real Estate Group recently paid 1.66 billion yuan ($255.4 million) for a 71-percent interest in the Shenzhen Construction Group Co. Ltd. In another move, Beijing Urban Construction Co. Ltd. agreed to acquire a 45-percent stake in the Beijing Century Hongcheng Co. Ltd.
"Smaller property developers are coming under mounting financial pressures as their sales plunge and domestic monetary environment tightens," said Yang Yongxu, an analyst with the E-house China Research and Development Institute. "That provided an opportunity for cash-awash behemoths to expand their footprint."
"With austerity government measures set to continue, there will be further consolidation in the industry this year," said Xu Weiqing, an analyst with Zero2IPO.
The sector is likely to witness more than 100 M&A deals in 2011, compared with 84 in 2010, Xu said.
"The consolidation is a needed boon for the industry to mature," said Nie Meisheng, Director of the China Real Estate Chamber of Commerce. "Now is the best timing for the property gurus to solidify their market foothold."
Loading Yen Assets
China bought a net 1.33 trillion yen ($16.6 billion) in long-term Japanese government debt in April, which is the largest amount since January 2005, according to the data released by Japan's Ministry of Finance.
As China tries to diversify its assets with its huge foreign exchange reserves, it probably wants to have yen-denominated assets to some extent, said Tetsuya Inoue, chief researcher for financial markets at the Tokyo-based Nomura Research Institute Ltd. The long-term appreciation trend of the yen is clear.
In another move, China trimmed its holdings of U.S. Treasury securities by $9.2 billion in March, the fifth straight month of net sales.
But worries abounded about prospect of the Japanese economy. In April, the international credit rating agency Standard & Poor's lowered the outlook for Japan's government debt to "negative" from "stable," warning that the huge cost of the recent devastating earthquake will hurt the country's already weak public finances.
Non-manufacturing Index Slowdown
The purchasing managers index for the non-manufacturing sector fell to 61.9 percent in May 2011, 0.6 percentage points lower than in April, said the China Federation of Logistics and Purchasing (CFLP).
The index provides a snapshot of the business climate in the service sector and other non-manufacturing businesses. A reading above 50 percent indicates expansion.
"The index shows that non-manufacturing economy of China has maintained momentum, though growth is slowing," said the CFLP. "Pressures are mounting on many companies as costs inflation creeps up and domestic monetary environment tightens."
Retailing businesses have been holding up, but consumers are becoming increasingly prudent in shopping amid simmering inflation, said Cai Jin, Deputy Director of the CFLP.
Among the monitored sectors, construction was the best performer, with a reading at 64.2 percent, followed by 56.7 percent of productive services. The index for the real estate industry was below 50 percent.
Ford Motor Co. is gearing up to expand its presence in China's auto market with an eye toward increasing its global sales by 50 percent by 2015.
Like many of its competitors, Ford is struggling to move out of shadow of industry fallout. While its home market languished due to lingering weakness of the U.S. economy, the Chinese market continued to be a safe haven.
In May, the company sold 45,162 units in China, up 14 percent year on year, while its U.S. sales dropped 2.4 percent.
China in 2009 toppled the United States from its decades-long position as the world's largest auto market, thanks to expanding consumer wealth and generous policy incentives.
In China, Ford still lags far behind GM, Toyota, Volkswagen and Hyundai in terms of market shares. In 2010, its China sales totaled 582,467 units, barely 25 percent that of GM.
Ford said it plans to add 100 dealers this year, boost its production capacity to 1.1 million vehicles by 2012, and double its dealer network in China by 2016.
Joe Hinrichs, President of Asia Pacific and Africa at Ford, said China's auto market may grow 5-10 percent this year, a slower but more sustainable pace for the industry.
China is expected to replace the United States as the world's largest banking market by 2023, raising pressure on Western banks to brush off the effect of the credit crisis, said the international accounting firm PricewaterhouseCoopers (PwC).
During and after the global financial crisis of 2008, many Western banks were hit hard causing the value of their assets to shrink dramatically. Chinese banks, however, were almost unaffected by the storm and have continued to dominate global rankings by market value. And lenders have already secured heavy emerging market exposure to tap into booming demand for financial products from young and increasingly wealthy populations, it said.
China's economy and wealth have been expanding faster than the United States and the UK. Its domestic banking assets are expected to be more than $30 trillion by 2023, said PwC.
PwC's chief economist John Hawksworth urged Western lenders, whose power has been sapped by the credit crisis, to heed the accelerating shift in global economic power and claim a share of emerging markets' relatively untapped populations.
"With populations of well over 1 billion each, access to markets like China and India is critical for growth," he said.