Monthly Archives: October 2011

Six boys versus five girls – China’s birth ratio in 2010

According to UNDP Human Development Index, China has the most skewed gender birth ratio (121.2: 100) is the world, not-very-closely followed by Armenia (116.5: 100) and Azerbaijan (115.6:100). By looking at the top 15 countries, it is unsurprising to find some Asian neighbors: Korea, India, Hong Kong and Singapore, which have birth ratios lower than 1.1. China was once enjoying such level of birth ratio (which is already quite skewed) back to the 1990s, which makes the Sharp rise in the past 20 years even more astonishing. It is hard to believe the gender selection or abortion not playing a significant role behind the ratio.

What about the pattern of birth ratio back to 1990s:

China was then ranked the 2nd in the world, following South Korea. What is obvious from the graphs is that the birth ratio has been more skewed in 2010 than in 1990. One explanation is the effect of gender selection prevailing in quite a few developing countries. Another would be some findings that giving birth at a latter stage of life (which becomes increasingly common in certain countries) tends to increase the chance of having a male baby than a female one. 

To put it in a bigger picture, one could find the most skewed ratio happens in countries with medium level of human development; in addition, Asian people tend to have more boys for every 100 girls than the Arab people:

Developed    
OECD 105.4 105.5
Non-OECD 106.2 106.5
Developing    
Arab States 104.2 104.3
East Asia and the Pacific 108.5 116.0
Europe and Central Asia 104.4 105.6
Latin America and the Caribbean 103.8 104.2
South Asia 106.8 107.5
Sub-Saharan Africa 101.3 101.9
     
Very high human development 105.5 105.6
High human development 104.2 104.8
Medium human development 107.8 112.2
Low human development 102.1 102.5
     
Least developed countries 102.2 102.5
     
World 106.0 108.4

Given the huge Chinese population, we need to worry in the future not only about how to deal with the large CA surplus but also about handling the huge male surplus.

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[Archived post] An email about SH vs HK on being CNH center and policy view on Chinese investing abroad 2011-10-14

Below is extracted from an email exchange with my friend:

I agree with you that HK is way ahead of SH and as you have already noticed, this situation has been in place for the past two decades when China was increasingly connected with the world. If I have to put a scale of 0 to 10, I would say HK always scores 8 to 9 in terms of its advantage in being the RMB liberalization center while SH scores 4 at best, although it is gradually improving. Main reasons lie in the soft power and much less regulatory barrier in HK as suggested in the article (and I agree) .

And I agree with you that it is better now than any time in the past for HK to become the offshore RMB (CNH) market, but I see it from a slightly different angle. HK’s popularity as CNH market is driven by, and also positively correlates with, the extensiveness of China’s trade with the world and RMB’s strength vs other major currencies. In contrast, SH’s popularity as an CNH market is driven by, and negatively correlates with, the strictness of China’s control on its capital account.

More importantly, if I put the case to extreme, SH’s popularity may even be negatively correlated with China’s strong growth prospect over the developed countries and some developing countries. That seems ironic but it is perfectly reasonable given the huge amount of international capital flow that is constantly hunting for higher yield and better growth: when the money flows to countries with higher growth, it is likely to cause overheating problem in countries with less-developed financial markets (emerging markets in mind) and consequently the government has to impose all kinds of barrier to it, which is the situation you have seen this year in certain emerging markets like Thailand and Brazil who imposed large withholding tax on foreign investment in their local-currency bonds. Likewise, as China offers better growth prospect than the indebted Europe and the US now, the Chinese government has to strengthen its control on capital account and prevents the international capital flow from entering and leaving China easily. That is why I argue SH’s popularity as CNH center is negatively impacted by China’s higher growth.

And interestingly, the point I just raised is not only related to the reason why HK is (again) better positioned than SH to become the major CNH market, but also related to my next argument: now it is the best time for either SH and HK to formulate relevant policies that help domestic capitals flow out. It seems you disagree with me on this point, but please correct me if I have said anything wrong:

  1. From policymaking point of view, it is the best time to let domestic capital flow out because there is less risk of over optimism of Chinese investors when they “go out” to invest in foreign assets, and hence less risk of blind investing. Imagine what would have happen if Chinese investors were already allowed to invest a massive amount of money in foreign assets in the “good” period (e.g. 2006) when the whole world was cheering for a long-lasting bull market? The loss could have been bigger following the collapse in 2008.
  2. From investment point of view, it is also a good time to encourage domestic capital to buy foreign assets which are traded at low premium and some even at fire-sale price.
  3. From monetary policy point of view, China should now encourage domestic capital to do foreign investment as a way to release the problems of excess credit and overheating problems in China (the persistently high inflation is indeed a good indicator).
  4. Even from a “social pressure” (as you mentioned) point of view, it is the right time to open the door and release the barrier to foreign investing: as the bad news of European debt crisis etc runs on the headlines every day which were largely created by the Europeans themselves, no one would accuse the Chinese government of letting him invest abroad when he makes a loss in the investment.

I am really passionate for this topic and look forward to any update from your side!

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[Archived post] About SAFE’s purchase of CBC shares from BoA 2011-9-6

The Sale of shares of China Construction Bank (CBC) by Bank of America (BoA) to the State Administration of Foreign Exchange (Safe) seems more than just a rumor. If it is true, then it is really a very interesting move of how China manages its substantial foreign exchange reserve, and I suspect such move is neither efficient nor healthy, despite praise from some people.

Some people argue that the SAFE’s purchase of the CBC share helps diversify the foreign exchange reserve, reduces the reliance on foreign government debt which offers meager yield and entails risk of debt crisis, and therefore enhance the return on the FX reserve in the long run. Others even go further by praising the timing of the deal: given the negative outlook in developed countries, there are only a few wealthy-enough buyers in the market for the CBC shares held by BoA which is eager to offload the share to recapitalize its tarnished balance sheet. For this sense, people argue that the final buyer –SAFE- should probably get a good deal, which further increases the future return from this investment.

However, I want to question about the justification for a country’s FX reserve manager to invest in the foreign shares of its (still largely) domestic bank. Let alone the resulting fact of the increase of the public ownership in the (largely nationalized) bank, let’s assess whether it has a positive or negative impact on China’s foreign exchange policy and the economy as a whole.

It is reasonable for China to invest its FX reserve to buy overseas real assets such as natural resources and/or technology as they are important input for medium-term growth and they are usually what China lacks. However, if China invests its FX reserve in the foreign/overseas shares of a Chinese company whose business is still coming within China, then it does not help reduce the large FX reserve that China holds. This is because the company that receives the proceeds of the investment (originally FX reserve) will convert the money back to RMB as it needs to invest and do business within China. Therefore, it creates more FX reserve that the central bank or SAFE needs to manage, and further worsened the inefficiency problem of Chinese foreign exchange policy. The result of the case will be even worse if the FX reserve is invested in a domestic bank rather than a company, because the former can engage in more lending which is essentially a money-creation process.

In the BoA-CBC-SAFE’s case, some opponents to my view may argue that given this is only a secondary-market sale, there is no money really going into CBC’s pocket and does not create additional capital for lending. However, it may provide strong support for CBC’s share price for future capital raising activities which will increase the lending base. That being said, strong price in overseas shares is for sure not necessarily bad; at least it helps the company to finance overseas investments which could be profitable. However, when we can reasonably assume that, in the foreseeable future, CBC will still mainly engage in domestic lending business –given the prudential regulation on Chinese banks and regulatory barriers to acquire foreign banks- SAFE’s purchase of CBC’s shares is simply another way of loosening the monetary policy and increasing domestic money supply. Doing so in such a convoluted way may well avoid some critics about Chinese monetary policy that causes excess credit and money growth.

Last, I have one counter argument to the view that such deal increases the return on Chinese FX reserve. Things being equal, enhancing the return from FX reserve investment should be good as it strengthens its purchasing power of foreign goods. However, the benefit can be more than offset by the cost of sacrificing the independence of monetary and foreign exchange policy, if it happens. In China’s case, increasing the size of an already-substantial reserve or continuing to spur money growth definitely causes the major cost I am talking about.

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[Archived post] A quick thought about Muddy Waters 2011-6-11

I just had a quick look at one of MuddyWaters’ research articles which are open to the public. Surprisingly it is not as difficult as I imagined to spot the dodgy quality of those Chinese OTCBB companies: What Muddy Waters does is simply to look at both the Chinese auditor report and the US auditor report and find the discrepancy, or the discrepancy between the auditor report and the business profile stated in some Chinese brochure!

Gentlemen, we have got so many brilliant friends who understand PRC accounting and read both languages, it is a shame we have not thought of Chinese Nasdaq as a not-so-difficult target!! Since ChiNext cannot be short, Nasdaq/OTCBB is a good place to play!

To be fair, given most Chinese Nasdaq/OTCBB companies have already been hammered with some being sold without discrimination (I suspect) due to contagion effect, some undervalued name may emerge.

Broadly speaking, regarding the incentive reason of investment bankers and auditors to promote companies onto floatation, newly-floated names are good research targets. Lack of historical information is also a place where research adds value.

Interestingly, Bloomberg has an index tracking the performance of Chinese nasdaq names that have employed reverse merge. Is it a natural short index, as I wonder, that appeals to hedge funds?

Last, with great respect to independent researchers like Muddy Waters. Brilliant job done about researching companies solely based on public information.

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Archive post a brief view on CDS cost and Chinese private finance companies 2011-5-28

Below is the quick response to the inspiring article (http://www.bullogger.com/blogs/chenzhiwu/archives/378840.aspx) by Prof. Chen Zhiwu on the regulation effects of CBRC.

I agree with most of what Chen said about rural finance in China. However, going back to the case of the US, I am not sure he has well recognized the cost of CDS to the society. While CDS does help commercial banks to offload the credit risk and therefore enhance their lending capability which facilitates business/personal finance, the counter-parties that take the risk by selling CDS to commercial banks may not have the ability to monitor and evaluate credit risk as well as the commercial banks. After all, as I believe, traditional commercial banks have better expertise in managing credit risk (loan book risk) than investors (eg IBs and hedge funds) that play with CDS and try to profit from it. Therefore, commercial banks’ buying CDS to offload risk may actual amplify or even concentrate the risk at a social level. And as you may agree, the “too big to fail” or morale hazard effects further worsened the amplification/concentration risk.

Going back to Chinese situation, though, I am keen to think that the private finance companies (like the ones which extend high-interest loans in Zhejiang) are as capable as, if not more capable than, those state-owned commercial banks in managing credit risk. That is because the private finance companies do not have i) the implicit obligation (by the government) to extend loans to unprofitable SOEs, or ii) the morale hazard (government implicit guarantee) issue as the state-owned commercial banks have.

Probably I have been too biased without talking to people in Chinese banks. After all, I am quite sure there are numerous brilliant people in big Chinese banks. And given I haven’t been worked with CBRC before, I don’t really have critical comments against CBRC, though their over-regulation due to the fear of getting screwed up with less traditional finance instruments/entities is definitely not impossible.

Therefore, I am waiting for the comments from my friends who have worked with CBRC before.  Let’s see.

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[Archived post] Tilting the yield curve? A brief look at this year’s Shibor 2011-5-22


The above chart shows the time evolution of Shibor since beginning of year. To begin with, the conclusion from the chart should not be drawn upon too much as the chart is definitely too short in time. Sorry for being lazy for that.

While there have been quite a few spikes in the short end (O/N, 1W and 2W) probably due to RRR hikes, the longer end (9M and 1Y) is much more smooth and stable. Apart from the general fact that short end exhibits higher volatility than the long end, it already reflects some interesting patterns.

First, the stable longer end (note that it is not long end as the maturity is at most 1Y) shows that there is still enough liquidity in the inter-bank market, despite severel RRR hikes. That further confirms the view that tightened policy is in place only to absorb the excess liquidity created by FX inflows (eg net export) under rigid exchange rate regime, without massively draining the liquidity pool. It also shows the high interest rate margin in Chinese banks (while 1Y banks’ borrowing rate is barely 5%, the loan rate is definitely quite a few hundred bps higher).

Second, the RRR hikes have indeed a large impact on the short end of Shibor, sometimes even reversing the slope of yield curve. No wonder SME and private companies have sought to private lending sources for funds, even at an interest rate as high as 10% per month: under such a highly tightened environment (in the very short term), SOEs definitely have much higher bargain power in securing short-term funding than private SMEs.

The tightness in the very short end and ample liquidity in the longer end of the short maturity do not look comfortable to people as it shows the policy deficiency in tilting the yield curve in the long end which really impacts the economy on a broader basis. It may lead to two conclusions: first, the real sector has less appetite for medium-term financing possibly lack of credible investment opportunity, which maintains downward pressure on longer-term yield. Second, increasingly high short-term financing cost will eventually eat into real sector profitability which further dampens its incentive to make medium-term value-added investment, ie the short-term debt overhang problem may have emerged now.

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