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Patrick Chovanec

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  • What Google's Threat to Pull Out of China Really Means [View article]
    I wasn't arguing that Google is unprofitable in China -- I don't know -- but was refering to others who were making that arguments. I've subsequently seen other (unverified) reports saying 2009 was a very good year for Google in China, and that it was making inroads into Baidu's market share. Regardless, I doubt this was an "easy" decision for Google, as others might suggest.
    Jan 13, 2010. 09:56 AM | 9 Likes Like |Link to Comment
  • China Acts to Calm Its Overheated Real Estate Sector - and Misdiagnoses the Problem [View article]
    Many people you will talk to within China's real estate sector make the same argument: there is a massive secular trend towards both urbanization and rising incomes in China, so if you build it, they will come. The problem, though, is that there is a huge mismatch between the kind of affordable housing that will, in fact, be much in demand in the foreseeable future and the kind of high-end luxury housing that being built as purely as an investment vehicle.

    On Dec 20 08:27 AM tedster98 wrote:

    > in the long term housing always goes up due to population- and since
    > china has the most populous country on earth, I don't see this being
    > a severe issue.
    Dec 20, 2009. 08:59 AM | 7 Likes Like |Link to Comment
  • Lilly Sees Big Opportunity in China [View article]
    Health care is an extremely promising sector in China, but investors should also be aware that it is also one of the worst when it comes to endemic corruption.

    They should also draw a distinction between outsourcing research or prodution to China (which has potential IP risks, depending on your counterpart, but it's been shown that those risks can be managed) and selling to the Chinese market. With anything other than the highest-end drugs, equipment, or supplies, it can be very difficult to get hospitals to stock or doctors to prescribe without paying bribes. This can present an extremely problematic situation for MNCs, whether working on their own or with partners.
    Apr 5, 2011. 09:38 PM | 4 Likes Like |Link to Comment
  • Chinese Banks' Illusory Earnings [View article]
    Two points. #1, the Chinese govt does not hold its reserves free and clear. For every forex asset on the PBOC's balance sheet, there is a domestic liability. The PBOC could not use the forex reserves to bail out Chinese banks without creating a massive hole in its balance sheet (it could do inject forex reserves in the form of capital -- in fact it did do that last time around -- and take equity as a replacement on the asset side of its balance sheet. However, that presumes the equity will retain its value and not be impaired, which is far from certain if you're being honest about the kind of losses that may be involved -- think TARP). The notion that China is sitting on a pile of money that it can use to bail out its banks is one of the most common misconceptions out there about China's forex reserves.

    #2, in the bailout ten years ago, which you mention, China did the following: the banks recognized some bad debt losses and offloaded the vast majority onto asset management companies (AMCs) which issued bonds in exchange at the face value of the loans. No losses (for the offloaded loans) were recognized. The bonds were supposed to be repaid through work-outs of the bad debt, but the AMCs got around 20 cents on the dollar and used the proceeds to pay the bond interest, leaving no principal. When the bonds came due, the govt ordered the banks to simply roll them over and pretend they were actually backed by something real. In short, nobody -- not the banks, not the AMCs, not the govt -- ever recognized the losses. They're still sitting there, unresolved, to this very day, but they're buried so deep in the banking system you'd never know they're there. For a detailed (if incredibly dry) analysis of this situation, check out the recently published book "Red Capitalism" by two authors with extensive experience in China's banking sector. The long and the short of it: China never "outgrew" its last bad debt crisis, as is so often reported, it merely buried it away out of sight. Deeply troubling.
    Apr 3, 2011. 08:20 AM | 3 Likes Like |Link to Comment
  • China Acts to Calm Its Overheated Real Estate Sector - and Misdiagnoses the Problem [View article]
    You are absolutely correct in principle. But the residential real estate market in China is very new. Given the asset appreciation that has taken place, I just don't think anyone is factoring the 70-year lease limit into their equations. I own a small apartment in Beijing, and it certainly was a consideration in my mind, but I haven't heard anyone besides foreigners actually raise the issue. The Chinese simply do not see real estate as a depreciating asset at this point.

    On Dec 20 10:08 AM waterlily57 wrote:

    > I understand that residential and commercial properties are held
    > under "land use rights" much like leasehold properties. The term
    > of the lease is probably a maximum of 99 years. So all properties
    > are fundamentally depreciating assets. It is not known how much the
    > state would charge for the renewal of the lease. Furthermore, most
    > residential properties are in the form of high rise apartments so
    > there is a depreciating factor of the building. So I think the rising
    > prices are indeed a bubble formation, not just naive conceptualization
    > of untaxed store value. Would the Professor elaborate?
    Dec 20, 2009. 10:35 AM | 3 Likes Like |Link to Comment
  • China's Economy: All GDP Is Not Created Equal [View article]
    China is my home, I live in Beijing. I
    Oct 27, 2009. 03:03 AM | 3 Likes Like |Link to Comment
  • Big Losses Are Hidden on China's Bank Balance Sheets [View article]
    To answer zorrow's question, yes and no. First of all, there is a transparency issue. Just because an asset may be guaranteed does not mean it is irrelevant if the asset itself is sound. Just because a bank may ultimately be bailed out does not mean its own solvency is of no interest to investors. If Enron, CDOs, et al taught us anything, it's that whenever there are assets out there that purport to be something they are not, we ought to be concerned.

    Second, ability to pay is not the same thing as willingness to pay. The Chinese government has the resources to pay, but they took a pass this time.

    Third, even if banks can be assured of payment, someone needs to recognize the accounting loss here. At the very least, the government needs to recognize a contingent liability for which they are "more than likely" to foot the bill. The fact that it is inconvenient or embarassing to make this admission is beside the point. If nothing else, the insolvency of the AMCs indicates that the original bad debt problem was far most costly to solve than once claimed, and still casts a shadow over the Chinese banking system. In itself, that heightens my concern about the bad debts currently being created by this year's lending binge.

    On Sep 23 06:52 AM zorrow wrote:

    > "And with $2 trillion in foreign currency reserves available to inject
    > as new capital, China could easily foot the bill without even blinking
    > (it wouldn’t even have to sell off its reserve holdings of U.S. Treasuries,
    > just transfer a portion to the AMCs, and thence to the banks as repayment)."
    > Didn't you sort of dispel investor fears and answer your own concern
    > about solvency right in the middle of your article?
    Sep 23, 2009. 07:40 AM | 3 Likes Like |Link to Comment
  • Recent Developments In China Make Caterpillar A Stronger Buy [View article]
    CAT is a fine company, but -- from my perspective here in China -- I could not disagree more with the interpretation of how trends in China will affect its fortunes. The author offers a 30,000-ft view that assumes monetary easing will automatically translate into continued growth, and ignores the severity of the structural problems China is facing. In particular, it ignores the collapse in real estate prices over the past several months, and the freezing effect this is likely to have (in fact, already having) in 2012 on both private and public-sector construction, as well as raw materials -- such as iron ore and copper -- to supply this construction. China is NOT a positive story in 2012 for Caterpillar, it is a "buckle up and hang on" story for an otherwise solid company.
    Jan 7, 2012. 11:54 AM | 2 Likes Like |Link to Comment
  • China: Initial Thoughts On PBOC Easing [View article]
    Keep in mind, Ben, that the reason bank reserve ratios are kept so high is to sterilize the inflow of new RMB deposits caused by China's purchase and accumulation of foreign reserves. Releasing these funds into the economy would be extremely inflationary. This is precisely what happened to fund the stimulus in 2009 (banks were allowed to draw down on their reserves) and what fueled the asset, wage, and consumer inflation that China has been experiencing. In theory, China has massive capacity to ease; in reality, it has very little room to maneuver.
    Dec 6, 2011. 08:22 AM | 2 Likes Like |Link to Comment
  • China's Biggest Investment Risk Is Political [View article]
    Caixin is right to question the salary figures cited by Chen Zhi. RMB 3,000 - 4,000 per month is at the very high end of a migrant's salary in Beijing. RMB 5,000 - 6,000 per month is a decent college graduate's salary, although not the high end.
    Oct 30, 2011. 01:22 AM | 2 Likes Like |Link to Comment
  • China's Runaway Local Debt [View article]
    Ben, there is a fundamental distinction you are confusing between liquidity and solvency.

    Cash reserves are held by banks to ensure liquidity on the asset side of their balance sheets -- i.e., that they are prepared to meet obligations as they come due (which, in the case of demand deposits, could be at any moment).

    It's the amount of capital on the equity/liability side of the balance sheet that determines whether a bank (or any business) is solvent or not -- i.e., whether their total assets exceed their liabilities. That is why banks are supposed to maintain capital adequacy ratios -- and why Chinese banks have been frantically trying to raise capital this year.

    A bank can be solvent but illiquid, which will certainly cause it problems (and may even push it into insolvency, if it has to sell off assets at fire sale prices). A bank can be liquid even though it is insolvent, although that probably won't last for long as the situation starts to dawn on people and they rush to get their money out.

    The fact that Chinese banks have 21.5% reserves -- a number that the PBOC may well push higher -- is completely irrelevant to whether they have enough capital to sustain the losses that are likely coming.
    Jul 17, 2011. 09:19 AM | 2 Likes Like |Link to Comment
  • What Google's Threat to Pull Out of China Really Means [View article]
    My friend Andrew Peaple at WSJ reports: "In truth, Google has been making substantial headway into China, taking its share of Internet search profits to roughly 36% in the fourth quarter of 2009 from 13% in 2006, data from research firm Analysys International show."
    Jan 13, 2010. 08:46 PM | 2 Likes Like |Link to Comment
  • Signs Of Continuing China Inflation [View article]
    I think your observation about the quality of informal vs. formal lending would be more true a year ago than it is today. What has happened, over the past year, is that the formal banking system, restricted (at least to some degree) in its ability to issue formal loans, has turned more and more to off-balance sheet methods of extending credit. These methods include: replacing loans with bonds (from the same borrowers); sponsoring private wealth management vehicles that use quasi-deposits to service borrowers' needs, while circumventing bank reserve requirements; extending letters of credit to Hong Kong banks which then lend into the Mainland. The borrowers in many of these schemes are the same state-owned entities or state-sponsored projects (or state-boosted real estate developments) that were the (problematic) recipients of the stimulus lending boom.

    The problem is that the formal lending sector, with all its distorted practices and incentives, has invaded the informal lending market and exploded its size. That's far more alarming than if people were simply abanding a distorted formal system for a more market-driven informal one.
    Sep 1, 2011. 10:23 PM | 1 Like Like |Link to Comment
  • Thoughts on Dagong's U.S. Treasuries Downgrade [View article]
    Correct, I jumped the gun. In fact, S&P today announced that it is downgrading U.S. debt from AAA to AA+. However, I wouldn't say that this changes my perspective on Dagong' A rating or the rationale behind it.
    Aug 6, 2011. 07:40 AM | 1 Like Like |Link to Comment
  • Does It Make Sense to Be Bearish on China? [View article]
    "I would guess that most of the people writing the most doom and gloom-filled articles on China have never been there."

    But as you know, there are plenty of commentators who live in China, including myself, who have deep concerns about what we are seeing there.

    In particular, I think you are underestimating the problems in China's real estate market and the exposure of its banking system to property values.
    Apr 5, 2011. 09:43 PM | 1 Like Like |Link to Comment