China's Surge Confirmed by HSBC Move

Includes: FXI, HSBC, PGJ
by: Carl T. Delfeld

In a highly symbolic move, HSBC (HBC) announced the relocation of chief executive Michael Geoghegan from London to Hong Kong.

Stephen Green, chairman, old the Financial Times. ”Asia and China are the centre of gravity of the world and of our business. To drive the business, you have to be here – Hong Kong is the gateway to China”. Hong Kong and China together accounted for 40 per cent of HSBC’s pre-tax profits in the first half of the year and analysts predict this could reach 50 per cent in the next five to 10 years.

Do you believe it? China’s finance ministry announced in late June that half the $173 billion in central government spending had already been allocated to specific projects. Of much greater importance to China’s rebound are two other government efforts that are paying big dividends: reckless lending and oodles of export subsidies. The state-controlled banking system here opened the spigots with $1.2 trillion in extra lending to Chinese consumers and businesses in the first seven months of this year. This is for an economy with a GDP of about $4 trillion. Although most believe that China’s substantial stimulus package announced earlier this year is being invested in infrastructure, many analysts agree with my perception that most of it is ending up in overheated stock and real estate markets. The Chinese refer to this as “stir fried” markets.

This inevitably leads to the issue of credit quality and the possibility of China’s own homegrown debt bubble. Pivot’s research shows that rather than China having a manageable public debt to GDP ratio of 35%, then inclusion of off balance sheet items like guarantees of local government bonds brings this number up to closer to an uncomfortable 62%.

In addition, China’s non-performing loan data is clearly being managed and does not even include the $200 billion of bad loans from Chinas top four state-owned banks that were moved “off balance sheet” to state-run asset management companies. In return, the banks received $200 billion of bonds that are still on the books of the banks at face value even though their real value is a small fraction of face value. As the bonds come due, they are being rolled over for another 10 years.

China’s bank lending explosion has led to credit to GDP during the first half of 2009 rising to 140%, levels equal to America in 2008 and Japan in 1991 just before their market meltdowns. Chinese financial institutions extended $1.2 trillion worth of local currency loans in the first eight months of this year, an increase of 164 percent from the same period in 2008. China’s top banking regulator, Liu Mingkang, last week warned of growing risks to the country’s financial system as a result of the rapid expansion of new loans. “This year, all kinds of risks have arisen in the banking sector along with the rapid credit expansion,” said Mr. Liu in a recent written statement.

Beijing also has given huge tax breaks and other assistance to exporters. They include placing broad restrictions on imports and intervening heavily in currency markets to hold down the value of the renminbi, to keep Chinese exports competitive even in a weakened global economy.

Even so, American trade data shows that imports from China only eroded 14.2 percent in the first seven months of this year while imports from the rest of the world plunged 32.6 percent. China’s trade surplus, already the world’s largest, was $108 billion for the first seven months of this year. At least a third of the extra bank lending in China appears to have gone into real estate and stock market speculation.

Real estate markets throughout Asia are moving and few faster than in Hong Kong.

Two new luxury flats in Hong Kong have been put on the market for a record per square foot price of HK$75,000 (US$9,640) as the buoyant economy and stock markets on the Chinese mainland lift demand for exclusive properties beyond pre-crisis levels.

Prices for luxury apartments in Hong Kong, where property investment is a passion for many, have risen about 26 per cent since their peak ahead of the collapse of Lehman Brothers a year ago, according to DTZ, a property adviser.