China and the Subprime mess

The answer is absolutely not on either count. Various Chinese banks do have exposure to sub-prime debt- although this is low, for instance. As reported, Bank of China holds U$9 billion in subprime mortgage-backed bonds and $682 mn in CDOs. ICBC holds $1.2 billion in mortgage-backed securities,

Even if China’s markets are closed and thus shut off from America’s, movements on Wall Street do affect the mood of China’s investors and thus the market. Thus, the optical correlation between both markets is not bad. lso, if the US market keeps tanking, then expect US consumption to cool off even more, and this will hurt exporters out here, so our macro-sentiment gets dented, too,

More important, though, is that with China opening her capital accounts, any losses that punters make in China now increasingly can be covered by sales of more liquid overseas assets – such as large cap H-shares traded in Hong Kong.

Besides, don’t think that Chinese banks are not in trouble for domestic reasons: they are. According to Morgan Stanley (MS), Some companies speculate on the stock market by either borrowing from banks or with their retained earnings. Morgan Stanley reckons that if the stock market were to crash, 30% of all loans extended by Chinese banks could turn bad .

What about her capital account: is it still closed?

No! Of late China has opened her capital account in two curious ways:

First, by allowing mainland gamblers to go to Macau. Of course they convert their yuan into Hong Kong dollars and probably hide some of these in Macau, and secondly, by allowing individuals to buy Hong-Kong listed shares here. They must convert a minimum of 100,000 yuan into HK dollars so as to punt here, and I suspect that as well with Macau

Surely you believe that the yuan will appreciate even more, no?

Absolutely not! You have to ask yourself why so much money is leaving China via these two channels we just mentioned: I believe that locals do not believe in their own banks, and thus they want to exit the RMB in order to exit their banks! We mentioned one such weak point during the discussion of domestic forces that threaten Chinese banks

17th Party Congress (PC) : key issues?

The strife among the delegates is telling: only this Wednesday did we find out that it would start on 15th October. That a date finally has been announced suggests that the new leadership lineup has been agreed upon.

The Party’s Central Committee will hold a plenary meeting on 8th October to set the agenda.

Key issues are:

1. How President Hu can consolidate his power

2. The direction of policy over the next 5 years.

Within this, the key is that the PC has to determine who will succeed President Hu as the General Secretary of the Communist Party. It looks like the PC will endorse the Hu’s continued leadership of along with Wen’s and seal the retirement of some of the members of the Politburo’s Standing Committee. It has nine members, two of whom are retiring and one who died in June. Likely candidates who will join the PSC are: the party secretaries of Liaoning, Jiangsu, Guangdong and Hubei as well as the vice chairman of the Chinese Peoples’ Consultative Committee, the Director of the Central Committee’s General Office, the Municipal Party Secretaries of Shanghai and Tianjin.

The key ideological issue is to heave Pres. Hu on to the same level as Deng. Basically, the PC will put Hu’s concept of “scientific development” on the same level as Deng’s “to get rich is glorious”.

Assessment: Investors might want to look at which provinces are getting represented in the Standing Committee: seems like these could get more political favours from Beijing than the provinces not represented.

That Hu’s thoughts are elevated, but kept within the boundaries of Deng’s capitalism, tells us that China will go even more capitalist during her first industrial revolution.

Thus: great for markets.