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China Roundup: China’s growth slows; Shuanghui’s IPO; and cross-border investments

by Major Tian

April 11, 2014

Red Door-Resized

The week that was: China’s growth slows further; financial regulators wrangle over debt problems; and meat processing company Shuanghai International (now known as WH Group) prepares to list in Hong Kong. 

China prepares for slower growth

More signs of a slowing Chinese economy this week—imports and exports fell by 11.3% and 6.6% year-on-year in March, surprising many forecasters who predicted moderate pick-ups of the numbers.

HSBC economist Ma Xiaoping told the Wall Street Journal that one of the reasons of weak exports is the slower-than-expected recovery of China’s major trading partners, including the US, Japan and Europe. Another reason, many analysts believe, is that the trade data from last year was inflated. It means that some Chinese trade companies faked export or import invoices to launder capital across the border, especially for exchange rate speculators who bet on the consistent appreciation of the Chinese currency, the renminbi (RMB). But even if this is factored in, the trade numbers are still below expectations, economists say.

For now the slowdown remains tolerable for Beijing, as Premier Li Keqiang said at the Boao Forum for Asia this week that the central government is not ready to jump into more short-term stimulus policies to take care of interim fluctuations. He also reiterated that the 7.5% GDP expansion goal is flexible, as long as China stays in full employment. Meanwhile, the government is making minor adjustments to cushion the slowdown—the People’s Bank of China (PBOC) injected about $9 billion into the banking system on Thursday, first time in nine weeks, the Journal reported.

First quarter GDP data is slated for release next week, and according to a Wall Street Journal survey of 15 economists, the growth rate is expected to be 7.3%.

The China debt problem blame game?

The Financial Times caused a stir late Thursday by publishing an article saying that there’s a “turf war” between China’s top financial regulators. The article cited anonymous sources saying that the China Banking Regulatory Commission (CBRC) is at odds with the central bank PBOC on who should be responsible for the China’s debt problems. The PBOC feels frustrated by the CBRC’s “inability to rein in” shadow banking, and CBRC officials cry that they are just scapegoats, the sources said.

A few hours later, the PBOC made a harsh response, posting a statement on Weibo, China’s Twitter-like social media service, which claims that the story is completely false and “twisted facts deliberately”. The “PBOC and CBRC strongly condemn” the newspaper’s actions, the statement said—a tone that resembles that of the Foreign Ministry of China, as many web commentators pointed out.

But at least some outsiders think that the recent bond defaults and a tiny bank run are not doomsday signals for the Chinese regulators yet. According to a study by Deutsche Bank, the eventual default rate of Chinese bonds may be lower than the global average of 1.08%, as the majority of companies faced with poor performances are state-owned, which are unlikely to default because of bad political implications. The study also states that corporate bonds held by the Chinese banks only account for 2.4% of their total assets.

China’s biggest pork producer to list in Hong Kong

Shuanghui, which bought American pork supplier Smithfield Foods, has begun its IPO process to go public in Hong Kong. The company, now rebranded as WH Group, hopes to raise as much as $5.3 billion, according to The New York Times.

The $4.7 billion cash buyout of Smithfield last year was the biggest American acquisition by a Chinese company. The deal is expected to equip WH Group with better production management tools and also reduce its costs, which are 60% lower in the US compared to China, according to the chairman of a private equity firm that holds a minority stake in WH Group.

Improved efficiency is key to the success of the Luohe (Henan province)-based hog producer, as prices of pork have fallen 50% in the past two months. Prices of pork are usually an important barometer of overall food prices in China, where more than half of the world’s pork is consumed. Yet only 2.5% of China’s hogs are from large-scale farms like WH Group, the Times article said.

Shanghai and Hong Kong markets open for more investors

Authorities from Mainland China and Hong Kong struck a deal on Wednesday, allowing more investors to make cross-border investments in stocks.

Under China’s capital control policies, investors could only make such investments through programs like the Qualified Domestic Institutional Investor (QDII) or the Qualified Foreign Institutional Investor (QFII). The new scheme allows institutional as well as individual investors in the Mainland with stock accounts bigger than RMB 500,000 ($80,483) to buy Hong Kong shares. Hong Kong investors, on the other hand, will have access to the Shanghai Stock Exchange. However, there are caps for both directions—a total quota of RMB 250 billion (a RMB 10.5 billion daily limit) from the Mainland to Hong Kong, and a RMB 300 billion quota (a RMB 13 billion daily limit) the other way around, according to Bloomberg.

The pilot program may help people from the Mainland ride high on the rise of companies like Tencent and Lenovo or tap in the Macau casino stocks that are also listed in Hong Kong. But some observers say Hong Kongers might not be as interested in the anemic A share market, which is still crawling back very slowly (if at all) to its 2007 peak. They worry that allowing more capital to flow out of the domestic stock market may hurt the Shanghai Composite Index even more.

Tech acquisitions to continue in China?

The sell-off of American tech stocks is not stopping some Chinese tech giants to spend big money on acquiring new assets. Companies like Lenovo, Tencent and Alibaba have all made significant moves in the past quarter, speeding up integration in the sector.

Jack Ma, Chairman of China’s leading e-commerce company Alibaba, which is expected to list in New York soon, made two more investments during the past week. According to South China Morning Post, Ma and his two partners will spend more than $1 billion for a 20% stake in Wasu Media, a cable TV operator listed in Shenzhen; Ma will also pay about $550 million for a 20.6% stake in a financial software company called Hundsun. Both transactions reinforce Ma’s ambitions in entertainment as well as finance.

By comparison, things have been a little quiet for China’s search giant Baidu, which shows no intention of joining the shopping spree. Robin Li, CEO and Chairman of the NASDAQ-listed firm, said in a conference call with analysts that the company has “a different style… (of) looking at (investment) opportunities” and prefers to acquire controlling stakes so they can be better integrated into his business. “We do not think that a minority investment in a partner would really make that much of a difference,” he said. But Li added that Baidu is open to necessary commercial collaborations if such deals fit their appetite.

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