C.M.O. 7.29.2009
Credit Market Overview
July 29, 2009
While soccer, or football as it is more widely known, might be the world’s sport there are few who don’t associate China and table tennis, or as we Yanks like to call it ping pong. For those thinking this a phenomenon local to the Middle Kingdom take note the International Table Tennis Foundation (ITTF) was founded in 1926 and there have been Olympic events since 1988.
Regardless of the sport in question it is often said that good offense is the best defense and towards this end China’s finance minister Zhu Guangyo got right down to business Monday after the niceties of the introductions at the “U.S. – China Strategic and Economic Dialogue” were over by stating, “We are concerned about the security of our financial assets”.
Statements of this nature have volleyed between the two countries since Treasury Secretary Geithner served up his ideas on how China should manage its currency in the world markets shortly after his confirmation hearings.
Zhu’s words were seen as a salvo against previous American rhetoric and gained poignancy as the talks, now more frequently referred to as “G-2” as they include the world’s largest economy and its fastest growing economic power, are occurring during a week that includes the largest auction of U.S. debt in the country’s history.
While China might appear to be on the offensive they have worries of their own as shares of the big property companies traded in Shanghai have just about doubled vs. an approximate 90% rise in the A-share index itself. Property transactions in major cities rose 53% YoY in 1H09 with MoM prices rising for the fourth consecutive time in June according to the WSJ.
Moody’s has a negative outlook on 10 of the 13 Chinese property developers it covers as refinancing looms and institutions such as the Industrial an Commercial Bank of China announcing its acute curtailment in lending in 2H09.
Property is not the only place the Chinese government’s stimulus funds appear to be seeping as the IPO market there is also beginning to gain momentum. In the first new share offering this year Sichuan Expressway Co. saw its stock triple on the first day of trading closing at 10.90 Yuan after trading as high as 15.25 Yuan.
Wednesday brings what is being called touted as the world’s IPO for homebuilder China State Construction Engineering Corp. which should raise about 50.2BN Yuan or $7.35BN.
Arjun Divecha, Portfolio Manager, GMO Emerging Markets III Fund, interviewed in Barron’s last weekend is negative on China citing the size of the stimulus package. “The stimulus package there has been absolutely massive. As a percentage of GDP it is three to four times the size of the U.S. stimulus. In this year alone, they’ve had new loans worth over $1TN, of which more than $250BN was issued in June.”
The CDS market does not appear to be as concerned as Mr. Divecha just yet as 5 year protection on China’s sovereign debt closed at 60bps last night. This compares with the all time low of 55bps seen on the last day of July last year. The peak was reached last October at 297bps and a second, lower, high of 268bps was hit on 3/2/2009.
Offense might be the best defense but it must also be said that too much of a good thing is no good. How China balances these two might well prove the deciding factor in whether Guangyo becomes China’s Greenspan.
Enjoy the week.
Jim Delaney
