The Mystery of Growing Foreign Exchange Reserve January - March 2007 Total increase = $136 Billion Trade surplus 34% To be explained 54% Net FDI inflow 12% Source: PBoC
Renminbi Pressure Indicator Initial Public Offering Indicator Market-Adjusted Debt Indicator Banking Strength Indicator Adjusted Trade and Finance Indicator M&A Indicator Privatization Indicator Corporate Governance Indicator
Composition of China s Financial System 2006 Government bonds 13% Total = $6.8 trillion Corporate bonds 6% Stock market cap 17% Bank assets 64% Sources: IFS, PBoC, BIS, HK Stock Exchange, and MI staff estimates
Big Four Dominate China s Banking System 2006 Total = $4.4 trillion Postal deposit units 4% City commercial banks and city credit cooperatives 6% Policy banks 8% Rural credit cooperatives Joint-stock 10% commercial banks Non-depositary financial institutions 2% Foreign banks 2% State-owned commercial banks (Big Four) 52% Sources: PBoC
Chinese Banking Strength Indicator Highest = 10, Lowest = 0 5.0 4.5 4.0 3.5 3.51 3.76 3.94 3.74 3.79 3.79 3.0 2.5 2.0 2000 2001 2002 2003 2004 2005 Sources: Xinhua Finance/Milken Institute
Banking Strength Indicator: The Big Four and Bank of Communications 2000 2001 2002 2003 2004 2005 2006Q2 Industrial and Commercial Bank of China 3.08 3.47 3.84 3.75 4.00 4.07 3.91 Agricultural Bank of China 5.52 4.53 5.03 3.78 3.28 2.42 n.a. Bank of China 3.87 4.30 4.65 4.53 5.32 4.67 4.98 China Construction Bank 3.17 3.68 4.38 5.23 5.74 6.03 5.68 Bank of Communications 4.84 4.73 4.48 4.07 4.53 4.92 4.86 Sources: Xinhua Finance/Milken Institute
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Growth in Trade: China vs. India 40 45 World exports 50 China imports 55 China exports Index, 1980=1 35 30 25 20 15 10 5 0 Source: IMF 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Index, 1980=1 55 India's exports 50 India's imports 45 World exports 40 35 30 25 20 15 10 5 0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 World Trade and GDP Shares: China vs. India 8% 7% China's share in world trade China's share in world GDP 8% 7% 6% 6% 5% 5% 4% 4% 3% 3% 2% 1% 0% Source: IMF 1980 1982 1984 2% 1% 0% 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 India's share in world trade India's share in world GDP
China s Current Account Surplus and U.S. s Current Account Deficit Current account balance, US$ billions 200 100 0 China -100-200 -300-400 -500-600 -700 United States -800 Source: IMF 1980 1985 1990 1995 2000 2005
Countries That Export Capital 2006 Other countries 22.2% Venezuela 2.1% China 13.5% Algeria 2.3% Japan 12.2% U.A.E. 2.7% Source: IMF Singapore 2.8% Kuwait 3.6% Netherlands 3.7% Switzerland 37% Norway Saudi Arabia Russia 8.8% Germany 8.8%
Countries That Import Capital 2006 Other countries 15.2% Italy 1.9% Turkey 1.9% United States 63.7% France 2.8% Australia 3.0% United Kingdom 4.1% Spain 7.4% Source: IMF
China s Adjusted Trade and Finance Indicator Percent 80 70 60 50 48.0 47.5 50.8 56.3 59.5 66.3 67.9 61.8 61.5 62.5 40 30 20 10 0 ec-01 un-02 ec-02 un-03 ec-03 un-04 ec-04 un-05 ec-05 un-06 Sources: Xinhua Finance/Milken Institute
Singapore France U.K. Germany S. Korea Mexico China Indonesia Australia Malaysia Japan U.S. Brazil Russia Adjusted Trade and Finance Indicator Selected Countries, 2005 Percent 120 100 80 60 40 101.7 83.4 81.7 79.4 78.5 65.8 61.5 51.4 38.9 36.9 36.8 29.2 27.6 20 0 Sources: Xinhua Finance/Milken Institute 22.3
Accumulating Appreciation Pressure on Renminbi Index, 2000=100 RMB/USD 200 Renminbi Pressure Indicator 7.8 190 Renminbi Exchange Rate 8.0 180 170 160 150 140 130 2004 2005 2006 Sources: International Financial Statistic, Xinhua Finance/Milken Institute 8.2 8.4 8.6 8.8
IPO Indicator IPO Indicator Value December 31, 1997 = 100 250 200 150 100 50 0 January 1998 New regulations facilitate stock listing and trading December 2002 QFII allows foreign investment in A shares August 2004 IPOs suspended May 2006 IPO market reopens February 2007 232.0 February 27 2007 Xinhua FTSE All Share Index sees biggest decline in a day 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: Mergent, Bloomberg, Xinhua Finance/Milken Institute
Measuring China s Markets William Kazer
China s markets lack transparency.
Is this due to Culture? The political environment? Or the level of institutional development? Source: William Kazer, Xinhua Finance
Flight delayed due to reason Source: William Kazer, Xinhua Finance
Premier Wen Jiabao chaired the meeting and gave an important speech - CCTV Source: William Kazer, Xinhua Finance
China s central bank now has a monetary policy committee much like the FOMC But when does it meet? When can we expect a policy statement? Source: William Kazer, Xinhua Finance
The yuan is now described as having a managed float and being linked to a basket of currencies But what is in the basket? Source: William Kazer, Xinhua Finance
Shanghai-listed Zhejiang Hangxiao Steel Structure announces 34 billion yuan (US$4.4 billion) contract with Angola Stock soars until trading halted Regulator investigates Source: William Kazer, Xinhua Finance
In late 2005, China s statistics bureau revised its 2004 GDP data adding 16.8 pct to reflect service sector data it missed originally All GDP data from 1993 to 2004 revised Source: William Kazer, Xinhua Finance ND
Stock Market Outlook Bruce Richardson March 2007
China s Stock Markets Have Risen Sharply Index rises have been aided by G share reforms and by ongoing high liquidity. Source: Bruce Richardson, Xinhua Far East China Ratings
and Are Becoming Overvalued PEs approaching levels last seen before the correction in 2004 Source: Bruce Richardson, Xinhua Far East China Ratings
Shanghai A-50 Equally High Trailing PEs pushed in part by demand for investment grade A shares. Source: Bruce Richardson, Xinhua Far East China Ratings
As Are the Shanghai A-300 Higher PEs are exhibited by a number of mid-cap stocks as well. Source: Bruce Richardson, Xinhua Far East China Ratings
Share Prices of Shell Companies Price comparison of Nanjing Panda (RMB Yuan) 14 12 10 8 6 4 2 A H 0 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 With China s penny stocks, H share prices generally reflect a base value while the A shares go for a ride. Source: Bruce Richardson, Xinhua Far East China Ratings
Share Prices of Investment Grade Companies Price Comparison of ZTE (RMB Yuan) 60 50 40 30 20 10 H A 0 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Source: Bruce Richardson, Xinhua Far East China Ratings A & H share prices largely track each other.
Contact Information Asia Pacific Bruce Richardson Managing Director, Credit Ratings bruce.richardson@xinhuafinance.com Tel: (86 21) 6142 8198 Joseph Chan Managing Director, Business Development joseph.chan@xinhuafinance.com Tel: (852) 3196 3976 Hong Kong Office 2003-5 Vicwood Plaza 199 Des Voeux Road Central Hong Kong Fax : (852) 2541 8266 Shanghai, China Ms Yulia Wan CFA Director, Credit Ratings yulia.wan@xinhuafinance.com Tel: (86 21) 6142 8066 Fax: (86 21) 6448 4955 Ms Helen Cao Deputy General Manager, Shanghai Far East Credit Rating Co Ltd Shanghai Office Room 3905-3909 Tower 1 Grand Gateway 1 Hongqiao Lu Shanghai 200030, China Source: Bruce Richardson, Xinhua Far East China Ratings
Is There Penalty For Crime? Corporate Scandal and Management Turnover in China
Outcomes for CEOs After Scandal Group A include CEOs promoted to higher level positions in larger firms or their parent firms or higher level positions in government administrations. Group B includes those who keep their initial positions or move to similar position in the same firm or other firms affiliated to the same group. Group C includes those moved to same level positions in other comparable firms. Group D includes those moved to lower positions in the same firm. Group E includes those moved to lower positions in other firms. Group F includes those retire right after scandal or died soon after scandal. Group G include those go (flee) to other countries. Group H includes those subjected to severe administrative punishment, for example, dismissed from the firm, forbiddance to management position in listed firms, suggested dismissal from office or the Party by CSRC. Group I includes those are sentenced by the court. Source: Sun and Zhang (2006)
Outcomes for Chairmen After Scandal Group A include chairmen promoted to higher level positions in larger firms or their parent firms or higher level positions in government administrations. Group B includes those who keep their initial positions or move to similar position in the same firm or other firms affiliated to the same group. Group C includes those moved to same level positions in other comparable firms. Group D includes those moved to lower positions in the same firm. Group E includes those moved to lower positions in other firms. Group F includes those retire right after scandal or died soon after scandal. Group G include those go (flee) to other countries. Group H includes those subjected to severe administrative punishment, for example, dismissed from the firm, forbiddance to management position in listed firms, suggested dismissal from office or the Party by CSRC. Group I includes those are sentenced by the court. Source: Sun and Zhang (2006)