"I give you nice price !!"
Whenever you hear these words, tourist, buyer or businessman, be aware !! The last couple of weeks, we have been focusing a lot on developments in China and this doesn't relate to the sovereign debt crisis in Europe. No, it concerns China domestically and the various troublesome business news flashes we receive from all kind of sources.
On the Chinese property bubbles and ghost towns, we know it's there. And we also know that public investment is for 50% responsible for GDP growth contribution, a pace with current growth levels not sustainable nor desirable because it will lead to more and more inefficient capital allocation (AKA the law of decreasing marginal efficiency, this time on a different scale ). But there is more. Since last year, several whistleblowers have warned for increasing tensions in financial markets, with the unofficial "shadow banking system" getting out of control. And we have posted as well on the letters of credit with copper serving as collateral. Some weeks ago, the Chinese authorities admitted that there was a problem with non-performing loans of regional public authorities. So they brought out in the open and took it on the central books, but the official number is very likely to diverge from reality and the real problems.
This week, we hear however other disturbing sounds, this time from private sector origin :
"The client is a very large commodity seller who sells massive amounts to China. This company typically sells its product to Chinese private companies that use letters of credit. Prior to 2008, this client's Chinese customers pretty much always paid. Then in 2008, they started contesting the letters of credit and seeking lower prices than that to which they had agreed. Soon after that, they started rejecting the shipments entirely. My client told me that in the last 3-4 weeks, nearly all of his non SOE (State Owned Entity) Chinese clients have contested the letters of credit and have sought lower prices of around twenty percent. They are confessing to my client that they cannot get loans and without loans they cannot pay so much. If it were just that, I might chalk it up to problems in one industry, but it is not just that. Chinese companies that are going out of business or believe they are going out of business have an annoying tendency to ship bad or fake or no product at all. In 2008, pretty much every week we were getting calls from companies saying that the product they had ordered just was not coming. We handled one case where a company had bought about a million dollars of fish and received containers of cheap bricks surrounded by fish. That fake shipment was the dying gasp of a company that ceased to exist. We have started to get those same sort of calls in large numbers again". Chinalawblog - China, smells like 2008
"Businessmen have been forced to turn to private lenders for help in the wake of tighter central government loan policies introduced late last year to fight inflation. The higher interest rates that are demanded by the underground lenders can become particularly onerous when the businesses do not run as well as expected. Many SMEs have turned to private sources and even loan sharks, who charge up to 180% annual interest. However, most of the SMEs' profit is less than 10%, so borrowing from loan sharks would amount to attempted suicide. Most of the company heads who have absconded were involved in manufacturing and had borrowed hundreds of millions of yuan from banks and private creditors. Wenzhou has about 360,000 small and medium-sized enterprises, producing a wide range of consumer goods - from shoes, cigarette lighters to spectacles - whose low cost has helped to make China the world's workshop. Last Wednesday, Hu called the company's chief executive officer to say that he was unable to sustain the company any longer. He is now believed to be in the United States, according to the 21st Century Business Herald. In July, Wenzhou's underground banks processed 110 billion yuan, up about 40% from the 80 billion yuan processed in the same month a year earlier and equal to more than one-third of the city's entire 2010 GDP of 292.56 billion yuan, according to the Wenzhou branch of the People's Bank of China. About 89% of families or individuals in the city and about 57% of enterprises had either borrowed from or made deposits to non-bank finance companies in last year's second quarter, the most recent figures available from the People's Bank of China". Olivia Chung, Hong Kong
So there is in fact something to worry about. We used to say that when Paris sneezes, Brussels gets a cold. These days however when Bejing sneezes, chances are that influenza goes global.