For someone who blogs on China, leaving 100 days between entries is inexcusable! What can I say? I’ve been working on increasing my coverage of the Turkish and MENA consumer space for a new product my fund plans to launch. It’s been a lot of effort. In fact, I was in Turkey last week meeting management teams, and am happy to share some of my thoughts with you in upcoming entries. Even though they are not China related, I hope someone will find them interesting! (More to come on that later this week).
Anyway, for a while now I’ve aspired to move to China and to work in the Chinese markets. With that in mind I was speaking to a friend who lived in HK for a number of years. My aim was to price the cost of living and to see at what stage of my career I could make such a move. He told me that in 2005 when he last lived there he rented an apartment for US$5,000 a month. The details of the apartment are irrelevant. The interesting point is that today the same apartment costs $10,000 a month to rent… and it’s occupied!
A 100% increase in 5 years is surely indicative of a problem. Since hearing this, my attention has been increasingly drawn towards cracks in the China story…
Let’s start with another piece of anecdotal evidence – I love a good story! Last weekend Sotheby’s in HK failed to sell all of its wine on auction for the first time in 17 sales. Anyway…
Last Thursday Reuters carried a story about Chinese entrepreneurs going into hiding to avoid repaying loans. According to the report cash-strapped firms, unable to borrow from banks due to a credit clampdown directed from Beijing, have turned to underground lending markets. These underground markets are known to have annual lending rates as high as 100% (15x higher than the official benchmark).
Local media reported last week that the bosses of 9 SMEs in Wenzhou had fled town, unable to pay corporate loans. One such boss is the Chairman of glasses manufacturer Zhejiang Center Group. In 2008 these guys were hoping for an IPO. According to their website they employ 3,000 people and enjoy annual revenues of ~550m yuan.
The total underground lending market is estimated at about RMB 5bn – that’s about 10% of total Chinese lending. About half of this figure comes from high net worth (HNW) individuals, anxious to put their money to ‘better use’ than make do with the rates received on official deposit accounts. As the risks of default increase HNW are trying to withdraw their commitments. Yet the market is getting concerned that HNW are going to take a hit, and stop buying sports cars and luxury goods (not to mention their trips to Macau).
The picture gets complicated when this lending (and the HNW purchases) is removed from the real estate pie. Not only is real estate hit (and my friend’s old rental might come down from US$10,000 a month), but there is US$1.7tr (yes trillion) of outstanding local government debt in China. So what’s the issue – about 40% of local government revenue comes from land sales, and volumes are down about 30 this year!
In fact, for the first time in five years Chinese housing starts are on the decline as credit becomes increasingly harder to arrange. New developments are being postponed or slowed with banks less happy to lend for construction. In addition, the availability of mortgages has fallen while pricing has increased.
One final tidbit – the average days for accounts reveivable of the largest 300 Chinese stocks stood at 48 days in 1H11 – that compares with a decade average of 39 days. Apart from bein g a sign that SMEs are finding it harder to pay their suppliers, that’s going to impact the price of borrowing as well as cash flows. Yes this has happened before, but it was always in an environment in which RRRs were decreasing – today they are increasing.
So with the interconnected nature of financing, real estate, SMEs, HNW, employment, and Government revenues – things are about to get messy.