The Financial Times reports that the European Commission intends to launch a new type of Government bond, packaging the bonds of various countries into a single security. I think this is an extremely bad and dangerous idea. First, it is a distortion of the market that would cause large amounts of capital to flow into the bonds of the weaker economies, just as it happened when the Euro was created and interest rates started to converge. Second, The pooling of bonds carrying various risks into a single security, was at the core of the global financial crisis.
In one of my Op-Eds written for Radiocor- IlSole24Ore, Moody’s fa i conti e si allinea alla realtà dei fatti， I talked about Moody’s choice to align itself with the reality when China’s sovereign debt was downgraded from A1 to Aa3. China’s state bonds market is, currently, a non-market: the trading volume is low and the main players are state banks that buy bonds issued by the government and, almost always, they keep them in the portfolio until they expire.
Insiders said that private funds like PAG and Long Star are starting to be interested again in returning to Chinese non-performing loan (NPL) portfolios in recent months. Government loose credit policy in the last three years has boomed the NPL market, which has reached over 3 trillion US dollars at the end of last year. I think the true size of NPL in China (like in any other country) has always been unclear.
In an op-ed written by Morgan Stanley, Global Researcher Chen Aiya, re-affirms his confidence in China’s ability to deal with its increasing debt. I often encourage analysts to look at China as if it was a firm and estimate the usual profitability ratios used in Corporate Finance. In the case of China’s debt and GDP growth path, one could say that its ROC is declining, but still respectable. This decline occurs because current Chinese growth model is based on investment to drive GDP.
The president of Italy is currently in china for an official state visit. This state visit comes at an interesting time for both China and Italy: the two countries are engaging more than before into a commercial dialogue of mutual respect and common interests, trade between the two counties shows good sign of improvement and Italian trade deficit appears to narrow slightly and capital investments made in the past couple of years have all helped improve the image that the Italian Business community has of China.
According to the annual budget report of the Finance Department of the central province of Hunan, the central government has estimated that national fiscal revenue will increase 5% this year and local government fiscal revenue will increase 6%. Looking at the fiscal budget and in particularly the forecasted increase in revenues, could offer an indication of the government expectation of future nominal GDP growth rate. So from this figures, 6 % of expected fiscal revenue growth, one could try to get an estimate for next year fiscal GDP growth.
PwC thinks that in 2017, the value of China outbound FDI might be lower than that in 2016. This would be due to the new Chinese government regulations that extended the approval process for cross border M&A in the attempt to limit capital outflows. I think even if indeed there is some closure in the capital account flows, one should also take into account potential increases in demand for inbound investment from other countries. In particular I would advice to pay particular attention to Trump’s infrastructure development strategy for the US which maybe require Chinese input.
In recent days, there has been a heated debate as to the actual burden of corporate tax rates in China. Depending on how one reads figures and follows event, one can reach totally opposite conclusions, in some cases, it seems that China corporate tax rates are high, while in other cases they appear to be low. As often in the case of China, the right answer is “it depends”. China often resembles one of those old snow balls that change from summer to winter every time we turn it upside down. Some companies decide to move manufacturing facilities from China to the US on the argument of lower tax rates, while other analysis paint a different picture.