Chinese cities are busy competing with each other to lure private-equity business to set up shop there. Shanghai, Chongqing and Beijing have been shaking hands and offering tax breaks to executives of Blackstone, Carlyle and TPG this past week as fund manager's hunt for office space. It’s a high-stakes race for these cities since bringing a PE firm to town would mean not only prestige and access to foreign investment funds for domestic projects but also jobs. TPG founder and CEO James Coulter was shuttled between the cities before eventually choosing to set up new headquarters for its Western China Growth Fund in Chongqing, the cities first PE fund launched by a foreign company. Cities have been offering funds ‘dowries’ that can include waving some fees for setting up funds, financial assistance and policy support. For many private-equity “is the crown jewel of the investment industry” according to the mayor of Chongqing, Huang Qifan. While private-equity has stirred controversy in the US because their business model generally involves high-leverage and low tax rates, Chinese officials have displayed controversy-free enthusiasm. Therefore, for many fund managers investing in China is a logical move as rates of return for funds in China over the last decade have been excellent.
On the data front, two competing survey’s showed last week that China’s manufacturing activity accelerated in August. The HSBC China manufacturing PMI rose to 51.9 from 49.4, rebounding back above the key 50 level which indicates the sector is in expansion, after July’s reading notched up the first contraction in 16 months. The rival PMI by the government-run China Federation of Logistics abd Purchasing rose to 51.7 from 51.2 in July. HSBC’s co-head of Asian economic research Qu Hongbin wrote that the reading “reconfirmed our long-held view that China is moderating rather than melting down”. However, we take a slightly less optimistic position, while we have articulated here several times that we believe China is successfully engineering a soft landing, these figures reflect traditional seasonal strength and shouldn’t necessarily be trusted as hard evidence of improving momentum in the sector. Bank of America Merrill Lynch analyst Ting Lu in a note suggested something similar “the slight rebound might be a result of insufficient seasonal adjustments as this PMI usually rises from July to August in past years, the markets will likely nonetheless respond very positively”.
Turning to the banking sector, four of the five biggest banks reported increases in so-called ‘special mention’ loans in the second quarter. These ‘special-mention’ loans refer to loans that have potential weakness or pose an unwarranted financial risk that, if not corrected, could weaken the asset and lead to higher risks, according to the China Securities Journal. Although data from the five banks showed a decline in non-performing bad loans, their special-mention loans rose in the second quarter and were equivalent to 3.91% of these banks’ outstanding loans, up 0.1% from the first quarter, according to statistics cited by the China Securities Journal.
Looking finally at the yuan, deposits in Hong Kong banks are expected to accelerate in coming months, marking what could be the tipping point for the use of the currency for settlement and trade. The Hong Kong Monetary Authority reported last week that deposits of the yuan held in Hong Kong banks rose to 103.7 billion Hong Kong Dollars ($1.23 billion) in July, an increase of 15.6% from the month prior and 86% higher from a year earlier. Nomura research shows the yuan’s usage as a currency of settlement in Hong Kong is doubling every quarter, while deposits should continue to grow at double-digit rates.
Written by Jonathan Granby, DailyFX Research Team
If you wish to contact the author with comments or questions email jgranby@fxcm.com
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