Overview
Chinese Economy Continues to Accelerate; Forecasters Scramble to Keep Pace
Manufacturing activity in China increased for the fourth consecutive month as the $585 billion stimulus plan and record bank lending continued to accelerate the recovery of the third largest economy in the world. The official Purchasing Managers’ Index rose to a seasonally adjusted 53.2 in June from 53.1 in May, with a reading above 50 indicating an expansion.
The new export orders index improved in June to 51.4, reflecting a steady increase for the second consecutive month. This appears to indicate a stabilization in the world’s largest import economies and increased demand in China’s low cost goods. Any growth in exports is viewed as a bonus of sorts as China’s current focus remains on reaching 8%+ GDP growth this year primarily through domestic consumption.
The investment bank CLSA, which releases its own vaunted indices on China manufacturing, expects that the Chinese economy grew at a 7.0% pace in the second quarter of 2009 after 6.1% growth in the first quarter. Our views concur with CLSA's projections of 9.0% growth in the third and fourth quarters of 2009. In the past couple weeks, institutions such as the OECD, World Bank, JPMorgan, Barclays, Standard Chartered, Royal Bank of Canada, and others have raised their China GDP forecasts significantly. We suspect those that do not have a GDP growth target for 8%+ this year will raise their forecast further still in the next couple of months. Goldman Sachs, to their credit, was out in front on this outlook, having indicated 8.3% GDP growth back in May when many other analysts were still forecasting 6-7% growth for the year.
The resiliency of the Chinese economy has exceeded the expectations of many global institutional forecasters who under-estimated the effect that China’s domestic consumption could have on the country’s growth in the face of anemic export markets. With export markets appearing to stabilize, the prospects for China’s economy could surprise even the most optimistic forecasters before the year is over.
China Recovery Hopes Gather Pace
China’s manufacturing and business-activity indices both finished in positive territory in June, confirming that the world’s third-largest economy is continuing to expand amid a mixed picture elsewhere in Asia.
The Chinese indices, one produced by CLSA, the investment bank, and the second by Chinese government agencies, have now recorded an increase in output for at least four months in succession.
The positive expansion recorded by the indices provides further evidence that Beijing’s RMB 4.0 trillion ($585 billion) stimulus package, buttressed by a surge in bank lending and a series of tax breaks, is having a substantial impact in the real economy.
“We take this as a signal that the green shoots of economic recovery have taken root and are likely to blossom in the second half of the year,” Morgan Stanley’s Chinese economy research team wrote.
Andy Rothman, China analyst for CLSA, pointed out that new export orders, after rising for seven straight months, finally broke into expansion territory in June. “This improvement in the export orders index is consistent with the ‘WalMart effect’ we have been writing about, and is why we are less pessimistic than most about Chinese export prospects for this year,” he said.
Source: Financial Times
China’s Corporate Debt Sales Overtake Japan
Chinese companies have for the first time issued more corporate bonds than their Japanese counterparts over the past year, marking another milestone in the development of China’s capital markets.
Record Chinese issuance in the first half also surpassed Japanese companies’ own record sales during this period.
The increase in Chinese debt sales, which has been a feature of the market for the past few years, partly reflects the incremental steps the government is making to expand the market. This was highlighted by the Agricultural Bank of China’s massive $7.33bn sale in May.
Fergus Edwards, head of debt syndicate in Asia at UBS, said: “Over the past five years we have seen Chinese domestic bond markets take incremental steps forward, adding both depth and sophistication.
“Importantly, the process for regulatory approval is now considerably faster and smoother than in the past.”
He added that many issuers thought it was sensible to lock in fixed rate financing at a time when interest rates are low and before volatility returned.
Year to date, Chinese companies including financials issued $144.3bn worth of corporate bonds, compared with Japan’s $123.6bn, according to Dealogic data.
In the first half of 2009 alone, Chinese issuance was a record $96.7bn while Japan’s reached $76.3bn, the data showed.
The Chinese market has grown from $12.2bn in2004 to $67.4bn in 2008, with a notable surge in issuance in 2007. “It’s important to remember that the pool of investable assets is relatively shallow in China which leaves relatively large pools of savings held in the banking and insurance systems; in turn this increases the funds institutional investors have,” said Mr Edwards.
Japan’s corporate bond market has different dynamics. Although Japan’s economy and capital markets are more mature and open, many companies still rely on loans from banks rather than the debt markets. As a result, the country’s corporate bond market remains small compared with the US. Debt sales have stayed between $82.7bn and $114.3bn from 2004 to 2008.
Source: Financial Times
Metals and Mining
Chinese Steelmakers Fail to Reach Deal on Ore Price
China's steel industry failed to reach a supply deal with the world's major iron-ore producers by the deadline of June 30th, highlighting the challenges the resource-hungry nation faces in trying to shift the balance of power in global commodities markets.
The world's largest steel-producing country started annual talks on the key raw material during the depths of the financial crisis, as commodity prices collapsed and prospects for the world economy turned bleak. The China Iron & Steel Association, a government-backed body that coordinates the industry, argued for cutting contract iron-ore prices nearly in half from last year.
Its position never changed but market conditions did, with most Chinese steel-makers ramping up output since early this year on signs that government stimulus is boosting demand for their products.
The steel association found itself isolated in its insistence on a cut of at least 40% from last year's contract price. Major Japanese and Korean steelmakers have already reached separate iron-ore supply contracts based on price cuts of 28% to 33%, which the mining companies say should be the global benchmark.
Few expect China can get a lower price, especially since many smaller Chinese steel mills have ignored the association and also done separate deals.
"Being a large consumer of commodities has not given China a lot of pricing power," said Scott Kennedy, an Indiana University political scientist. "The failure is a signal that the Chinese industrial-policy machine has problems."
The China Iron & Steel Association declined to comment regarding June 30th, when many of the supply contracts China negotiated last year expired.
With China's steel output already back to last year's record levels, steelmakers have been buying more iron ore on the spot market, pushing imports to new highs. That undermined the association's position that China's market is so weak that it can't accept less than a 40% cut. And prices for iron ore imported into China are now up about 12% since April's lows. They are even higher than the long-term contracts others have negotiated, so letting the contracts lapse looks like less of a good deal.
"It's hard to have a united front. The small- and medium-sized steel companies in particular cannot just stop production to wait for the final result of the negotiation," said Zhu Fengliang, who heads a steel industry group in the western province of Shanxi.
China is now faced with the prospect of a tough negotiating environment, as Rio Tinto and fellow mining giant BHP Billiton work toward a joint venture that would combine their key iron-ore mines.
"The Chinese have an unenviable negotiating position in iron ore. If anything they need more of it than they did before," said Michael Komesaroff, a mining consultant with Urandaline Investments.
Lower global prices for iron ore have made supplies from China's own high-cost mines less competitive, he said. The result is that China's steelmakers have this year become more dependent on imports, not less. Domestic iron-ore output, as of May, was down 6% this year.
Few Chinese steel companies now want to stay in the association's framework for iron-ore purchases, said Jia Junyan, a private iron-ore trader in Shanxi province. "No one wants to wait and end up with what will probably be a bad deal," he said. "The steel companies have lost faith in the China Iron & Steel Association. It's embarrassing. No one wants to listen to them," he said.
Source: Wall Street Journal
Alternative Energy
Green Power Takes Root in the Chinese Desert
As the United States takes its first steps toward mandating that power companies generate more electricity from renewable sources, China already has a similar requirement and is investing billions to remake itself into a green energy superpower.
Through a combination of carrots and sticks, Beijing is starting to change how this country generates energy. Although coal remains the biggest energy source and is almost certain to stay that way, the rise of renewable energy, especially wind power, is helping to slow China’s steep growth in emissions of global warming gases.
While the House of Representatives recently approved a requirement that American utilities generate more of their power from renewable sources of energy, China imposed such a requirement almost two years ago.
This year China is on track to pass the United States as the world’s largest market for wind turbines — after doubling wind power capacity in each of the last four years. State-owned power companies are competing to see which can build solar plants fastest, though these projects are much smaller than the wind projects. And other green energy projects, like burning farm waste to generate electricity, are sprouting up.
Dunhuang, an oasis town deep in the Gobi Desert, has become a center of China’s drive to lead the world in wind and solar energy.
A series of projects is under construction on the nearly lifeless plateau to the southeast of Dunhuang, including one of six immense wind power projects now being built around China, each with the capacity of more than 16 large coal-fired power plants.
Each of the six projects “totally dwarfs anything else, anywhere else in the world,” said Steve Sawyer, the secretary general of the Global Wind Energy Council, an industry group in Brussels.
HSBC predicts that China will invest more money in renewable energy and nuclear power between now and 2020 than in coal-fired and oil-fired electricity.
That does not mean that China will become a green giant overnight. For one thing, Chinese power consumption is expected to rise steadily over the next decade as 720 million rural Chinese begin acquiring the air-conditioners and other power-hungry amenities.
As recently as the start of last year, the Chinese government’s target was to have 5,000 megawatts of wind power installed by the end of next year, or the equivalent of eight big coal-fired power plants, a tiny proportion of China’s energy usage and a pittance at a time when China was building close to two coal-fired plants a week.
But in March of last year, as power companies began accelerating construction of wind turbines, the government issued a forecast that 10,000 megawatts would actually be installed by the end of next year. And now, just 15 months later, with construction of coal-fired plants having slowed to one a week and still falling, it appears that China will have 30,000 megawatts of wind energy by the end of next year — which was previously the target for 2020.
A big impetus was the government’s requirement, issued in September 2007, that large power companies generate at least 3 percent of their electricity by the end of 2010 from renewable sources. The calculation excludes hydroelectric power, which already accounts for 21 percent of Chinese power, and nuclear power, which accounts for 1.1 percent.
Chinese companies must generate 8 percent of their power from renewable sources other than hydroelectric by the end of 2020.
Source: New York Times
Recent Transactions
Suntech Raises $50 million in Private Placement
Suntech Power Holdings Co. Ltd. (NYSE: STP) recently announced a private placement of convertible loan for gross proceeds of $50 million. The funding will include participation from new investor International Finance Corporation. The convertible loan has a fixed coupon rate of 5% per annum payable on June 15 and December 15 in each year. If the loan is not converted, it will be repayable in full 7 years after the date of drawdown. The loan can be converted into common shares at $18 per American depositary share.
Suntech Power Holdings Co., Ltd., a solar energy company, engages in the development, manufacture, and marketing of photovoltaic (PV) products worldwide. Its products include monocrystalline and multicrystalline silicon PV cells; PV modules; and building-integrated photo-voltaics products. The company also provides PV system integration services, including designing, installing, and testing PV systems used in lighting for outdoor urban public facilities, as well as in farms, villages, and commercial buildings; and project development services. Its products are used to provide electric power for residential, commercial, industrial, and public utility applications. The company sells its products primarily through value-added re-sellers, such as distributors and system integrators; and to end users, including project developers. Suntech Power Holdings Co., Ltd. is head-quartered in Wuxi, the People’s Republic of China.
Source: Capital IQ
Novast Pharmaceuticals Raises $25 Million
Novast Pharmaceuticals Ltd recently announced that it has raised $25 million in its series C round of funding led by SAIF Partners. The round saw participation from New Enterprise Associates, Qiming Ventures, Eli Lilly & Co., and BioVeda Capital.
Novast Pharmaceuticals Ltd is a generic pharmaceutical maker based in Nantong, China.
Source: Capital IQ
Bawang Prices IPO at Top, Raising $215 Million
Strong institutional orders and frantic retail demand enabled herbal shampoo maker Bawang International to price its initial public offering at the top of the range and to raise HK$1.6 billion ($215 million).
The 700 million shares on offer were priced at HK$2.38 each, the top of an indicative price range of between HK$1.95 and HK$2.38. If the 15% greenshoe is exercised in full, a further 105 million shares could be injected into the deal, bringing the maximum possible deal size to $247 million.
Retail demand was so strong -- the Hong Kong public offer was over 400 times covered -- that it triggered a clawback which increased the 10% that was initially earmarked for retail investors to 50%. Tying up $8.6 billion of cash, this is the strongest retail showing in a Hong Kong IPO so far this year in terms of subscription ratios, and well beyond the coverage levels of other IPOs of a similar size that have proved popular with retail investors.
The final price values Bawang at 17.5 times predicted earnings for 2009. Since there are no other shampoo companies listed in Hong Kong, investors compared it to companies such as Hengan International, China's leading personal hygiene company, which is currently trading at 24 times predicted earnings for 2009, according to Bloomberg.
Source: Zero2IPO