DragonWeek

Monday, May 28, 2012

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What happened
Private investment is encouraged in statedominated fields like railways, energy, communications, education and health, State Council said.

What it means
The threat of a worse-than-expected economic slowdown makes supporting private investment a higher policy priority. SASAC issued a notice welcoming private capital in SOE restructuring, and MOR also encouraged private firms to enter the rail sector. While private firms are unlikely to start building new rail lines, they could benefit from the open bidding on railway projects. Private-sector investment held up well in 11 but is now slowing more; a rebound in state-led infrastructure in 12 will help but private firms make up the majority of fixed-asset investment. This high-level focus on creating opportunities for private firms is positive, though unlikely to deliver an immediate boost. The latest revisions to expenditure GDP figures, for 05-10, show that household consumption had a somewhat larger share and investment a somewhat smaller share than first thought. The biggest change was for 10, when household consumptions share went up 1.1 pp to 34.9%, while investments fell 0.7 pp. The figures do not change the trend of a rising investment share of GDP, but they underscore that official statistics tend to understate consumption. Current policies aim at stabilizing investment growth to avoid a sharp slowdown in overall GDP, which if successful will mean the investment share will decline only slowly. The sale of corporate bonds traded on stock exchanges had been limited to listed companies. Unlisted SMEs can now sell bonds directly to qualified investors if their debt to equity ratio is below 20%; there is no profitability requirement. This deregulatory approach should be more effective than a previous program to boost bond issues by SMEs, which organized joint issuance by several firms but generated only Rmb10 bn in total sales. It could also boost the exchange-traded bond market, now much smaller than the interbank market.

Fixed capital formations share of GDP rose to 46.2% in 11 from 45.6% in 10, revised NBS figures showed.

Unlisted small businesses can sell bonds via private placement, the Shanghai and Shenzhen stock exchanges said.

Industrial profits fell -2.2% YoY The poor showing on industrial profits is in line with other weak data for Apr. in Apr, after rising 4.5% in Mar, Slowing demand looks to be the main culprit, as revenue growth slowed to 9% YoY in Apr from 14% in Mar. However the decline in profits over Jan-Apr is NBS data showed. concentrated in state-controlled firms, down -9.9% YoY, and foreign-invested firms, down -13%; profits at domestic private firms are up 21%. In terms of sectors, the biggest profit declines are in chemicals, metals and electronics. Chinese importers asked to defer several deliveries of iron ore and thermal coal, Reuters reported.
Anemic power output growth of 0.7% YoY in Apr has led to rising coal inventories and falling coal prices. Coal inventories at Guangzhou and Qinhuangdao ports were up 24% and 19% YoY, suggesting weak demand from power plants. The benchmark price of Asian thermal coal has fallen -15% since Feb to US$99 per ton, its lowest level in two years, while iron ore prices are also down -9% since end-Apr. May demand for imported ore and coal will likely be weak as buyers wait to see if prices fall further. The latest hike of Rmb0.01 per ton-kilometer is much larger than the last hike of Rmb0.002 in Apr 11. Higher freight rates will boost the rail ministrys revenue and help it service an increasingly large debt. In Q1, MOR made a loss of Rmb7 bn, while its liabilities surged to Rmb2.4 trn. After issuing Rmb50 bn of bonds so far this year, MOR is close to regulatory limits on bond debt; additional central government support is likely to continue financing railway investment.
GaveKal Ltd. Redistribution prohibited without prior consent. This report has been prepared by GK Dragonomics mainly for distribution to market professionals and institutional investors. It should not be considered as investment advice or a recommendation to purchase any particular security, strategy or investment product. References to specific securities and issuers are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

Railway freight rates were raised 9.5%, NDRC and MOR said.

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DragonWeek
Monday, May 28, 2012
Page 2

Rosealea Yao
ryao@gavekal.com

Charts of the week

The steady rise in inventories of unsold housing has been one of the more worrying market developments in recent months. So it is notable that inventory pressures actually eased in Mar and Apr. We view this as evidence that the current level of housing sales is enough to gradually draw down inventories. Our composite of four major cities with good data seems to track broader trends well. Their total inventories fell to 390,000 units in Apr from the peak of 450,000 units in last Dec, or 14 months of sales in Apr rather than 20 in Dec. The supply side is also a factor in the improvement in inventories . Residential completions growth has decelerated sharply to 1% YoY in Apr, after 48% in Jan-Feb.

The recent high growth in completions is the consequence of the surge in starts in 09-10. That boom should have worked its way through the system by 3Q12, as starts usually lead completions by 18-24 months, reflecting the average construction time for a residential building. This could mean some developers will be looking to start new projects by later this year. However, a second if smaller spike in starts later in 11 means completions will probably rebound again in 13. So new supply will keep adding to inventories over the next 12-18 months, limiting the room for a rebound in housing prices.

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