Today’s China Readings June 12, 2012

Apologies for the delay this morning, technical problems.

In May there were fears that credit demand in China had decreased precipitously. It turns out those fears were misplaced, as the May lending numbers are out and loans surpassed analysts’ estimates. As Bloomberg reports in Jump in China Loans Helps Wen’s Efforts to End Slowdown:

Local-currency lending was 793.2 billion yuan ($125 billion), the People’s Bank of China said on its website yesterday. That was the most on record for the month of May and more than analysts’ 700 billion yuan median forecast. Loans extended for a year or more accounted for 34 percent of the total, up from 28 percent in April.

Bank deposits also rose unexpectedly. FT Alphaville says there is something for both bears and bulls in the latest data releases, and BeyondBrics even goes so far as to ask if we are seeing China green shoots. China’s economy is clearly struggling, but not as much as some of the pundits would like you to believe. I am sticking with my belief that China will muddle through, at least in the short to medium term.

In a possible sign that some smart money sees a bottoming of the real estate market, Hong Kong developer Wharf Holdings made a large investment into Greentown China. Greentown is in deep trouble and Wharf got a deal. Greentown shorts got killed Monday as the stock rose 33%. Perhaps Beijing encouraged this deal, as consolidation is better than bankruptcy, but Wharf is not dumb money and would not make such a large investment unless they saw real value and the potential for the market to turn.

The Wall Street Journal’s Tom Orlik has two good articles examining interest rate reform and China’s banking system. Both Charting the Brouhaha Over China’s Banks and Beijing Finds a Path to Liberalizing Rates are worth reading. Orlik knows his subject and is the author of the recent book Understanding China’s Economic Indicators: Translating the Data into Investment Opportunities.

China accounting guru Paul Gillis has weighed in on John Hempton’s kleptocracy post. Gillis address Hempton’s charge of Big Four auditor complicity with China frauds, writing that:

I personally do not believe that any of the Big Four firms would do these things. There is always the possibility that a rogue partner could undermine the firm’s quality systems. If the fraud were later discovered the firm would be in a tough position. It will be tempting to early retire the partner and then try to sweep the problem under the rug. There have been persistent allegations this year by people in the investment community that that is exactly what has happened in at least one situation…

These allegations demand a response – from both Hempton and the Big Four firms.  Hempton needs to put up his evidence, if not to the public, at least to the PCAOB and SEC. Maybe he has done that, and perhaps his allegations have led to some of the current (and likely continued and expanded) actions against the Big Four by the SEC. The Big Four firms need to aggressively push back on Hempton’s allegations.  If they have a problem, they need to disinfect it with sunlight. As countercultural as it may be to them, they need to throw any rogue partners to the wolves.

Professor Jeremy Wallace believes Hempton overstates his case, as I do. Wallace writes in On Chinese Kleptocracy: Stationary versus Roving Bandits that:

The individuals that make up the regime in China steal, but they also think about maintaining control of the country over the long-term. The people under their rule overwhelmingly remain poor but are still better off in economic terms than they were 30 years ago. The big game is not theft of deposits to go to the children of Politburo Standing Committee members trust funds; it is to produce sustained economic growth that allows the Party to stay in power. To use Mancur Olson’s phrase, the Party is a stationary bandit, not a roving one. A roving bandit takes everything and moves on. The Party acts as a stationary bandit, to maximize its take over time it is interested in increasing the size of the pie so that there is more to steal in the future. The regime is not stripping factories bare thinking about only today, it is navigating a complex route to continued rule through continued economic development…

…The piece boils down many of the essential ingredients of the political economy of contemporary China. However, it boils them down a bit too far and ends up oversimplifying in putting theft at the top of the list of concerns of the party over remaining in power.

The Atlantic’s Brian Fung writes that Monday’s Apple’s WWDC Keynote Was All About China. Apple announced several localized product enhancements and deals for the China market, including the launch of Chinese Siri. Fung quotes Scott Forstall, senior VP for iOS, as saying “you can now do local search even in China.”

So does that mean Chinese Siri will be hosted behind the great firewall? How will the keyword filtering and censorship work? Apple’s China services include far more than just hardware and the company collects all sorts of data on Chinese users. Google avoided collected personal information of its China users to avoid a replay of Yahoo’s Shi Tao problem. Should we care, or is it no big deal as Apple is just obeying the law, as anyone who wants to operate in China must? As I discussed a few days ago, China’s smartphone market is extremely competitive, prices are dropping fast, and Apple does not have a lock on the phone market here.

Gallup has released an encouraging poll that purports to show that the majority of Chinese Prioritize Environment Over Economy. The reactions on Sina Weibo are interesting. For those wondering what “鸡的屁” (pronounced gee duh p, literally meaning chicken’s butt) means, it is a weibo-ism for GDP.

Two more China bankers are under investigation. The head of China Postal Savings Bank has been detained and the chairman of Yantai Bank will face criminal charges for corruption. Banking is a dangerous business, I guess because that is where the money is.

The best way to read this blog is to subscribe by email, especially if you are in China, as Sinocism is still blocked here. The email signup page is here, outside the GFW. You can also follow me on @niubi or Sina Weibo @billbishop. Comments/tips/suggestions are welcome, and feel free to forward to recommend to friends. Thanks for reading.

The best way to read this blog is to subscribe by email, especially if you are in China, as Sinocism is still blocked here. The email signup page is here, outside the GFW. You can also follow me on @niubi or Sina Weibo @billbishop. Comments/tips/suggestions are welcome, and feel free to forward to recommend to friends. Thanks for reading.

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