3 Things to Watch for in China in 2013

Olaf has looked into his crystal ball and sees a bright future for China in 2013. Naturally there still are serious problems that pose an existential threat to the ruling party (property prices, bank capitalization, demographic trends, wealth gap, etc.), but my feeling is that these won’t come to the front burner quite yet. So without further ado, I present my predictions:

More Outbound Investment / M&A

This has already been happening for some time now, but look for it to increase greatly in 2013. There is effectively a government mandate now for companies to look abroad to acquire know-how, technology, and natural resources. And not simply by ripping it off either. The Chinese government and Chinese companies already know that they are reaching the limits of what they can accomplish by producing low-grade copies of someone else’s work.

In addition, don’t expect too many high profile acquisitions by the SOEs or other companies that are close to the central government / military. The government will be shrewder in how it orchestrates things, as it doesn’t want to draw negative attention in the way that companies such as Huawei have. The pending acquisition of AIG’s ILFC unit by a consortium is a good example of what future deals will look like.

Slight Strengthening of the RMB

But if it doesn’t become stronger, it will most certainly not become weaker. Although a weakening of the RMB would help Chinese exporters, it would definitely also respark a debate within the US about the Commies starting a trade war of sorts. Moreover the Chinese government does indeed realize that economic development can no longer depend on the country being the world’s factory anymore. Maintaining or strengthening the RMB would go a long way to reinforce to the world that the government understands this.

New Leadership Won’t Rock the Boat

Ruffling feathers, especially with the retiring guys who used a lot of their political capital to get you where you are, doesn’t get you very far in China (see: Bo Xilai). What’s most important to the incoming Magnificent Seven is that they will, at least at first, remain faithful to the credo set by Hu Jintao and Co. There has been and will continue to be a talk about reforming this and that, but for at least the first year it will remain mostly talk. This new crop will be around for the next five years, and some of them for another five years after that. They don’t have to deal with elections every other year, and as such are in no hurry to act.

Of course there are problems that require slightly more immediate actions, but these actions have already been set into motion by the outgoing bunch. Expect the status quo for the time being.

 

Massive western slowdown will reveal the extent of the frauds hitting China. Public unrest when they see the degree that the previous bunch have looted the country. Unemployment will hit, from rising costs, and we'll finally get to see China for how it really is. Remember, when everyone else is running in one direction, you need to go the other.

 
shark-monkey:
Adding: Grey (shadow) banking system that will/is lead to an increase in loan default rates which leads to China's property bubble popping.

Recently there have been at least two instances of trust products sold by the banks as WMPs going into default and had to be taken over by the AMCs. This is just the beginning. The next wave of Chinese bad loans will derive from these products. Also watch out for the corporate bonds. They may be the next domino to fall.

Too late for second-guessing Too late to go back to sleep.
 
brandon st randy:
shark-monkey:
Adding: Grey (shadow) banking system that will/is lead to an increase in loan default rates which leads to China's property bubble popping.

Recently there have been at least two instances of trust products sold by the banks as WMPs going into default and had to be taken over by the AMCs. This is just the beginning. The next wave of Chinese bad loans will derive from these products. Also watch out for the corporate bonds. They may be the next domino to fall.

Right on. Article in the WSJ this morning too.

http://online.wsj.com/article/SB100014241278873244616045781887811283769…

Fear is the greatest motivator. Motivation is what it takes to find profit.
 

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