News reports about China’s GFC keeps escalating, but it seems the Communist Party of China (CPC) is managing the risks well enough to prevent contagion.  This has ramifications for Australia.

In summary, there has been strong action from Chinese regulators to reduce leverage and rein in systemic risks  within China’s financial markets and in particular, its shadow banking sector.

This contrasts to general expert commentary reported earlier this year that Chinese authorities will do little ahead of the National Congress (due in late 2017) to prevent instability.

Below is a selection of recent Asian news stories covering these developments.

  1. The funding tap is running dry for Chinese property developers, according to Caixin. Click Here
  2. The chairman of China’s third largest (& fastest growing) insurer, Anbang, is reportedly being probed by authorities and is unable to continue his work duties for ‘personal reasons’. Click Here  Anbang is a major issuer of short term insurance-based investment products sold to Chinese retail investors to fund its global acquisitions.
  3. China’s banking regulator has reportedly asked its banks to provide information on overseas loans made to five major Chinese companies who have been on a global corporate buying spree.  They include Dalian Wanda, Anbang, HNA Group, & Fosun (three of these firms have major investments in Australia). Click Here
  4. China’s shadow banking contributes about one third of China’s total credit, and is a lesson in ‘how a well-intentioned policy can lead to a financial mess’  – South China Morning Post. Click Here
  5. Chinese capital outflow is slowing rapidly –down 70% in April (vs April 2016) and down 56% in the first four months of this year, according to Xinhua. Click Here
  6. China’s Debt Squeeze has Moody’s awaiting first ever local government financing vehicle default Click Here 
  7. Overseas investment deals are a national security matter, and will be further monitored, said China’s President Xi.  Click Here
  8. Why is China scrutinizing its biggest deal makers Click Here

 (An eye-opener is the reported probe into Anbang’s chairman who is married to a grand-daughter of Deng Xiaoping (After Mao, Deng is regarded as the most influential CPC leader who ‘opened China’ in the 1980s) indicating even strong political connections count for little in Xi’s new China.)

However, the ‘black swan’ here is whether Chinese retail investors will withdraw from wealth management products, (WMPs) which are a key part of China’s shadow banking.  It’s their retail savings placed into WMPs that in turn invests in corporate bonds which has helped fund Chinese corporations go on their global and local buying sprees.(For background on the China GFC, deleveraging and WMPs, see my articles April 12 and May 8.)

Contagion Risks being Managed 

The government is aware of this risk, and as mentioned in my May 8 newsletter, has continued to crackdown on private media channels to ensure the news flow is managed to reduce the risk of a ‘run’ on WMPs.

Last week, three major internet news sites were ordered to stop video and audio streaming due to content deemed inappropriate by authorities.    Recent closures of popular blog sites, which while mostly pertaining to risqué celebrity news, also is a warning to investment bloggers, some of them who have millions of followers.

However, the 10% stock price plunge in Wanda Films last week following ‘rumours’ of the regulatory checks (see 3 above), shows the Chinese market is still prone to fast and widespread news distribution as well as the actions of Chinese ‘Big Hands’…(Big Hands was the term used for manipulative market players in Taiwan in the early 1990s.  They were able to influence stock prices for example in ‘pump and dump’ schemes, and made fortunes along the way..before eventually being caught…Click Here.  There are ‘Big Hands’ in the Chinese markets today.

Finally, any plans by foreign speculators to ‘short’ Chinese financial markets (currency, stocks or stock indices) is fraught with risk of the Chinese government seeking to ‘kill a chicken to scare the monkey.’

For example, on June 6, the shorting of two Hong Kong listed stocks were announced by high profile investment firms.  After falling 6-10% on the day, share prices have since rebounded.  The risk for short sellers is a repeat of the China Evergrande playbook, whose share price has nearly tripled since short selling began in March this year.

Impact on Australia

1. Australia is at risk of becoming a more attractive ‘proxy short’ on China by global investors.  eg hedge funds who prefer to take an investment position via a ‘sell Australia’ position rather than a riskier ‘sell China’ position.  While this proxy short is not a new idea, it is now more likely given the likelihood for the Chinese government, via their state run investment firms, to be ‘killing chickens’ (chickens being the short sellers on Chinese stocks)...to deter other potential short sellers.

2. Capital flows from China will increasingly be tight.  While China has a ‘go -out’ investment policy for 10+ years, and wants its currency to be an international currency in the long term, in the short-term, the government’s focus on deleveraging its economy, cleaning up its poorly regulated financial markets, and stabilizing its currency.

To achieve this, the government has continued to tighten capital outflows even more, including investigating large outbound investment deals and restricting retail investments into overseas property.  (eg the US$50,000 annual limit for offshore transfers can no longer be made for the purposes of property investment outside China)

This increases the risks in Australia’s residential construction market…

  • just as the number of Chinese retail buyers start declining as they cannot take their money out of China (or it costs too much via underground banks to do so)
  • just as dwelling supply escalates,
  • just as Australian banks tighten lending and increase borrower interest rates,
  • just as foreign buyers transaction taxes are introduced or increased
  • and as local experts keep warning that house prices are already too high

(More on the above in my next newsletter)

However, China’s economy is still growing at fast-paced 6.9%, particularly in its services and consumption industry.   This means China’s mass market demand for consumer goods, services and experiences (ie tourism, education, entertainment, dining etc) will continue…hence my Aus-China Film Investment Conference to take advantage of China’s surging mass consumer ‘box office’ movie ticket sales.

Aus-China Film Investment Conference, Sydney, Monday 4 September  1.30pm to 7.30pm.

China’s box office is now almost as large as the US, sparking an avalanche of Chinese investment into the global entertainment industry.

Australia’s film, TV and gaming industry has the expertise but lacks the capital…. which is why local talent has been going to Hollywood.

Yes, Chinese money will influence film content but China’s surging box office is hungry for well-made films…for stories that touch the heart.

And with this hunger comes the opportunity for Australia to project its own soft power via its story-telling talent…and to potentially achieve high investment returns.

Indian films, for example, have had Chinese box office success.  Its latest, ‘Dangal’ or ‘Let’s Wrestle, Dad’ took in US$93m in the first two weeks following its May 2017 release.

Australian and Chinese high-net-worth and venture capital investors should now be exploring opportunities in films and TV that appeal to both the Western and Chinese mass consumer audience.

Revenues from ‘product placement’ and its de-facto advertising for  Australian tourism, education, lifestyle investments and consumer brands can also boost investment returns due to the unique acceptance by Chinese audiences for product placement in films.

This event, the first of its kind in Australia, is designed to bring Australian and Chinese high-net-worth investors and venture capital funds to meet with the Australian film industry to capture opportunities from this growth area.  Click here for details.

The key discussion points are;

  1. The Australian and Chinese governments have a co-production agreement that will benefit the Australian film industry.  Why is now the time to invest?
  2. Aus-China co-produced films must have content that appeals to both Chinese and Western audiences – Where will these stories come from?  Perhaps a Chinese equivalent of Home and Away – about overseas students living in an Australian city and their interaction with the locals: TV documentaries related to unique Australian agricultural & tourism experiences that appeal to the Chinese
  3. Australia’s film production talent is on par with the US but the local industry lacks capital…which partly explains why Australian film have tended to be lower budget ‘arthouse’ productions rather than more expensive ‘blockbusters’, and why Australian talent moves to Hollywood where the capital is.
  4. Australia has the opportunity to project its ‘soft power’ via its Australian-style of storytelling and content
  5. The global audience for entertainment assets has doubled due to the entry of Chinese mass consumers for film and TV.
  6. Product placement opportunities and its de-facto advertising opportunities for Australian industries and regions are substantial, given the unique Chinese acceptance for such placements, & their willingness to buy product.
  7. Given the above points, Australian and Chinese investors should now take a fresh look at investing in Australian films (not arthouse but mass consumer ‘Chinese-angle’ productions).
  8. Investments can also be made in the film industry itself e.g. film production companies, animation studios, film production schools etc.

Click here for more information and registration details