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News from China
Faster growth in profits due to lower costs as prices rise
28th September 2017

 CHINA’S major industrial companies posted faster profit growth in August as producer prices went up and production costs came down, the National Bureau of Statistics said yesterday.

 
Industrial companies reported profits totaling 671.97 billion yuan (US$101.31 billion) last month, up 24 percent year on year — a growth 7.5 percentage points faster than in July.
 
The bureau tracks companies with annual revenue of more than 20 million yuan. Among the 41 industries surveyed, 39 posted year-on-year profit growth during the first eight months.
 
China’s producer price index, which measures costs of goods at the factory gate, rose 6.3 percent year on year in August, 0.8 percentage points higher than in July.
 
The price rebound added some 127.3 billion yuan to August industrial profits, accounting for 31.2 percent of the total profit increase last month, said bureau statistician He Ping.
 
The trend was particularly evident in sectors such as the petroleum, steel and electronics industries.
 
He added that ongoing supply side reform had helped lower costs and debts for companies and accelerated turnover of products and capital.
 
January-August total profits rose 21.6 percent to 4.9 trillion yuan, nearly three times the pace in the same period of last year and faster than the 21.2 percent increase for the first seven months.
 
Profits at China’s state-owned enterprises were up 46.3 percent to 1.08 trillion yuan in the January-August period, compared with a 44.2 percent rise in the first seven months.
 
Private companies reported profits growing 14 percent to 1.63 trillion yuan in the first eight months, compared with 14.2 percent in the first seven months.
 
Last month, the oil and natural gas exploitation industry’s profits went up 4.94 billion yuan from a year ago, but in July they suffered a decrease of 1.03 billion yuan.
 
Meanwhile, for each 100 yuan of revenue, companies had to spend 85.44 yuan, a 0.64-yuan decrease from the same period last year, according to bureau figures.
 
He said that the leverage ratio of Chinese industrial firms was on the decline amid the government’s supply-side structural reform. By the end of August, their debt-asset ratio dropped 0.7 percentage points from a year ago to 55.7 percent.
 
The industrial sector, which accounts for about a third of China’s GDP, started to pick up last year after a bad 2015, helped by government efforts to cut overcapacity and a recovery of the property sector.
 
Major activity indicators, including industrial output, retail sales and trade, showed cooler growth in August.
 
The upbeat August profits data has added to evidence of resilience in the sector and steady improvement in the overall economy, Xinhua news agency said.
 
China’s value-added industrial output grew 6 percent year on year in August, previous data showed. On a monthly basis, industrial production edged up 0.46 percent in August compared to July.
 
CITIC Securities expects industrial profit growth to slow to between 8 to 12 percent in the next 6 to 12 months amid slower price increases. But stable economic expansion and low inventory will sustain profit growth at a relatively fast range, CITIC said.
 
That compares with the 8.5 percent full-year increase in 2016.
 
Economists expected China’s GDP to moderate in the second half from the first half’s 6.9 percent, but the whole year growth is expected to exceed the government’s target of 6.5 percent.
 
Asian Development Bank has projected economic growth for this year at 6.7 percent.
Source: Shanghai Daily, September 28, 2017
Regulators put the squeeze on market risk
27th September 2017

 The Chinese government’s efforts to reduce risk in the financial system appear to be slowly showing positive results.

 
The campaign to unwind risk began in mid-2016, mainly targeted at the interbank funding market and the shadow-banking sector.
 
The interbank market is the conduit of financing for banks and other financial institutions. This year, volumes have been contracting. In the first eight months of the year, interbank assets fell by 3.2 trillion yuan (US$480 billion) and liabilities slumped by 1.4 trillion yuan.
 
Joint-stock banks showed the steepest decline, with interbank assets diving 45 percent, according to the China Banking Regulatory Commission.
 
The regulator said that the declines mean more money is being channeled into the “real” economy instead of idling in the financial sector.
 
The deleveraging has taken its toll on the net interest margins of smaller and mid-sized lenders that have relied on borrowing from the interbank market. Their margins fell sharply in the first half, while the nation’s largest banks improved their margins. That divergence is expected to continue through the second half, Noel Chan, a banking analyst at UBS Securities, told Shanghai Daily.
 
“We look at the deleveraging as akin to a mild forest fire, allowing the stronger trees to grow taller out of the ashes of the weaker trees and bushes,” Nomura noted in its recent Asia special report.
 
Amid the structural shift from interbank assets to traditional credit assets, Nicole Zhou, a partner at McKinsey & Co, said that banks “should always strengthen their core while growing fee income.”
 
The shadow-banking sector, which functions largely outside the banking regulatory system, is a tougher nut to crack when it comes to reducing financial risk.
 
That sector operates wealth management products, “underground” financing and off-balance-sheet lending. Its size in the six years to 2016 surged from 19.4 trillion yuan to 122.8 trillion yuan, according to a recent report by Nomura.
 
That rampant growth triggered alarm bells in a government afraid that a collapse in any sector of the financial system could undermine the whole economy.
 
Attempts to bring more order to the sector have been paying off. Wealth management products, a major driver behind the boom in shadow banking, lost ground for seven straight months, registering a 27 percent decrease year-on-year.
 
At the end of 2016, China’s asset management industry was valued at more than 60 trillion yuan, according to the People’s Bank of China.
 
The value of interbank wealth management products has been reduced by 22 trillion yuan this year. City and rural commercial banks that relied heavily on interbank financing in recent years suffered slumps of 40-90 percent.
 
Entrusted loans, another type of the informal lending, recorded a year-on-year reduction of 151.4 billion yuan in August. However, trust loans recorded a rise of 40.7 billion yuan, while undiscounted bankers’ acceptances reported a gain of 61.8 billion yuan over the same period last year.
 
The government’s crackdown on riskier shadow banking has led companies to resort to traditional banks for funding. Chinese commercial lenders extended 1.15 trillion yuan in corporate loans in August, up almost 350 billion yuan from the prior year, China’s central bank said recently.
 
Government attempts to implement controls always come with loopholes. Financial regulators are seeking to close them.
 
The National Financial Stability and Development Committee was set up in July to shore up weak links in supervision and strengthen coordination among the various regulators.
 
The central bank is now including asset management business in its prudential oversight. As of September 1, financial institutions have been banned from issuing negotiable certificates of deposit, a popular interbank debt instrument, with tenures exceeding one year.
 
The banking regulator has rolled out a series of policies to tighten financial regulations implemented earlier this year. For example, banks have been asked to monitor their interbank liabilities so that they don’t exceed a ceiling of one-third of total liabilities.
 
The government curbs aim to force the banks to adjust their balance sheets and profit models, Li Yamin, a banking analyst at Pingan Securities, said in an interview with Shanghai Daily.
 
“The adjustment is far from completed,” Li said. “It will carry on through the second half. It might take another year for some unlisted lenders to make the adjustments.”
 
UBS Securities’ Chan said the current crackdown is mainly focused on listed banks, but the firm’s research points to even more serious problems in the unlisted realm.
 
“It will take the decision-makers a long time to deal with the shadow banking activities, which weren’t built in a day,” he said. “In a sense, the deleveraging process has just begun.”
 
Sophie Jiang, head of Hong Kong and Chinese m bank research at Nomura, said banks with sizable exposures to leveraged financial assets — both on and off balance sheets — are yet to undergo fundamental changes.
 
“We believe that China will proceed with its efforts on financial deleveraging,” Li Jing, manager director of JP Morgan said in a recent Shanghai media briefing. “It is quite likely that the authorities will take a progressive and measured approach to avoid potential adverse impact on economic growth and financial stability.”
Source: Shanghai Daily, September 27, 2017
Chinese turbines to drive Baihetan power dam
26th September 2017

 The world’s second-largest hydropower station, Baihetan, in southwest China will use Chinese turbines.

 
Baihetan is on the Jinsha River, the upper section of the Yangtze, straddling Sichuan and Yunnan provinces.
 
With an installed capacity of 16 million kilowatts, the dam is expected to generate more than 60 billion kilowatt-hours of electricity a year, equal to about two-thirds of Beijing’s consumption in 2015.
 
It will have 16 turbines, each with a capacity of 1 million KW, said Tu Yangwen, director of an equipment installing team of the China Three Gorges Corp, the Baihetan project owner.
 
This equipment was developed and made by Chinese companies. “Making million kilowatt-level turbines is no easy task,” said Tu.
 
Before 1994, when work began on the Three Gorges project, Chinese companies could not build a 350,000KW turbine.
 
“In cooperation with overseas hydropower equipment builders, China began to work on its own equipment,” said Tu, recalling construction of the Three Gorges project.
 
The Three Gorges project has 32 sets of 700,000KW generators.
 
When Baihetan was approved in 2006, development work on the generators began.
 
The plant will go fully operational by the end of 2022.
 
“China’s turbines are as good as any made by overseas companies. Our hydropower equipment has made great strides to become a strong competitor in the international marketplace,” said Zhang Chengping, director of mechanical and electrical engineering at the corporation.
 
Baihetan, one of four hydropower stations in the lower reaches of the Jinsha River, is downstream of the Wudongde plant that is under construction.
 
Xiluodu and Xiangjiaba stations have gone into operation.
Source: Shanghai Daily, September 26, 2017
Unmanned vehicle hub
25th September 2017

 Shanghai wants to build an industrial cluster for producers of unmanned vehicles.

 
Hu Weiguo, head of the city’s Jinshan District, said on Saturday at the opening of the 2017 World Unmanned System Conference that the district government had planned to foster such a production base.
 
He said the government would encourage research, production, testing and system integration of drones, self-driving vehicles and vessels, as well as intelligence robots in the industrial base.
 
China’s unmanned system industry is still in its infancy, said Sun Baiyuan, secretary-general of the Association of Unmanned Vehicle Systems of China.
 
He said the industry needed strategic development, network safety protection and research on market applications.
 
The event showed off drones used for firefighting and automated delivery, unmanned vehicles for digging and demolition, as well as self-driving boats for testing water quality.
 
Industry officials from the United States, Britain and Germany attended the meeting.
Source: Shanghai Daily, September 25, 2017

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