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Tuesday 17 March 2009
Small firms at risk of being left behind in China’s recovery
No one can blame the Chinese state for taking the lead in rebooting the economy. It would be irresponsible of it not to do so, and Beijing, after all, is acting no differently from governments around the world.
Small firms at risk of being left behind in China’s recovery
By Alan Wheatley
Reuters 16 March 2009
BEIJING: No one can blame the Chinese state for taking the lead in rebooting the economy. It would be irresponsible of it not to do so, and Beijing, after all, is acting no differently from governments around the world.
Yet China needs less state involvement in its economy, not more. Fostering innovation, developing the stunted services sector and tapping the potential of rural business are tasks for smaller, privately owned firms that China-watchers fear will suffer as Beijing directs the big banks and capital-intensive heavy industries it controls to increase investment.
“With the stimulus benefiting the traditional commanding heights of the economy, there is a risk that, without specific policy attention, new activities and new firms do not get the attention that they need,” said Louis Kuijs, the senior economist in the World Bank’s office in Beijing.
One particular risk is that small and medium-size enterprises, or S.M.E.’s, will pay the price as state lenders squeeze out marginal clients to focus on state-owned enterprises, or S.O.E.’s.
“If the bulk of lending were to go to S.O.E.’s under the stimulus package, this would serve the short-term goal of propping up the economy and ensuring employment,” said Alastair Campbell, vice chairman for Greater China in Beijing at APCO Worldwide, a consulting company.
“But it would not be very good if you looked longer term because S.M.E.’s and private companies are the ones that are going to drive innovation and growth.”
In his annual news conference last Friday, the Chinese prime minister, Wen Jiabao, reaffirmed his commitment to S.M.E.’s and said they generated 90 percent of all jobs.
But small firms, which struggle in the best of times to borrow from banks in any developing country, not just China, will be swimming against a strong tide.
The Communist Party is doing what it does well, mobilizing the massive resources at the disposal of the state in pursuit of a clearly articulated goal — in this case attaining the 8 percent growth rate deemed necessary to underpin the party’s legitimacy.
The state owns China’s banks and so has been able to generate 2.7 trillion yuan, or $395 billion, in new loans just in the first two months of 2009, more than half of the minimum goal for the entire year.
Much of the lending is being steered to local governments and state-owned enterprises, which still control the most capital-intensive sectors of the economy, including oil and gas, petrochemicals, steel, aviation and power, said Andy Rothman, an economist based in Shanghai with the broker CLSA.
“With a one-party system, there are no political or legal obstacles,” he wrote in a report. “There is basically one large pool of cash controlled by the Party, whether at the central government level, at local governments, at the state-controlled banks or at the S.O.E.’s.”
A related concern is that the increasing influence of the state will reinforce what Western businessmen already have seen as a striking trend in China toward favoring domestic, usually state-owned, firms.
Postponing the issuance of 3G telecommunications licenses until a home-grown alternative was available to rival established Western standards is a prime example.
“That has applied in a number of industries. China is clearly putting a much stronger emphasis on the ability to create technology which is not dependent on foreign intellectual property,” said Campbell. “From a Chinese point of view, it’s entirely understandable. From the foreign vendor’s point of view, it seems to be a barrier and a barrier that could be described as economic nationalism.”
Now, China has no monopoly on economic nationalism. Look no further than the “Buy American” provisions in the U.S. stimulus.
And by the standards of the times, China’s steps have been moderate. While the United States and Europe are bailing out their car sectors, China has pumped cash into two major state airlines. China has increased tax rebates for some exporters, but it has not erected import barriers in the way India and Russia, among others, have.
NEW YORK (Reuters) - U.S. credit card defaults rose in February to their highest level in at least 20 years, with losses particularly severe at American Express Co and Citigroup amid a deepening recession.
AmEx, the largest U.S. charge card operator by sales volume, said its net charge-off rate -- debts companies believe they will never be able to collect -- rose to 8.70 percent in February from 8.30 percent in January.
The credit card company's shares wiped out early gains and ended down 3.3 percent as loan losses exceeded expectations. Moshe Orenbuch, an analyst at Credit Suisse, said American Express credit card losses were 10 basis points larger than forecast.
In addition, Citigroup Inc -- one of the largest issuers of MasterCard cards -- disappointed analysts as its default rate soared to 9.33 percent in February, from 6.95 percent a month earlier, according to a report based on trusts representing a portion of securitized credit card debt.
"There is a continued deterioration. Trends in credit cards will get worse before they start getting better," said Walter Todd, a portfolio manager at Greenwood Capital Associates.
U.S. unemployment -- currently at 8.1 percent -- is seen approach 10 percent as the country endures its worst recession since World War Two, leaving more than 13 million Americans jobless, according to a Reuters poll of economists.
However, not all were bad surprises. JPMorgan Chase & Co and Capital One reported higher credit card losses, but they were below analysts expectations.
Chase -- a big issuer of Visa cards -- reported its charge-off rate rose to 6.35 percent in February from 5.94 percent in January. The loss rate for the first two months of the quarter is 126 bps from the previous quarterly average compared to an estimate of a 145 bp increase, Orenbuch said.
Capital One Financial Corp's default rate increased to 8.06 percent in February from 7.82 percent in January.
MORE PAIN AHEAD
Analysts estimate credit card chargeoffs could climb to between 9 and 10 percent this year from 6 to 7 percent at the end of 2008. In that scenario, such losses could total $70 billion to $75 billion in 2009.
"People underestimated the severity of the downturn we are experiencing and I wouldn't be surprised to see them north of 10 percent," said Todd, who added American Express was most exposed to higher credit card losses, given its sole reliance on the industry.
Credit card lenders are trying to protect themselves by tightening credit limits, rising standards, and closing accounts. They have also been slashing rewards, raising interest rates and increasing fees to cushion further losses.
Meredith Whitney, one of Wall Street's best known and most bearish bank analysts, estimates that Americans' credit card lines will be cut by $2.7 trillion, or 50 percent, by the end of 2010 -- and fewer Americans will be offered new cards.
"We believe that the US credit card industry will feel additional credit pain over the next 12-18 months. Until lenders like Capital One show stabilization, followed by trend-bucking improvement over a several-month period, we will continue to remain bearish on credit card lenders," said John Williams, an analyst at Macquarie Research.
Todd said credit card issuers shares -- which are down up to 60 percent in 2009 -- will remain under pressure until the end of 2009, or early next year, when bad loans could start to redeem.
2 comments:
Small firms at risk of being left behind in China’s recovery
By Alan Wheatley
Reuters
16 March 2009
BEIJING: No one can blame the Chinese state for taking the lead in rebooting the economy. It would be irresponsible of it not to do so, and Beijing, after all, is acting no differently from governments around the world.
Yet China needs less state involvement in its economy, not more. Fostering innovation, developing the stunted services sector and tapping the potential of rural business are tasks for smaller, privately owned firms that China-watchers fear will suffer as Beijing directs the big banks and capital-intensive heavy industries it controls to increase investment.
“With the stimulus benefiting the traditional commanding heights of the economy, there is a risk that, without specific policy attention, new activities and new firms do not get the attention that they need,” said Louis Kuijs, the senior economist in the World Bank’s office in Beijing.
One particular risk is that small and medium-size enterprises, or S.M.E.’s, will pay the price as state lenders squeeze out marginal clients to focus on state-owned enterprises, or S.O.E.’s.
“If the bulk of lending were to go to S.O.E.’s under the stimulus package, this would serve the short-term goal of propping up the economy and ensuring employment,” said Alastair Campbell, vice chairman for Greater China in Beijing at APCO Worldwide, a consulting company.
“But it would not be very good if you looked longer term because S.M.E.’s and private companies are the ones that are going to drive innovation and growth.”
In his annual news conference last Friday, the Chinese prime minister, Wen Jiabao, reaffirmed his commitment to S.M.E.’s and said they generated 90 percent of all jobs.
But small firms, which struggle in the best of times to borrow from banks in any developing country, not just China, will be swimming against a strong tide.
The Communist Party is doing what it does well, mobilizing the massive resources at the disposal of the state in pursuit of a clearly articulated goal — in this case attaining the 8 percent growth rate deemed necessary to underpin the party’s legitimacy.
The state owns China’s banks and so has been able to generate 2.7 trillion yuan, or $395 billion, in new loans just in the first two months of 2009, more than half of the minimum goal for the entire year.
Much of the lending is being steered to local governments and state-owned enterprises, which still control the most capital-intensive sectors of the economy, including oil and gas, petrochemicals, steel, aviation and power, said Andy Rothman, an economist based in Shanghai with the broker CLSA.
“With a one-party system, there are no political or legal obstacles,” he wrote in a report. “There is basically one large pool of cash controlled by the Party, whether at the central government level, at local governments, at the state-controlled banks or at the S.O.E.’s.”
A related concern is that the increasing influence of the state will reinforce what Western businessmen already have seen as a striking trend in China toward favoring domestic, usually state-owned, firms.
Postponing the issuance of 3G telecommunications licenses until a home-grown alternative was available to rival established Western standards is a prime example.
“That has applied in a number of industries. China is clearly putting a much stronger emphasis on the ability to create technology which is not dependent on foreign intellectual property,” said Campbell. “From a Chinese point of view, it’s entirely understandable. From the foreign vendor’s point of view, it seems to be a barrier and a barrier that could be described as economic nationalism.”
Now, China has no monopoly on economic nationalism. Look no further than the “Buy American” provisions in the U.S. stimulus.
And by the standards of the times, China’s steps have been moderate. While the United States and Europe are bailing out their car sectors, China has pumped cash into two major state airlines. China has increased tax rebates for some exporters, but it has not erected import barriers in the way India and Russia, among others, have.
U.S. credit card defaults rise to 20 year-high
By Juan Lagorio
Mar 16, 2009
NEW YORK (Reuters) - U.S. credit card defaults rose in February to their highest level in at least 20 years, with losses particularly severe at American Express Co and Citigroup amid a deepening recession.
AmEx, the largest U.S. charge card operator by sales volume, said its net charge-off rate -- debts companies believe they will never be able to collect -- rose to 8.70 percent in February from 8.30 percent in January.
The credit card company's shares wiped out early gains and ended down 3.3 percent as loan losses exceeded expectations. Moshe Orenbuch, an analyst at Credit Suisse, said American Express credit card losses were 10 basis points larger than forecast.
In addition, Citigroup Inc -- one of the largest issuers of MasterCard cards -- disappointed analysts as its default rate soared to 9.33 percent in February, from 6.95 percent a month earlier, according to a report based on trusts representing a portion of securitized credit card debt.
"There is a continued deterioration. Trends in credit cards will get worse before they start getting better," said Walter Todd, a portfolio manager at Greenwood Capital Associates.
U.S. unemployment -- currently at 8.1 percent -- is seen approach 10 percent as the country endures its worst recession since World War Two, leaving more than 13 million Americans jobless, according to a Reuters poll of economists.
However, not all were bad surprises. JPMorgan Chase & Co and Capital One reported higher credit card losses, but they were below analysts expectations.
Chase -- a big issuer of Visa cards -- reported its charge-off rate rose to 6.35 percent in February from 5.94 percent in January. The loss rate for the first two months of the quarter is 126 bps from the previous quarterly average compared to an estimate of a 145 bp increase, Orenbuch said.
Capital One Financial Corp's default rate increased to 8.06 percent in February from 7.82 percent in January.
MORE PAIN AHEAD
Analysts estimate credit card chargeoffs could climb to between 9 and 10 percent this year from 6 to 7 percent at the end of 2008. In that scenario, such losses could total $70 billion to $75 billion in 2009.
"People underestimated the severity of the downturn we are experiencing and I wouldn't be surprised to see them north of 10 percent," said Todd, who added American Express was most exposed to higher credit card losses, given its sole reliance on the industry.
Credit card lenders are trying to protect themselves by tightening credit limits, rising standards, and closing accounts. They have also been slashing rewards, raising interest rates and increasing fees to cushion further losses.
Meredith Whitney, one of Wall Street's best known and most bearish bank analysts, estimates that Americans' credit card lines will be cut by $2.7 trillion, or 50 percent, by the end of 2010 -- and fewer Americans will be offered new cards.
"We believe that the US credit card industry will feel additional credit pain over the next 12-18 months. Until lenders like Capital One show stabilization, followed by trend-bucking improvement over a several-month period, we will continue to remain bearish on credit card lenders," said John Williams, an analyst at Macquarie Research.
Todd said credit card issuers shares -- which are down up to 60 percent in 2009 -- will remain under pressure until the end of 2009, or early next year, when bad loans could start to redeem.
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