OPINION

Short Selling China's Economy

"China is bound to go through a financial crisis sooner or later," said James Chanos, President of Kynikos Associates, the largest investment company that is focused on short selling. The international capital market is brewing up a new round of short selling China's economy.

It all began when Fitch Ratings downgraded China's long-term local currency rating from AA- to A+, the first time that China's sovereign credit rating has been cut by a major international agency since 1999.

Then, Moody's Investors Service, despite maintaining an A3 rating, lowered its outlook for China's government bond rating from positive to stable. Standard & Poor's (SP), though not downgrading China's credit rating, claimed "China will have to pay for its economic stimulus policies."

James Chanos, who has thought poorly of China's economy, is engaged in stock short selling of China's construction industry, including construction companies, real estate developers, and manufacturers of steel, iron ore and cement.

According to Hong Kong Exchanges and Clearing Limited, on April 17, the Capital Group unloaded 100-million-yuan ($16.22 million) H shares of Agricultural Bank of China for HK$342.2 million ($44.08 million) with the ratio of long position falling from 11.24 percent to 10.91 percent. JPMorgan Chase & Co. and Citigroup were also reported to have sold 42.36 million and 92.59 million H shares on April 12.

Some financial commentators believe, three points should be made in explaining the short selling of China's economy by international capital. First, capital holders predict the prospects of China's economy is not so promising. After a rebound in the fourth quarter of last year, China's economic growth fell back to 7.7 percent from 7.9 percent in the first quarter of 2013, missing the expectation of 8 percent growth.

Second, China's local debt risk has been on the minds of domestic and overseas investors. China's local debt rose from 10.7 trillion yuan ($1.73 trillion) in 2010 to 12.85 trillion yuan ($2.08 trillion), accounting for 25.1 percent of its GDP.

Last, shadow banking is another demon. According to Fitch, China's total credit had equaled 198 percent of its GDP by the end of 2012, exceeding the 125 percent proportion back in 2008. From the perspective of financial stability, the expansion of non-banking credits breed risks.

While there is a possibility that big players in the international capital markets conspire to go bottom fishing through short selling, it should be recognized that China's economy may be undermined by a potential financial crisis. If China's economy continues to slow down, overcapacity triggered by a massive economic stimulus can water the seeds of financial risks.

For instance, severe overcapacity in the steel sector has led to heavy losses and difficulties in paying back loans and interest. Once these companies default on their bank loans, credit risks would come to light.

Debt risks derived from local financing platforms continue to expand. Fitch downgraded China's long-term local currency rating because its local financing platforms had accumulated 12.85 trillion yuan ($2.08 trillion) of debt by the end of 2012, while former Finance Minister Xiang Huaicheng predicted the figure at 20 trillion yuan ($3.24 trillion). Huatai Securities estimated that local government debt had reached 15.3 trillion yuan ($2.48 trillion) in 2012.

China should take the short selling as a kind reminder, rather than view it maliciously, and respond in a proactive way.

This is an edited excerpt of an article by Yu Fenghui, a financial commentator, published in Information Times 

THE MARKETS

Continued Growth Slowdown

Baidu Inc., China's biggest search engine, has recorded slowed net income growth for the ninth consecutive quarter, which it blamed on continued heavy investment in research and development as it continues to grow its share of China's mobile Internet market.

However, some analysts said they expected the declining profit growth could continue for up to two years, as the company strives to translate its mobile traffic into revenues.

Baidu reported total revenues of 5.97 billion yuan ($961.0 million) in the first quarter, a 40-percent increase over the same period last year, which delivered net income of 2.04 billion yuan (331million), an 8.5 percent rise. Most of the revenue came from search advertising, it said.

The company's net income growth rate peaked at 171.3 percent in the fourth quarter of 2010, but has been declining since.

IT Legal War

Tencent, China's biggest Internet company, won its third lawsuit against Qihoo 360, a leading Chinese antivirus software developer, over claims of the latter's unfair competition, according to a court ruling issued on April 25.

Qihoo 360 was accused of breaching faith as well as equal competition and was malicious in its competition against Tencent, a Guangdong Provincial High People's Court ruling said.

Qihoo 360 seriously disturbed the Internet business order and set down the roots of a long and drawn-out legal war between the two companies, it added.

Fined 5 million yuan ($802,568) in compensation to Tencent, Qihoo 360 was asked to apologize on its official website and via several major portal websites and newspapers.

Qihoo 360 held a news briefing in Beijing immediately after the trial, saying it will appeal to the Supreme People's Court.

Numbers

1,174 bln yuan

Profits of industrial enterprises above the designated size—annual sales revenue of more than 20 million yuan ($3.15 million)—from January to March, a 12.1-percent year-on-year increase

29

The number of industrial sectors that witnessed higher year-on-year profits from January to March

330%

Year-on-year increase in profits of the ferrous metal processing sector from January to March

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