Friday, April 29, 2016

A Return to Local Real Estate Projects

China has turned again to real estate projects financed with local government loan guarantees as a way to boost its economy. That strategy worked reasonably well six years ago but left a worrying loan overhang that has caused some instability in the financial sector that continues to the present. There were also some boondoggles, projects built 20 years or longer ahead of any realistic need. The new projects are generally more practical. The first category I think of is parking lots. With more vehicles in China, there is an immediate need for parking spaces in some places. On the other hand, there are also projects like housing construction, a worrying trend after many of the larger residential buildings built five years ago remain vacant, or in some cases, unfinished. In a make-work program like this, the quality of execution is everything. If the boondoggle ratio is low enough and the loan performance is strong enough, the real estate projects will be seen as a practical way to boost a sluggish economy. If the reverse is true and the bad loans crash the economy, the program will be judged as the height of folly.

Thursday, April 28, 2016

Phone Sales Drop

Mobile phone sales are down from last year for the first time in the smart phone era. News headlines have focused on the decline in Apple sales, consumer resistance to the oversized form factor of the iPhone 6 and 6S, and declines in mobile phone units in the U.S. and China, but there is more to it than that. The decline in phone sales is a global trend not limited to Apple, smart phones, or the two biggest smart phone countries. Designs have become more sturdy and durable, reducing the number of phones that must be replaced because they are broken. At the same time consumers have become more skeptical of the need to upgrade and are expecting the devices they already have to last longer.

Thursday, April 14, 2016

China Ends Subsidy Program

China is ending its most controversial export subsidies, according to a Reuters article that cites U.S. sources, “U.S. says China to end export subsidies in seven sectors.”

. . . China had agreed to end a program known as its "demonstration bases-common service platform" . . .

The Chinese industries that have received the subsidies under the program include textiles, light industry, specialty chemicals, medical products, hardware, agriculture and advanced materials and metals, including specialty steel and aluminum products . . .

Export subsidies can help to increase capacity and employment in specific sectors, but at the same time they put downward pressure on wages. They are generally harmful to an economy if carried on for an extended period or on too large a scale. Export subsidies can also fail if other countries enact retaliatory tariffs, and this becomes more likely than not if subsidies are carried on beyond an initial year or two.

Wednesday, April 13, 2016

Largest Coal Producer in Bankruptcy

The bankruptcy today of Peabody Energy, the world’s largest coal producer and a dominant force in international coal trading, was partly the result of the ongoing downsizing of the global steel industry. Since 2002, U.S.-based Peabody has made major acquisitions in Australia, mainly in metallurgical coal, and in the last two years these operations have failed to produce the profits needed to cover payments on the huge loans taken out to make the purchases. Much of the coal from eastern Australia was shipped to steel producers in China, but China’s steel production is being trimmed by a third in a government-led restructuring initiative, leaving Australian mines nearly idle. Steel production cuts are occurring elsewhere in the world at the same time. China was the least efficient global steel producer, using more coal to produce steel than any other country, so its cutbacks have a disproportionate effect on coal production. Peabody Energy coal mines are still operating during a restructuring process. The restructuring in bankruptcy could see the U.S. coal mines sold at auction.

Coal from Peabody Energy supplies 2 percent of the world’s electricity. One possible scenario is that electric utilities that operate coal-burning power plants could be forced to buy coal mines (at a low price, but still with considerable financial risk) in order to be sure that coal production continues.

Saturday, April 2, 2016

Steel Trade War Likely

It looks like a trade war in the offing with China selling steel at a loss worldwide while at the same time imposing a 46 percent tariff on imports of steel from Europe. The new tariff puts more pressure on European governments to withdraw the favorable treatment steel from China gets in Europe. That’s a move that trade unions and industry groups have been pushing for in Europe for three years.