China to expect uninterrupted but more balanced growth in 2010

Date Mar 02 2010 14:43:28 Source:FinanceAsia

Last year, loan growth in China was up by 33% in the third and fourth quarters, compared to an average growth rate of 18% over the past six years. Although lending growth came off slightly in January, it was well above the 24% growth rate during the previous loan cycle peak in 2003.

"This year, we expect that lending growth will slow to about 17% as Chinese policymakers look to curb liquidity," Jing Ulrich, J.P. Morgan''''s chairman of China equities and commodities, said at a recent media briefing.

The central government is also trying to revert to a more balanced pace of lending this year. New loans made by Chinese banks in each of the years between 2001 and 2008 were roughly spread over the four quarters in a pattern of 30%-30%-20%-20%. However, in 2009, around 50% of the new loans were given out in the first quarter as regulators encouraged banks to lend to offset the impact of the global recession on China.
Despite the slowdown in lending, Ulrich does not expect a credit crunch in the corporate sector as corporate savings growth currently stands at a record high of nearly 40%. Companies in China are sitting on strong balance sheets after borrowing money in 2009. "As they still haven''''t used the money, hopefully they will be using this money from the bank in 2010," said Ulrich. 
The credit situation in the household sector is somewhat different from that in the corporate sector, she continued. China''''s population has a strong savings culture and earlier used to maintain large current account balances. In recent years, this has changed and household deposits have declined due to the negligible interest rates. The Chinese are still saving rather than consuming, but they are channelling their savings towards the stock or property markets. Thus, the household sector also does not seem at risk of a credit crunch.
Besides regulating the amount and the pace of lending, the Chinese government is using a combination of "window guidance" and quantitative measures to slow liquidity in China, including raising the reserve requirement ratio (RRR) -- the amount of deposits that commercial banks have to hold with the central bank. So far this year, the ratio has been increased twice and now stands at 16.5%, compared to the previous peak at 17.5%.

"Therefore, there is not much scope left for the central government to lift the RRR," said Ulrich, who forecasts that the next step will be an interest rate hike. "Just like the two RRR hikes which came sooner than the market expected, we may have our first interest rate hike in two years in the second quarter this year," she said.
"In 2010, I believe the Chinese economy will achieve better balanced growth," said Ulrich. "We expect that investment and consumption will contribute evenly towards growth, and consumption will play a larger part towards growth relative to fixed asset investment."

Barclays Capital hires Johan Leven

Date Mar 02 2010 14:42:59 Source:FinanceAsia

Barclays Capital (BarCap) has hired Johan Leven to co-head corporate finance for Asia-Pacific together with Richard Gallivan.

Leven joins at the level of managing director, reporting to Matthew Ginsburg, who heads investment banking for Asia-Pacific, and to Ros Stephenson and Tom King, who co-head global corporate finance.

Ginsburg joined BarCap in 2009 from Morgan Stanley. Since then he has been seeking to build the firm''s investment banking capabilities. Both Leven and Gallivan are based in Hong Kong. Their role is to lead the firm''s industry and country coverage groups in Asia-Pacific, and to manage relationships with key clients across the region.

By hiring Leven, BarCap has gained a career Goldman Sachs banker. Leven joined Goldman in 1990 in London and worked there until he resigned in June 2009. He moved to Hong Kong in 2001, following a two-year stint with the Wall Street investment bank in Sydney.

Leven was co-head of mergers and acquisitions for Asia ex-Japan at Goldman when he announced his resignation. His fellow co-head, Richard Campbell-Breeden, who transferred from London in August 2008, became sole head of M&A when Leven left.

Jason Rynbeck heads advisory for Asia-Pacific at BarCap. Rynbeck was poached from ABN AMRO along with a team of senior bankers in May 2008 to kick-start BarCap''s investment banking, and specifically its M&A, business.

Prudential snaps up AIA shortly before a planned IPO

Date Mar 02 2010 14:42:28 Source:FinanceAsia

After a weekend of speculation that eventually turned into more substantial reports, UK-based Prudential plc yesterday confirmed that it has reached an agreement to merge with AIA Group, the Asian life insurance business wholly owned by American International Group (AIG), in a transaction valued at $35.5 billion.

The merger, which ranks as the largest insurance M&A ever, will create a life insurance powerhouse in Asia with more than 20 million customers and businesses in 15 countries. It will also provide AIG with much needed cash as it strives to repay the $182.3 billion of bailout money that it received from the US government in 2008. However, the development deals a blow to the Hong Kong stock exchange, since the initial public offering that AIA was working on will now not happen. At a talked-about size of more than $10 billion, the deal had the potential of being the largest IPO in Asia this year and it was widely anticipated by investors.

AIG''s decision to go with a trade sale of AIA instead also means a significant loss of fees for the nine investment banks mandated to arrange the IPO. Several of the banks do have roles on the merger, according to sources, but the reimbursement on an M&A is typically significantly smaller than the 2.5%-3% fee that is the norm on a Hong Kong IPO.

Prudential said in a statement filed with the London Stock Exchange, however, that "in recognition of the importance of Asia to the combined group (it) intends, in due course after the completion of the transaction, to seek a dual primary-listing on the Hong Kong stock exchange". The merger, which requires approval from Prudential''s shareholders (the deal and the financing) as well as Asian regulators, is expected to be completed in the third quarter this year.

The $35.5 billion price tag comprises $25.5 billion in cash and $10.5 billion in new Prudential shares, mandatory convertible securities and preferred shares. And rather than a straight-forward takeover, the transaction will be effected through the acquisition of both Prudential and AIA by a new holding company, currently named New Prudential. The new company will eventually assume the name Prudential plc and, like its current namesake, it will be listed in London and on the New York Stock Exchange (through American depositary receipts).

Observers referred to AIG''s change of tack as a smart and sophisticated move that will allow it to realise more immediate benefits. While expectations were that the IPO would value AIA at up to $35 billion on a fully-distributed basis, a trade sale will allow AIG to sell the entire company in one go, avoiding the execution risk that may come with having to rely on later follow-ons to complete the sell-down, and won''t require an IPO discount. It will also result in a lot more cash up front.

And, at the same time, AIG will benefit from the potential upside offered by the Prudential shares that it will receive as part-payment.

Indeed, AIG initially attempted to offload AIA through an auction process, but that plan was called off in March 2009 as it didn''t think the bids were high enough, which is perhaps not too surprising given that the sales process was launched at the very bottom of the global stockmarket rout and AIG itself was at the epicentre of the financial crisis.

It then decided to go for an IPO instead and, in June last year, mandated Deutsche Bank and Morgan Stanley as joint global coordinators to help arrange a listing. Last month it added another seven bookrunners to the deal line-up, giving no hints that it was also keeping the door open for an M&A transaction. And it is probably an understatement to say that yesterday''s merger announcement would have come as a surprise to several of the banks involved in the IPO.

However, Credit Suisse has been advising Prudential since it made the first bid in early 2009 and is now acting as a joint global coordinator and underwriter for the $20 billion rights issue and the $5 billion senior debt that will be sold to help finance the merger. The other joint global coordinators and underwriters working with Prudential are HSBC and J.P. Morgan Cazenove.

And, according to sources, Citi, Deutsche Bank and Goldman Sachs are advising AIG together with the company''s long-term adviser Blackstone, while Morgan Stanley as an adviser to the US Federal Reserve is also assured of a role.

For the other banks that were mandated last month -- Bank of America Merrill Lynch, CCB International, ICBC and UBS -- the celebration of having been picked for what would quite likely have been the largest IPO in Asia this year, turned out to be short-lived.

Prudential was one of the bidders in early 2009 and, aside from doing a lot of due diligence then, it is now also benefitting from the work that AIA has done to prepare for an IPO.

"Time has helped the (Prudential) board get more and more comfortable with the asset. They are paying more, but the market has recovered, their own share price has recovered and they have the benefit of a cleaned up asset and extended due diligence," said one banker.

"This transaction is hugely exciting and a one-off opportunity to transform the group," noted Tidjane Thaim, CEO of Prudential. "The combined group would have 60% of 2009 new business profit coming from Asia and puts us in a strong leadership position in all the critical growth markets in the region."

According to the statement, New Prudential will have a market leading position in seven Asian countries (Hong Kong, Singapore, Malaysia, Indonesia, Vietnam, Thailand and the Philippines) and will also be the leading foreign life insurer in China and India.

Meanwhile, the poor start to the Hong Kong IPO market this year may have helped convince AIG that a listing of AIA was a less certain route. Of the 11 listing candidates that have been in the market so far this year, several have been priced at the low end, a couple have been pulled and most of them are trading below issue price. The largest newcomer, Russian aluminium producer UC Rusal which raised $2.2 billion, was down 27% as of last Friday.

"It doesn''t feel like the market is very supportive, especially if you want to do a large offering of up to 50% (of a company)," the same banker added.

According to a statement filed by Prudential to the London Stock Exchange, the purchase price translates into 1.69 times AIA''s embedded value as of November 30, 2009, and 25.4 times its new business profit as of the same date. This compares with the 2.5-2.7 times embedded value that the fast-growing Chinese insurance companies are trading at and the 2.7 price-to-embedded value multiple that French insurance company AXA paid when it bought out its partner from its Asia-Pacific business in December.

The transaction is expected to result in annual cost savings of about $340 million before tax within three years of completion, and will also allow for revenue synergies through enhanced agency productivity, shared bancassurance relationships, enhanced customer cross-selling and synergies across asset management activities.

Not everyone was immediately convinced about the merits, however. Prudential''s share price fell as much as 14.5% after the announcement and closed 12% lower at 530 pence. AIG did significantly better, gaining 4.1% to $25.78.

The decline in Prudential''s share price was likely partly due to the potential dilution from the large rights issue that it will need to complete to finance the merger and the fact that AIA is being acquired at higher multiples than what Prudential is currently trading at. But one observer also noted that there was a lot to take in straight away and suggested that the share price will recover once investors begin to understand the long-term value creation.

Quality crucial as sales continue to soar

Date Mar 01 2010 15:54:27 Source:China Daily

Beijing - The Chinese automotive industry achieved remarkable growth in 2009 and the momentum hasn''t slowed as we enter 2010, despite tightening of purchase tax incentives.

New vehicle sales reached a record-high 1.6 million units in January, an increase of 117 percent over a year ago. Passenger vehicle demand rose sharply, some 122 percent, to 1.1 million units while light commercial vehicle sales increased 105 percent to 480,000 units.

The January figures translate into a seasonally adjusted annual sales rate of 18.5 million vehicles - up 20 percent from December''s rate of 15.3 million.
Automotive sales in January carried over momentum from 2009, especially in the run-up to the Chinese New Year. [China Daily]

Though purchases in the run up to the Chinese New Year likely distorted the annualized sales rate, it seems the industry is still in good shape.

But wholesale numbers do not always reflect actual demand. Supply struggled to meet demand in the last few months of last year, resulting in most inventories running below normal.

Early boost to 2010

It is also thought that some companies might have pushed part of their December sales figures into January after exceeding 2009 targets to provide an early boost to sentiment and bookkeeping in 2010.

Both domestic-made and imported vehicle prices are reported to have climbed around 2 percent in January over December in major cities. Insufficient supply was thought to be the key factor, with surging purchases before the Chinese New Year in February giving dealers the confidence to limit discounting.

Almost every brand recorded double-digit or triple-digit growth in January. Sentiment across the industry is very different today from what it was a year ago, when most companies were expecting a sluggish market in 2009.

Optimism is now rife. Sales targets for 2010 for most automakers are above 10 percent growth, with some as high as 80 percent.

Second-tier cities

There are good reasons to believe the Chinese automotive industry will maintain strong momentum this year, including in second-tier cities and rural areas, due to continuing incentives and new development plans, improving road conditions, recovering export demand and expanding capacity.

But not all is positive in the market, with quality issues now garnering even more attention than usual.

In addition to Toyota''s recent travails, Honda, Mitsubishi, Suzuki, Kia, Volkswagen and Geely have all issued recalls in one form or another so far this year. We believe this is merely the tip of the iceberg.

It has been five years since the government drew up its regulations on vehicle recalls. In 2009 a total of 1.3 million vehicles were recalled, accounting for 10 percent of new vehicle sales.

The number of vehicles recalled in the US in 2008 was higher than new vehicles delivered that year. It seems improbable that vehicle quality in China is much better than in the US, so the situation in China has the potential to turn much grimmer.

Afraid of negatively impacting their brand image, carmakers in China typically try to address vehicle quality problems during regular maintenance checks, shielding problems from publicity and governmental awareness.

The author is an analyst at JD Power.

Controls on bank loans raised again

Date Mar 01 2010 15:53:11 Source:China Daily

China''s banking regulators may raise large commercial banks'' capital adequacy ratio to 11.5 percent from an earlier 11 percent level, people familiar with the matter confirmed.

The 21st Century Business Herald said on Friday that the regulators may ask the country''s top five banks to apply the increase.

"The regulators meanwhile requires all the commercial banks to hold more than 75 percent of their capital as core, or Tier 1 capital, which comprises equity and disclosed reserves," sources said.

But they added that the capital adequacy ratio requirement for smaller banks would remain at 10 percent.

The new requirement may trigger a new round of fundraising plans by major Chinese lenders, including the two largest - the Industrial and Commercial Bank of China (ICBC) and China Construction Bank (CCB) - analysts pointed out.

By September 2009 the capital adequacy ratio of ICBC and CCB were respectively 12.6 percent and 12.11 percent. ICBC and CCB, both of which possess relatively abundant capital, have not released any financing plans yet.

"The two banks may need to draw up additional financing plans this year with the new ratio requirement," Zhang Qi, analyst with Haitong Securities said.

The risk-weighted assets of China''s big four banks are estimated at 19.5 trillion yuan. The 0.5 percentage point rise in the capital adequacy ratio will demand 97.5 billion yuan of net capital, according to Jin Lin, a financial industry analyst with Orient Securities.

If one fifth of the 97.5 billion yuan can be raised via the issuance of bonds, then at least 78 billion yuan are needed through equity financing, the analyst told Xinhua News Agency.

The Bank of China and Bank of Communications have already put forward additional financing plans valued at 82 billion yuan.

Several other major lenders, including China Merchants Bank and Shanghai Pudong Development Bank, announced fundraising plans in the capital market in order to meet the tightening ratio requirement.

But CCB chairman Guo Shuqing said on Friday he had not received any word from the authorities about a capital adequacy ratio increase.

China''s banking regulator is urging lenders to replenish their capital after a record 9.6 trillion yuan ($1.4 trillion) surge in bank lending last year.

Industrial insiders revealed that the banking regulator last week also warned banks to raise their threshold in mortgage lending in order to prevent the emergence of bad loans.

"Lenders are required not to issue mortgage merely based on collateral without ensuring that their primary source of repayment is adequate," the industry insiders said. "It also requires banks to keep a close eye on the value of collateral in mortgage lending."