Mini-vans the next big thing as China eases one-child policy

Automakers are betting that Chinese families will embrace the mini-van, hoping the larger, unsexy sibling of the bestselling SUV will become the next big thing just as Beijing relaxes the one-child policy. 

PHOTO: BLOOMBERG

NOV 30, 20157:35 AM

[GUANGZHOU] Automakers are betting that Chinese families will embrace the mini-van, hoping the larger, unsexy sibling of the bestselling SUV will become the next big thing just as Beijing relaxes the one-child policy.

Mini-vans, or multi-purpose vehicles (MPVs), were front and centre at the Guangzhou auto show, where Volkswagen AG presented a supersized version of its Touran and Guangzhou Automobile Group subsidiary GAC Motor showcased a prototype mini-van. The show ended Sunday.

These seven-seaters currently account for just 10 per cent of passenger car sales in China, but sales are growing at a faster pace than the entire auto market, the world's largest.

Industry experts say the appetite for bigger cars is strong enough in China, where extended families often live under one roof, to potentially turn it into the largest MPV market after the United States, where automakers have sold big cars to families for years.

At the end of October, China further relaxed its one-child policy, a move which experts said would not necessarily lead to a sudden increase in the size of the average family.

But Chinese authorities hope it will help boost the population to 1.45 billion by 2030 from 1.37 billion at the end of last year.

"After the roll out of the two-child policy, I believe the market share of 7-seat SUVs and MPVs will further strengthen,"Wu Song, GAC Motor's general manager, told Reuters.

MPV sales for the first 10 months of the year grew 7.8 per cent, according to the China Association of Automobile Manufacturers, outperforming the 1.5 percent growth in the overall car market.

FAMILY FRIENDLY

The focus on Chinese families is relatively new for MPV makers which for years targeted companies seeking large, luxurious models for executives or small businesses that need a workhorse to haul goods and staff.

Many households include at least one set of grandparents, as they play a key role in childcare.

These extended families, coupled with restrictions in most major cities on owning a second car, give MPVs an advantage over the five-seat sports utility vehicles (SUVs) that currently account for the bulk of passenger car sales growth.

"The cost of owning two vehicles is high. That is why demand for seven-seat vehicles has grown greatly," said Gustavo Céspedes, executive vice president of General Motor's joint venture with SAIC Motor and Wuling Motor which makes China's best selling MPVs.

GM and its partners account for more than half of all MPV sales. The top seller is the Wuling Hongguang, a utilitarian mini van that starts at 42,800 yuan (S$9,500), but the more family friendly Baojun 730, which starts at 69,800 yuan, became the second most popular MPV just one year after it was launched.

Spurred by the rapid success of the Baojun, rival Geely Automobile Holdings is designing a mini-van for families, a person familiar with the matter said. A company spokesman said it was too early to discuss future products.

GAC Motor also sees opportunity in families. Design director Zhang Fan said GAC started working on a car two years ago to fill the gap between basic mini-vans and high-end models such as Toyota Motor Corp's Alphard, which starts at 759,000 yuan. "That gap is actually quite lucrative," he added.

The rising popularity of the lumbering MPV shows that more Chinese consumers are becoming savvy and choosing cars that meet their needs, and not because of the status they confer.

Ma Li, a plastic surgeon in Beijing, bought an MPV because he said its sliding doors were safer for his 10-year-old son. "I didn't think at all how my friends would view this car,"Ma added. "The important consideration was the practical use."

REUTERS

    
 

Chinese banks challenged to fill half-trillion TLAC capital gap

 

China's four largest lenders face starkly higher funding costs as a result of global rules designed to prevent a collapse of banks deemed too big to fail. 

PHOTO: REUTERS

NOV 30, 201510:55 AM

[HONG KONG] China's four largest lenders face starkly higher funding costs as a result of global rules designed to prevent a collapse of banks deemed too big to fail.

Having relied so far on domestic depositors and friendly local investors to fund their lending, the Big Four will need to issue hundreds of billions of dollars of capital to comply with worldwide standards on total loss-absorbing capacity, or TLAC.

Restrictions on cross-holdings between banks and China's limited institutional investor base mean much of that will have to come from the overseas markets at yields far higher than China's banks are accustomed to paying. "It will be more challenging than the Chinese think to find buyers for this paper," said a London-based portfolio manager at a major American asset manager. "There is a clear mismatch between the spreads they want to sell at and the spreads investors would demand. Given all the volatility in the Chinese market over the course of this year, there are no natural buyers, outside of Chinese banks themselves, for this type of risk at these levels." Estimates have varied, but, in a November 24 report, Moody's says the shortfall among China's global systemically important banks, or G-SIBs, will be US$553 billion. The figure is far more than the US$115 billion in TLAC needed for US banks and the US$201 billion for European banks.

China's G-SIBs are Agricultural Bank of China, Bank of China, Industrial Commercial Bank of China and China Construction Bank, which was added to the list at the start of November only days before the final TLAC rules were published.

Chinese lenders have a number of avenues, such as cutting risk-weighted assets and raising equity, to improve their TLAC buffers over the next 10 years, but bankers at Chinese G-SIBs have said that Additional Tier 1 and Tier 2 bonds will be a large part of the process.

Domestic regulators have yet to decide whether senior debt, which some European banks have made loss absorbing, will count towards TLAC, but analysts anticipate it will not be allowed.

This points to a flood of issuance of subordinated bank capital in the coming years, raising concerns over how much the Chinese and global markets can absorb.

Banks are, by far, the biggest buyers in China's domestic bond market and typically support PRC issuers in the overseas markets. However, that level of support will not be available for TLAC-eligible securities, since the rules are designed to spread the risk beyond the banking system.

G-SIBs will need to deduct any holdings of loss-absorbing debts from other G-SIBs from their own TLAC ratios, while Basel III rules already penalise banks for holding regulatory bank capital.

That leaves overseas buyers to play a bigger role, but several global fixed-income investors have said they are uninterested. Their concerns relate to pricing, risk and transparency.

Victor Rodriguez, the head of fixed income for Asia Pacific at Aberdeen Asset Management, said there was too much of an equity component in these bonds and, as such, it was not an asset class his firm was attracted to.

Others on the buyside argue that there are simply better opportunities elsewhere, both in bank capital and in other parts of Asia.

As an example, ICBC currently has US$2 billion Baa3-rated 10-year Tier 2 bonds yielding 4.699 per cent, while Macquarie has a Baa3-rated T2 quoted at 4.834 per cent.

China's banks only began issuing loss-absorbing capital in 2013, and issues of AT1 securities have relied heavily on PRC insurers and other state-owned enterprises as buyers.

It is difficult to estimate how much more these companies can buy, but some, such as China Huarong Asset Management and China Life Insurance, do have vast balance sheets. China Life's 2014 annual report shows it has total investment assets of 2.1 trillion renminbi (S$463.6 billion) - 940 billion renminbi of which is in bonds.

While meeting the TLAC requirements poses a challenge, a crucial advantage the Chinese G-SIBs will have is time. They will have until 2025 to reach the first benchmark of 16 percent of risk-weighted assets and 6 per cent of leverage exposure, and another three years to get to 18 per cent of RWA and 6.75 per cent of leverage exposure. Other G-SIBs will have until 2022 to reach the full requirements.

Yet, one drawback to the extension is that, when the first bonds come to the market, buyers will know there is considerably more supply coming, and may prefer to wait for more attractive yields. "The market is opaque and no one really has a lot of confidence that these numbers are correct and that there isn't going to be even more supply to come in the future," said another London-based asset manager. "That makes it hard to feel great about the technicals unless this stuff comes very cheap."

REUTERS

      

Nippon Life plans Japan's largest REIT as investors crave yield

A man walks past a logo of Japanese life insurer Nippon Life at the company's headquarters in Tokyo on Apr 21, 2011. 

PHOTO: REUTERS

NOV 30, 20157:56 AM

[TOKYO] Nippon Life Insurance Co, which is seeking to gather about 300 billion yen (S$3.4 billion) for what would be Japan's largest private real estate investment trust, is targeting returns of 4 per cent as yields on government bonds languish near zero.

Nippon Life Realty Management Inc will seek investments from large Japanese investors such as pension funds and banks, said Takashi Tanizawa, president of the company that will manage the fund.

The fund, which will open next year, is targeting assets of about 100 billion yen within the first year and about 300 billion yen over the mid-to-long term, larger than any existing offering of its kind, according to Nippon Life.

Japan's largest insurance company is looking to appeal to pension plans and big institutions by offering the prospect of higher returns as the country's 10-year government bond is paying a yield of about 0.3 per cent. While it is harder for investors to exit private REITs than publicly traded ones, they are attractive to investors seeking stable returns because they are less vulnerable to market swings.

"The commercial real estate market is robust," said Genzo Kimura, an economist at Sumitomo Mitsui Trust Bank Ltd, one of Japan's largest banks. Overseas investors including sovereign wealth funds are buying properties in Japan and that is helping support prices gains after many years of stagnation, he said.

OFFICE BUILDINGS

Nippon Life, which has about 1.08 trillion yen in real estate investments, including some 330 leased buildings, will sell part of that portfolio to the trust.

About 60 per cent of the trust's investments will be in office properties, with the remainder in retail, housing, distribution centres and some other assets, Mr Tanizawa said. Prices of high-end office buildings in Tokyo gained 21 per cent in the second quarter from a year earlier, according to property-services company Jones Lang LaSalle Inc.

Nippon Life will continue to undertake property developments and will focus primarily on large-scale office projects in Tokyo, said Hiroshi Ooshita, a deputy general manager at the company's real estate department.

Regulation of life insurers is making it more difficult for Nippon Life to boost investments in real estate itself, and the REIT will allow the insurer to reduce risks on its balance sheet, while continuing to be involved in property development, Mr Ooshita said.

There were about 13 private REITs operating in Japan in March, including trusts sponsored by Tokio Marine Holdings Inc and Nomura Real Estate Holdings Inc., according to a Sumitomo Mitsui Trust Research Inc report in June.

The size of the nation's private real estate trust market will probably triple to about 3 trillion yen from about 1 trillion yen at the end of last year, Nikkei Real Estate Market Information reported in April.

BLOOMBERG

    
 

Euro holds drop as ECB week begins with all eyes on China stocks

The euro maintained losses, headed for its worst month versus the dollar since March amid prospects European policy makers will further ease monetary policy this week. 

PHOTO: REUTERS

NOV 30, 20157:15 AM

[WELLINGTON] The euro maintained losses, headed for its worst month versus the dollar since March amid prospects European policy makers will further ease monetary policy this week. Chinese stocks are in focus following Friday's selloff, sparked by concern over regulatory probes into local brokerages.

Expectations the European Central Bank will reduce its deposit rate and expand the region's asset-purchase program on Thursday has weighed on the euro, which is trading around its weakest level in more than seven months against the greenback.

Commodity-linked currencies also held losses after oil and industrial metals resumed their rout on Friday, despite a shortened trading day following Thanksgiving in the US The biggest American exchange-traded fund tracking Chinese stocks sank the most since August on Friday.

Investors are likely to be jolted from their Thanksgiving week torpor by a slate of key economic events this week.

As well as the ECB meeting, Federal Reserve Chair Janet Yellen appears before Congress ahead of November payrolls data on Friday.

With odds of an interest-rate increase from the Fed in December above 70 per cent, the focus is shifting to policy divergence and how other central banks may respond to US policy tightening. Shanghai-traded shares slumped the most in three months Friday as some of the country's biggest brokerages said they were under investigation for alleged rule violations.

"After last week's doldrums, this week's agenda will come as a shock to the system," Raiko Shareef, a markets strategist in Wellington at Bank of New Zealand Ltd, said in a client note. "Front of mind will be the ECB's policy decision. The US employment reports will garner interest, but only a disastrous result would likely derail the FOMC from raising rates next month."

Citic Securities Co, Haitong Securities Co and Guosen Securities Co are being probed for alleged breaches of rules on margin and short-selling contracts, according to exchange filings by the companies on Sunday. Shares of Citic and Guosen plunged by the daily limit on Friday, while Haitong was suspended from trading. Carrying on from the Shanghai Composite Index's 5.5 per cent slide, the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF dropped 7.3 percent last session, the most since Aug. 24. All three firms have said they will cooperate with the regulator and operate as normal.

Currencies The euro was little changed at US$1.0589 as of 7.34am. Tokyo time, after weakening 0.5 per cent last week. The common currency is on track for a 3.8 percent loss in November, the most since a 4.2 per cent tumble in March. The ECB is looking to bolster stimulus in order to prop up sluggish inflation in the euro area, a potential policy move that puts it at odds with the Fed.

The Bloomberg Dollar Spot Index, a gauge of the U.S. currency against 10 major peers, jumped 0.4 per cent Friday to bring its weekly advance to 0.5 percent. The index has climbed 2.3 per cent this month as bets on a U.S. rate hike started to be ratcheted up.

The Australian dollar was steady at 71.92 US cents following a 0.4 per cent drop Friday, while its New Zealand counterpart traded at 65.32 US cents, headed for a 3.6 per cent decline in the month.

Currencies of raw material-exporting countries - from Canada to Norway and Malaysia - weakened Friday. The Bloomberg Commodity Index sank back to a 16-year low amid losses of more than 1 percent in metals such as copper and nickel. West Texas Intermediate crude ended Friday down 3.1 per cent from Wednesday levels, to US$41.71 a barrel.

Stocks New Zealand's S&P/NZX 50 Index, the first major stock gauge to start trading in the Asian region, added 0.1 per cent, following last week's 1.5 per cent advance to a record high.

Futures on Australia's S&P/ASX 200 Index were little changed, while those on the Kospi index in Seoul dropped 0.3 per cent on Friday. Nikkei 225 Stock Average futures traded in Osaka climbed 0.1 per cent by 3am on Saturday, local time.

Hang Seng Index futures climbed 0.3 per cent with those on the Hang Seng China Enterprises Index, a gauge of mainland stocks listed in Hong Kong. FTSE China A50 Index futures were down 0.2 per cent in most recent trading.

The Standard & Poor's 500 Index rose 0.1 per cent to 2,090.11 on Friday, after failing to move more than 0.2 per cent on each of the previous three trading days. Volumes were 65 per cent below the 30-day average given the early market close and Thursday's holiday.

Japan reports a raft of data on Monday, including retail trade and industrial output, while central bank chief Haruhiko Kuroda is due to speak. Sri Lanka updates on consumer prices, India posts third-quarter gross domestic product data and markets in the Philippines are closed for a holiday.

BLOOMBERG

    
 

Lufthansa wage accord for 30,000 ground staff

NOV 29, 201510:56 AM

[BERLIN] German carrier Lufthansa, reeling under a series of recent strikes, said Saturday it had reached a wage rise accord with services sector union Verdi covering 30,000 ground staff.

The accord gives a one-off payment of 2,250 euros (US$2,350) and a 2.2 per cent wage rise to ground staff and employees of IT subsidiary Lufthansa Systems, Lufthansa Service catering, Lufthansa Technik maintenance and Lufthansa Cargo freight service, the airline and Verdi said.

The collective bargaining accord runs to the end of 2017.

Ground staff at several key airports in Germany had answered a Verdi half-day strike call in late March, causing hours of delays.

See who is talking about LUFTHANSA

Last 30 days:

• 7603
• 110
• 1781

30 days avg

HOT COMPANIES

BHP Billiton +76% messages

• HSBC +36%
• United Utils Grp +33%
• Legal&General +29%
• Babcock +21%
• Kingfisher +21%
• Berkeley Grp HLD +20%
• Meggitt +16%
• InterContinental +15%
• Aberdeen +13%

• HSBC +36%
• United Utils Grp +33%
• Legal&General +29%
• Babcock +21%
• Kingfisher +21%
• Berkeley Grp HLD +20%
• Meggitt +16%
• InterContinental +15%
• Aberdeen +13%

Lufthansa then said in September it intended to reach an agreement ending the dispute by the end of November.

But the carrier is still facing a battle with pilot and cabin staff unions as well as with Verdi over disputes over pay and retirement benefits which have led to several strikes in recent months.

Seven days of industrial action earlier this month, the longest strike in the company's history, saw some 4,600 flights cancelled, affecting more than half a million passengers.

Lufthansa is looking to slash costs in the face of competition from low-cost rivals and Gulf airlines.

Lufthansa said earlier this month it plans to hold a "jobs summit" on December 2 with flight attendants' union UFO, the Cockpit pilots' union and Verdi to hash out key problems in the long-running dispute.

UFO responded by saying it would hold off on strikes until at least after the jobs summit.

AFP

    
 

China's shadow banking risk shifts to booming bond market

NOV 29, 201510:43 AM

[SHANGHAI] A year after China's financial regulators squared up to the systemic perils of "shadow banking", the threat is shifting to a booming corporate bond market, and risky borrowers' debt is finding its way into products aimed at retail investors.

An opaque network of trust companies and non-bank lenders had grown their annual market to a hefty 2.9 trillion yuan (US$450 billion) in loans before regulators stepped in, spooked by rising defaults on wealth-management products (WMPs) backed by such high-interest shadow lending.

Now the high-risk borrowers who took those loans, such as unlisted real-estate firms struggling with a stagnant property market and financing companies backing shoddy local government investment, are finding a new avenue of funding after regulators began allowing unlisted companies to issue bonds on public exchanges.

New corporate bond issuance leaped to 914 billion yuan in the third quarter, accounting for 29 per cent of all new credit, up from 381 billion yuan and just 8 per cent in the first.

And the profile of new borrowers looks strikingly like the patrons of the shadow banking set.

Of the 57 firms posting bond listing announcements in Shanghai in October, 23 were local-government-owned project or infrastructure investment firms.

Beijing engineered the freeing up of the bond markets as a transparent alternative funding route, and the credit crunch that followed its clampdown on shadow banking guaranteed a high take-up.

But wealth managers are now turning these bonds into leveraged high-yielding products and selling them to investors desperate for returns after a real-estate slump and summer stock-market crash.

Data from CN Benefit, a research firm tracking wealth management sales, shows that 60 per cent of new bank wealth-management products (WMPs) were linked to debt and money market instruments in September, up from less than half in the first quarter.

Demand is hot for these products, and the higher the yield, the higher the risk, which is amplified if the fund's assets are partly bought on credit, or leveraged.

Colight Asset Management, a private fund offering bond-backed WMPs, raised more than 40 million yuan in just four days in November from an 8.7 per cent yielding, 400 per cent leveraged bond-based product, according to customer service staff member Chen Xun.

Much bigger companies such as Pacific Asset Management Co. and the Agricultural Bank of China also offer similar high-yielding leveraged products.

Investors, however, assume that products offered by big names are relatively safe. "The risk of default is very slim," said a 45 year-old business manager in Shanghai surnamed Pan who invests in WMPs on an exchange backed by China's second-largest insurer, Ping An Group. "I'm sure such a big company as Ping An will make sure investors can get their money back." Inflows to bond mutual funds have also risen.

Typical of such funds is the Great Wall Long Term Profit Gradated Debt Fund, whose top three holdings are all sub-AAA-rated local government fundraising company bonds. The firm adds leverage by borrowing cheaply in the bond repurchase (repo) market, fund documents show. "So for instance you can take 2 billion yuan of government debt as collateral and receive 750 to 800 million of cash, and use that to buy more debt," said an underwriter at an international bank in Shanghai who asked not to be named.

About half the Great Wall fund's 19 per cent return since late 2014 has accrued since July, a period when repo transactions in Shanghai soared, and the spread of AA corporate debt yields over Chinese treasuries fell 60 basis points to four-year lows.

Analysts say the narrowing corporate risk premium combined with weakening profits is a red flag for speculative activity. "Similar to what happened in China's stock market earlier this year, the rally of bonds is largely driven by liquidity conditions and speculation that government will provide support when necessary," said Zhou Hao, Senior Emerging Markets Economist at Commerzbank in Singapore.

Some industry professionals worry that these trends, enabled by regulatory reform, will create forces that regulators can't handle when market sentiment turns, in an echo of the stock market boom that preceded the summer crash and a frantic series of heavy-handed interventions by Beijing. "If, as seems likely, the government has succeeded in getting funding to higher risk sectors by relaxing bond approvals," wrote Christopher Wood of brokerage CLSA in a recent note, "it is all rather scary, given the regulatory failures exposed by the A share boom-bust cycle."

REUTERS