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Taylor China Weekly March 14, 2014

The week started with Panasonic, a huge Japanese global corporate, making not just a “cost of living adjustment” to salaries for its expats working in China, but actually a “cost of not living” adjustment to expat pay. What was most shocking in their announcement this week is that such a pay adjustment is not applicable to Chinese employees. I guess in their view, the life of a foreign expat is worth more than the life of a Chinese employee. Very scary indeed!

The saga of the non-bank lending continues, as apparently shadow lending in China ($7.62 trillion Q3 2013) has slowed significantly this month, due to active government intervention. Trust company shadow lending ticked up when local government investment companies and property developers were borrowing quite substantially, but were regarded as too risky by bank lenders due to the overall caps on bank lending imposed by the government, i.e. available funds went to the most credit worthy.

Mizuho Securities suggests that the efforts of the central bank to control the shadow banking sector are having results, which are reflected in the increase in on balance sheet bank loans that accounted for approximately 64% of new loans in China this year.

However, the big news this week for international markets was the warning by China’s premier, Li Keqiang, of potential bond or loan defaults by corporate borrowers. Historically most debt was quasi government guaranteed, as the government typically would bail out those who were over leveraged.

Needless to say, the world in on pins and needles waiting to see if new government deregulation allows defaults to occur, and potentially incite a “Lehman moment”. Although in the same breath, China’s premier was quick to say that China is projected to meet its 2014 GDP growth forecast of 7.5%.

Iron ore, the main commodity used to manufacture steel, prices tanked (Steel Index price reporting agency) this week as it was revealed that China steel mills have significant overcapacity and less than half of them are currently profitable. The fact that Haixin Steel, a privately owned steel mill, is technically in default of a bond repayment, certainly did not help support global iron ore prices or market values of the world’s biggest mining companies.  China consumes around two-thirds of the world iron ore consumption.

Finally, the most exciting news this week is that the Yu’e Bao an online money market fund, managed by Alibaba Group, topped Rmb500 billion ($81.4 billion) in total deposits with its 6 per cent on demand interest rate. No wonder, it’s a slam dunk in comparison to the government imposed, on demand bank savings account rate of 0.35 per cent.  Even the one-year bank deposit rate is only 3.3 per cent. The difference is truly “left over treasure” or Yu’e Bao.