In choosing whether to major in econ, women respond more to grades than men

This chart shows the percentage of male and female students who received a given grade in introductory economics course who then later majored in economics.

Source.

PRC Landmark: Interest Rate Liberalization by 2016

There is an ugly term economists have for deposit rates being lower than the rate of inflation: financial repression. The other term, negative real interest rates, is marginally better. For a long time, China's extremely investment-heavy growth has been conditioned on giving depositors poor returns on their savings, while lending money to (usually state-affiliated) enterprises at concessional rates.

With many investments not bearing fruit and polluting the Chinese environment besides, there has been a large rethink of this duality. With CCP bigwigs currently setting economic policy in Beijing for the next few years, one of the most notable changes promised is full-liberalization of interest rates in two years' time. That is, banks will be able to offer depositors higher rates, which in turn will mean borrowers will have to grow accustomed to a semblance of risk-based pricing of loans. From China Daily, still our favorite official publication after all these years:

China is set to fully liberalize its interest rate within one or two years, in a bid to further reform the financial sector, the Central Bank governor Zhou Xiaochuan said on Tuesday at a news briefing during the two sessions.

"We will let the market play its due role in interest rate liberalization. That's for sure," Zhou said. "Deposit rate is set to ease within one or two years. It's part of our plan." He added that interest rates will possibly go up, but will eventually level in the longer term due to market forces and competition.

Interest rate liberalization is but one part of an expected set of reforms to make China's economy more market-based:

Financial reforms, including yuan globalization, banking regulations, private equity, debt risks control, will be launched with zeal, although some steps may take three or five years, Zhou said. The country has stepped up its efforts to push for economic reforms in recent years, rolling out a slew of measures and regulations in the process.

"Reforms in other fields, including rural reforms, resource distribution and economic opening-up, will also involve financial reforms," Zhou added. "We will get them done step by step." 

It's about time is all I can say.

UPDATE: MarketWatch suggests that the emergence of online banks in China offering higher placement rates is driving this change as state-owned banks have felt the sting of withdrawals:

And for those awaiting marketization, they may owe a big thank you to the Internet companies. Why? Just several days ago, state media quoted Zhou as saying that China would not ban wealth management products from online providers, such as Yu’e Bao (a high-yield online investment product offered by e-commerce giant Alibaba since June, which can be easily accessed via smartphones) despite the recent controversy created by those products.

The rapid rise of Yu’e Bao and other similar products have generated hot debate, as tens of millions of ordinary Chinese savers have withdrawn their bank deposits and flocked to such Internet finance products that offer higher deposits rates.

According to Yu’e Bao’s statistics, it had attracted over 250 billion yuan ($41 billion) in assets and 490 million clients as of mid-January. And as of late-February, the number of clients had grown to above 810 million, while a Xinhua news report out Tuesday said assets had doubled to 500 billion yuan.

 SCMP also agrees that online banking is helping drive this liberalization.

ERP

The new Economic Report of the President is available here.

Crappier Than the West's: PRC Credit Rating Agencies

You have to be pretty bad to outdo Western credit rating agencies in terms of honestly rating securities free from conflicts of interest. However, it is unfortunately possible. In the wake of the first mainland China bond default, investors are beginning to question the assumption that the state will rescue these firms and that their ratings can be relied upon:

“China’s rating system has problems similar to those in the U.S. in 2008,” Guan Jianzhong, the Beijing-based chairman of Dagong, said in a phone interview yesterday. “There’s cut-throat competition and it’s not about who accurately evaluates the risks, but comes down to prices and ratings.”

The U.S. Financial Crisis Inquiry Commission said in 2011 that inflated credit grades were partly to blame for the worst downturn since the Great Depression, as rating companies lowered standards to win business amid a housing boom that fueled issuance of mortgage-backed bonds. China ended in 2012 a four-year ban on sales of asset-backed securities and credit assessments are of growing importance as market forces play a greater role in pricing risk in its $4.2 trillion bond market.

In a manner of speaking, the pressures for Chinese credit rating agencies to inflate ratings is even higher. For, Chinese issuers are not allowed to raise money in capital markets unless they get at least an AA- rating. Talk about high expectations...that are probably not always entirely met through legitimate means:

Dagong, which cut its U.S. sovereign rating to A- from A on Oct. 17, was set up in 1994 and is one of China’s three biggest rating agencies. The other two are China Lianhe Credit Rating Co. and China Chengxin International Credit Rating Co., which is partly owned by Moody’s Investors Service.

Issuers in China must obtain a rating of AA- or above in order to secure authorities’ approval to sell debt, Guan said. He warned in 2010 that grades assigned to bonds issued on behalf of local governments were misleading and failed to reflect the risks faced by investors. “The problem is getting worse,” Guan said. “Ratings on companies have been upgraded rapidly not because their repayment abilities have improved, but for the sake of getting bonds sold at lower rates, for getting the business done.”

Again, note that the person who made those comments is not some bond analyst but the head of one of China's largest credit rating agencies.

The only real advice I can offer is to do due diligence yourselves on these companies. Ultimately, you will have only yourselves to blame and not some credit agency if these issuances go kaput. Caveat emptor!

Are Stolen Passports Really That Common?

[On a personal note, dear readers, rest assured that our thoughts and prayers are with those affected by the lost Malaysia Airlines flight. Alike the missing Boeing 777, the airline has a sterling safety record, making things all the more mysterious.]

One of the more notable bits of news in surrounding the mysterious disappearance of MH370 is the absence of two European passengers who were supposed to be on board the flight but were actually not since their passports had been stolen:

[A]fter the airline released a manifest, Austria denied that one of its citizens was aboard the flight. The Austrian citizen was safe and sound, and his passport had been stolen two years ago, Austrian Foreign Ministry spokesman Martin Weiss said.

Similarly, Italy's foreign ministry confirmed none of its citizens were on Flight 370, even though an Italian was listed on the manifest. On Saturday, Italian police visited the home of the parents of Luigi Maraldi, the man whose name appeared on the manifest, to inform them about the missing flight, said a police official in Cesena, in northern Italy. Maraldi's father, Walter, told police he had just spoken to his son, who was fine and not on the missing flight, said the official, who is not authorized to speak to the media. Maraldi was vacationing in Thailand, his father said.

The police official said Maraldi had reported his passport stolen in Malaysia last August and had obtained a new one. But U.S. law enforcement sources told CNN that both the Austrian and Italian passports were stolen in Thailand.

It's all very curious. You would think that it would not be so easy to fly using illicitly obtained documents for obvious reasons: First, security has obviously been tightened post-9/11. Second, new biometric technologies--fingerprint protection and facial images--have come into widespread use to prevent exactly the kind of identity theft we have just observed. Europe has been at the forefront of implementing biometric technologies. What's more, while there is a problem authenticating the passport holder's identity when a passport is lost, this should not be a problem when the passport is stolen since the biometric information is all there:

However, chipbased e-passports have the same problem as conventional passports in authenticating the passport owner in the event the passport is stolen or lost.

Using deductive logic, matters become elementary, my dear. The likely reason why people still steal travel documents is because authorities are one step behind in preventing their use once stolen. That is, actual enforcement has not caught up with the promises of these new biometric technologies. Hence the notion of "crime entrepreneurs":

Most crime entrepreneurs are not the diabolical creative geniuses described by the mass media, but mobile risk takers responding to changing opportunities and law enforcement by trial and (custodial) error. This may imply that individual changes usually take place gradually: smugglers change commodities, e.g. from smuggling hard drugs to smuggling soft drugs on a larger scale; some smugglers enter organized cross-border fraud, mainly fiddling the VAT system or EC regulations or they broaden their trade to neighbouring branches while stil] using the same skills and social networks. Those who had been fencing stolen passports for forgery noticed that these documents were also valuable to those engaged in the smuggling of illegal immigrants.

Otherwise, it is certainly a researchable question what the extent of passport theft is in the face of clear lapses in enforcement.

UPDATE: Authorities now suggest that the two flyers using stolen passports were Iranian, but with no terror ties. 

PRC 'Bear Stearns Moment': 1st Local Bond Default

They built 'em; buyers didn't come

Chinese businesses have acquired a reputation for being protected by the national or local government in the absence of true "market discipline." That is, they may even be chronic money losers, but they are continually fed cash infusions in the hope that they will eventually turn the corner. However, with new PRC policies coming in spelling the end to subsidized credit, energy and so forth, Beijing has decided to make Chinese firms face the rigors of domestic and international competition. Hence its first impending domestic commercial bond default.

It will come as a surprise to no one following international business that the casualty will be a solar panel maker. These manufacturers have been given generous government supports in the expectation that solar energy will be a growth market of the future. Unfortunately, this scenario has yet to pan out. What's more, the Chinese government is under pressure from the EU and US (among others) for allegedly dumping solar panels. To be sure, the Chinese have also made counter-challenges: following the back-and-forth legal wrangling gives me a frickin' headache.

At any rate, the stay of execution has not been forthcoming for Chaori--the first PRC victim in a solar bloodbath as price wars take their toll from Europe to Asia:

China's first domestic bond default looked set to occur as expected on Friday as there was no sign of a last-minute bailout for solar equipment producer Chaori Solar, an event seen as a landmark for market discipline in the world's second-largest economy.

The loss-making Shanghai Chaori Solar Energy Science and Technology Co Ltd (002506.SZ) warned this week it could only pay out less than five percent of the 89 million yuan ($14.5 million) in interest due on 1 billion yuan worth of bonds issued in 2012.

After a series of near misses in recent years, in which local governments stepped in at the last minute to rescue local champions, analysts say the precedent-setting default is likely to force a re-pricing of credit risk in a market that long assumed even high-yielding debt carried an implicit state guarantee.

"The Chaori default goes to show the government will begin to let the market decide the fate of weak borrowers. This test case indicates the government is addressing the moral hazard issue," said Christopher Lee, managing director of corporate ratings for Greater China at Standard & Poor's in Hong Kong.

So, the implicit bailout has been rolled back. Chaori may be the first demonstration, but don't be surprised if others follow:

Such an adjustment appears well-justified, as analysts expect more defaults on loans, bonds and shadow-bank credit this year. Local governments and firms in industries suffering from overcapacity are the focus of concern.

Last month, a high-yield investment product issued by Jilin Province Trust Co Ltd and backed by high-interest loans to a struggling coal producer failed to repay investors on maturity. Ratings agency Standard & Poor's estimates overall debt in China reached 213 percent of GDP last year, up sharply from 140 percent in 2007. Corporate debt comprises the bulk of this total.

There is nothing wrong with borrowing per se--unless there is significant overcapacity in the borrowers' industries and (unwarranted) expectations that Uncle Mao will bail you out each time you get into trouble. For a lot of Chinese companies nowadays, both unfortunately hold. With some exaggeration, Bloomberg suggests this may be the "Bear Stearns moment" for Chinese credit, after which lenders become far warier:

This could be China’s “Bear Stearns moment,” strategists at Bank of America Corp. said earlier this week, and may prompt investors to reassess credit risks as they did after the troubled U.S. lender was sold to JPMorgan Chase & Co. in March of 2008. Six months later, Lehman Brothers Holdings Inc. collapsed in the biggest bankruptcy in U.S. history.

“This will likely be the first of many defaults, although I don’t think it’s going to cause a cascading effect in the bond market,” said Brian Coulton, a global emerging-market strategist in London at Legal & General Investment Management, which manages some 450 billion pounds ($753 billion) globally. “Short term, we’re likely to see higher bond yields but in the long term, this will create a better market for pricing credit risk.”

The yield on five-year AA- notes rose eight basis points to 7.77 percent on March 5, the most in almost four months. Yields rose a further five basis points to 7.82 percent yesterday. Ratings of AA- or below in China are equivalent to non-investment grades globally, according to Haitong Securities Co.

Welcome to the (somewhat) rougher and tougher China. 

UPDATE 1: Marginal borrowers are canceling bond issuances in the wake of Chaori.

UPDATE 2: PRC yield spreads are (surprise!) widening.

If Chinese Cars Can't Sell at Home...

The Qoros 3 looks quite handsome, but...

...what more abroad? There has been a certain fear factor--especially from less competitive European mass manufacturers alike Citroen/Peugeot, Fiat, Ford, Opel and Renault--that Chinese would be the next to undercut their already-dwindling sales with cheap products after the Japanese and South Koreans of the not-so-distant past. Moreover, it has been widely assumed that they would be at the forefront of China's forthcoming march into PRC-branded goods.

Actually, no. Or at least not yet. In reality, Chinese cars are taking a beating at home from foreign automakers viewed as having more desirable nameplates. The current bone of contention concerns requiring foreign automakers to partner up with Chinese ones in selling vehicles in the PRC. The Chinese automakers are adamant that they will be wiped out if the foreign automakers are allowed to go it alone in China:

Chinese brands will be “killed in the cradle” if the government allows foreign automakers to become more independent from their domestic partners in the world’s biggest car market, the country’s main auto group said.

The China Association of Automobile Manufacturers voiced its warning yesterday as it reported that Chinese brands in January extended market-share losses, falling 4.9 percentage points from a year earlier to 38.4 percent, while foreign companies such as General Motors Co. (GM) benefited from record industry sales. Geely Automobile Holdings Ltd. (175) alone saw deliveries tumble 47 percent.

“Relaxing the current foreign ownership restrictions will wipe out Chinese brands,” the state-based auto association said in a statement in Beijing. “Foreign companies can totally use the competitive advantage of their global supply chains to support a price strategy to kill Chinese brands in the cradle.” 

What's prompted the fear factor?

The comments escalate concerns that the auto group has voiced since a Chinese commerce ministry official said at a forum in October that automakers should prepare for the day when the foreign stake limit is relaxed. Since China opened up its factory floors to foreigners decades ago, companies from GM to Volkswagen AG (VOW) have poured billions of dollars to build cars in the country, as long as they set up joint ventures and kept their ownership capped at 50 percent. 

"Killed in the cradle" is precisely the infant-industry argument.  What's more, even if the 50-50 rule is not followed, Chinese automakers are already feeling the heat as generous subsidies of the past are being rolled back in line with official policy to reduce manufacturing subsidies and ensure that fitter enterprises survive:

Chinese carmaker BYD Co. (1211) may be getting some bad news as it prepares to start selling in the U.S. next year. A planned reduction in government subsidies and a phase-out of interest-rate controls threaten to raise costs for it and thousands of companies across China. 

Chinese manufacturers are going to lose a lot of subsidies they used to have. As labor costs rise, the yuan is also appreciating, while cheap credit and energy is increasingly a thing of the past. Sure it's not easy, but what does it say about Chinese automakers if they have been at the losing end in their home market having all of these advantages in place over the an extended period? After these advantages are removed or greatly reduced by government fiat, what more of a chance do they have in overseas markets?

In automobiles at least, the fears about China wiping everyone else out seem misplaced. Being emotive, big-ticket purchases, automobiles are more emotive buys than most other things. As it so happens, it is precisely in branding and marketing that the Chinese are weak.