Chinese “F U Equity”: You’re Kind of Stuck With It
It looks like the Chinese Government is following through (Alt) on its promise to liberalize and expand its financial markets: the Chinese State Council is fast-tracking qualified small and medium sized-enterprises (SMEs) to its over-the-counter (OTC) market. Applicant companies with 200 or fewer shareholders will see their application requirements eliminated. The State Council is encouraging institutional investors to participate, which may be hard considering this: regulators in the US and Hong Kong are demanding more transparency and warnings from Chinese companies like Baidu about the risks in owning stock that isn’t actually stock. Seriously, over the past 18 months, some investors have found out that their “shares” aren’t legally valued as equity in the courts. “At issue are ‘variable interest entities,’ or VIEs, which are used to circumvent the Chinese government’s restriction on foreign ownership of key industries. The VIEs give overseas investors both the economic gains and losses of the business through contracts rather than direct ownership.” Case in point: FAB Universal (ticker: FU. Seriously) VIE “ownership” may have led the CEO of FU to say “F U” to investors when he decided it wasn’t necessary to record a $16.4mn debt issuance on its financial statements. A China Opportunities Fund manager says “It’s part of investing in China. You’re kind of stuck with it.” Awesome.
Banking: Not Just For Banks Anymore
Shadow banking is hitting the restaurant industry: the number of employers and payroll firms lending to restaurant workers to help ease the burden of living paycheck to paycheck is growing. One such company “allows workers to take out loans ranging from $150 to $500 that typically last two weeks. The fees, ranging from $8 to $25 plus interest…based on the fees, the loans carry an effective annual percentage rate of 100% to 165%.” While the employers aren’t actually the ones issuing the loans, collecting the fees and therefore benefiting from a low-wage employment structure, “they say their goal is to help their employees lead more stable financial lives, alleviating workplace disruptions that financial stress can cause workers.” It would be easy to be critical of such “financial health-wellness” programs, (eg. Walmart’s Feed the Hungry/Our Employees Food Drive) however it should be pointed out that employer lending has cut into the payday lending market where interest rates can be as high as 300%. Meanwhile, the oil and gas industry is exploding (literally), and as Wall Street becomes increasingly “hamstrung by growing regulatory restrictions,” some corporate behemoths such as BP, Cargill and Koch Industries “are leveraging their robust balance sheets and savvy global trading desks to capture as much as a quarter of the global multibillion-dollar market for hedging commodity prices.” Over the last decade, big banks have rushed into the commodity trading business only to come rushing back to the sidelines in the wake of financial crisis, regulation, chaos etc. Oil producing executives like Alan Barksdale of Red Mountain Resources like making derivative trades with other firms with the physical ability to transfer crude oil (a foregone conclusion for most banks dealing in commodity futures). By some estimates, “investment banks now account for only about half of the US oil and gas-hedging business, with corporate merchants accounting for some 40 percent, up from almost nothing just a few years ago.”
“Russia has confirmed that it is ready to issue fresh loans to Ukraine, its cash-strapped neighbour at the centre of a geopolitcal tug-of-war between Moscow and the EU.” Kiev, Ukraine, if you missed it, has been a hotbed for demonstration and political unrest this last week as pro-European integration citizens call for President Yanukovich’s resignation over his apparent shift away from the EU and into the Kremlin. According to Moody’s, “Russian banks accounted for up to 50 per cent of outstanding cross-border loans to Ukrainian corporates as of July 1 this year.”
Google just purchased Boston Dynamics, “the creator of the world’s fastest running robot and other eerily realistic animal-like machines supplied to the US military.” Robot Wars: commence. Also: Please, please “don’t be evil.”
Graph showing % change in GDP per person for the European Union and others. While the northwestern (Germanic/Scandinavian) EU countries have fared the best, southern and central EU countries have seen some pretty dramatic shifts in economic order.