In this year's first half, the GDP in Shanxi Province, China's capital of coal, showed negative growth of 4.4%, due mainly to the large-scale reorganization of its coal industry. In April, the provincial government declared that by the end of next year, more than 2,000 mining enterprises will have merged or been consolidated, involving capacity of more than 220 million tons.

The objects of this integration are the province's many small mines, accounting for more than 80% of the total. This also means that many of Shanxi's coal bosses will soon become history.

By the end of 2010, a total of 2012 coal mines across the province will have been acquired or reorganized, among which 1161 will go to five major state-owned coal groups and 693 to local state-owned coal enterprises, leaving only 479 mines independent.

One coal boss had wanted to convert his 30 thousand ton yield into shares of Lu Ning Coal Group, but changed his mind later. "Selling it avoids trouble" he said, for the reason that the units participating in the consolidation are all state-owned mines.

The government is requiring that small coal mines with single wells and production below 90 tons/year will be integrated into the Shanxi Province Coal Mine Group, the Shanxi Coal Transportation and Marketing Group, and the Shanxi Coal Import and Export Group Corporation.

The government has ordered that the acquiring enterprises will pay a premium to the previous owners of 50% or 100% as compensation. But many say it is nowhere near enough

"I'm being paid 17 million yuan for the 10 million tons. According to the policy, the compensation is only 25.5 million yuan. However, the added 8.5 million yuan does not offset the investment of tens of millions and even billions," a coal boss from Xiaoyi says. "If the policy will not change for 5 years, I am sure I would carry out the investment. However, the policy has changed three times in five years."

Managers of large state-owned mines expressed understanding and sympathy for the coal bosses. "After all they have invested so much. And if the investment came after 2007, it is certainly a loss to sell now after mine closings and the Olympics. However, state-owned assets could not pay the bill for the policy." A Datong Coal Group manager noted that coal bosses also know it is better for them to take what is offered now than to get nothing later.

In the first half year, coal mines in Datong areas produced 2.83 million tons of raw coal, down 60%, year-on-year. In the first five months, fiscal revenues in Datong area fell 14.63%, year-on-year, while in the first six months, they dropped 6.28%, year-on-year. Coal has contributed 70-80% of local fiscal revenues.

Shanxi's GDP fell 4.4% in the first six months, year-on-year, and in the first quarter, GDP even showed negative growth of 8%. Shanxi is currently readjusting its industrial structure and integrating resources. The reorganization or closing of coal enterprises is an important cause for the economic dip.

In the first quarter of this year, the coal production in the Inner Mongolia Autonomous Region passed that of Shanxi, taking the Number One position. Now only one quarter of Shanxi's coal enterprises are under normal operation, throwing market share to Inner Mongolia. In addition, rail transportation in Inner Mongolia has been eased. In the first six months, the autonomous region produced 160 billion tons of coal, up 42.31 billion tons, year-on-year. It is expected that its coal production will continue to exceed Shanxi's this year and remain first across the country.

Shanxi's stalling GDP also reflects the risk of putting most of one's economic eggs into one industrial basket. Coal revenues account for 70% of the province's GDP. The added value of heavy industry accounts for 95% of its industrial output while industries such as electricity, coke, and metallurgy are over concentrated.

Some coal bosses are withdrawing from the coke field. Zhang Xinming, head of Shanxi Jinye Coal & Coking Group, has transferred many enterprises under his group to Datong Coal Group. It is estimated that the involved capital is about 4 billion yuan. Zhang's family ranks first in the energy field in Shanxi.

After the integration of thousands of mines, the huge capital piles that emerge may flow out of the province and into other industries, a prospect the province finds unpleasant.

Provincial officials are trying to find new ways to help these coal bosses keep their money in Shanxi. From 2009 to 2010, a government-controlled investment project of 650 billion yuan will be open to private capital, directing investment in infrastructure such as roads, railways, bridges, urban construction, environmental protection, and municipal areas such as public transportation and gas utilities. The government will provide preferential policies in nine areas such as land supply, financial support, and tax reduction.

Prior to this, some coal bosses in Luliang, Shuozhou, Linfen, and Changzhi have entered the breeding industry or tourism. The government is worried that large sums of freed up money will enter go to real estate, boosting existing bubbles. Shanxi coal bosses are known across the country for their Hummers and luxury flats in Beijing.

The policies Shanxi Province is introducing to direct private capital to infrastructure and public services investment include PPP (public-private partnerships), BT (build-transfer), BOT (build-operate-transfer), and TOT (transfer-operate-transfer). It is not know, however, whether conservative coal bosses will enter these fields.

CHINA MARKETS drop 5%- 29 JULY 2009

Talk about déjà vu. On July 29, the Shanghai Composite Index fell 5%, setting off panic selling in Hong Kong and dinging even the Dow. But Chinese stocks rebounded 2.7% the next trading day, the steepest rise in two months. Fast forward to Aug. 31. The Shanghai index dropped 6.7% that day, causing panic around Asia and even in distant markets like the U.S.
That's where the similarity ends. The index is not likely to return to its previous lofty perch anytime soon. Following a miserable performance in August — Chinese stocks fell nearly 22% last month — Shanghai's 81% Great Leap Forward from January to July has now been pared to 42% as of Aug. 31. That's still a hefty advance, but it's looking like the long march backward will continue for some time.

Technically, what happens in the Shanghai bourse should not matter outside China. Only locals can trade in Chinese A shares, which comprise the composite index. But markets are supposed to anticipate the economy's health, so the fall in the index could possibly signal a relapse in the world's third largest economy. The jitters in Asia and the rest of the world are rooted in the fear that China will not be able to help pull the global economy from recession, a big blow to recovery hopes given the inability of the U.S., Europe and Japan to play that role at this time.

But is the slump in the stock market really a reflection of rot in the wider economy? Not necessarily. Unlike the NYSE or the Hong Kong Stock Exchange, where institutional investors react as much to fundamentals as to greed and fear, the Shanghai and Shenzhen exchanges are dominated by retail investors driven to frenzy by speculation and sentiment.

Hong Kong's Hang Seng China Enterprises Index is probably a more realistic reflection of expectations about the direction of China's economy. It advanced only 45.8% from January to July this year. The sell-off in Shanghai trimmed that gain to 35.6% as of Aug. 31 — a strong gain, but hardly the stuff of bubbles.

The question on investors' minds is whether the recovery is for real. While China's GDP growth was better than expected, at 7.1% year on year in the six months to June, part of that expansion was fueled by an astounding 201% increase in bank lending. The central bank started tightening in July, when new loans totaled just $52 billion — down sharply from $224 billion in June. The August number may come in at an even lower $36 billion or so.

The aim is to purge the asset markets of speculators, which is clearly working given the deflation of the stocks bubble in Shanghai. The danger is that policymakers may tighten too much, discouraging not only speculation but also business growth and consumer spending, which could precipitate a hard landing for the economy. So far, there's scant evidence for collapse. The latest Purchasing Managers Index numbers, released Sept. 1, show China's manufacturers are continuing to rally. The index rose to 54.0 from 53.3 in July, marking the sixth consecutive month the index has been in expansion territory (over 50.0).

Some argue that overtightening is not the fundamental problem, however. Former Morgan Stanley star analyst Andy Xie, now an independent economist, questions the quality of China's recent growth. "The present economic 'recovery' began in February as inventories were restocked and was pushed up by the spillover from the asset-market revival," he contends in a recent opinion piece in Hong Kong's South China Morning Post newspaper. "These two factors cannot be sustained beyond the third quarter."

"When the market sees the second dip looming, panic will be more intense and thorough," he warns. Xie expects this economic slowdown to gather force in the fourth quarter, coinciding with a second-dip recession in the U.S. as inventory restocking and fiscal stimulus there, which are driving today's recovery, peter out. "By the middle of the second quarter next year, most of the world will have entered the second dip," he concludes. "By then, financial markets will have collapsed."

But Xie is definitely in the minority. Discounting the stock market's fall, Goldman Sachs has just boosted its growth forecast for China to 9.4% this year from 8.3% previously, and to 11.9% in 2010, from 10.9%. Bank of America Merrill Lynch is sticking to its forecast of 8.7% growth in 2009 and 10.1% in 2010.

Praising China's use of moral suasion to persuade the banks to cut back on lending instead of resorting to the blunt instrument of raising interest rates, ING sees GDP returning to its trend growth of 10% next year. The Shanghai index now "rests two standard deviations below the trend line that starts in early November 2008, which we consider strong support," says ING chief economist Tim Condon. "We do not expect the support to be broken."

Who is right? Only time will tell, of course. But China's economic policymakers have been performing admirably since they wisely held the line on devaluing the renminbi in the 1997 Asian financial crisis. Their decisive action on a massive fiscal spending program this time around has helped the economy bounce back strongly.

With luck, the doomsday scenario may not come to pass. Xie will no doubt be happy to be proved wrong, along with the rest of the world.

Shanghai Index May Drop 25% on Economy, Xie Says (Update1)
2009-08-31 20:38:14.188 GMT    (Updates prices.)

By Allen Wan and Erik Schatzker
    Sept. 1 (Bloomberg) -- The Shanghai Composite Index, the
world's worst performer in August, may fall another 25 percent
as China's economic recovery isn't "sustainable," former
Morgan Stanley Asian economist Andy Xie said.
    The measure plunged 6.7 percent to 2,667.75 yesterday, the
most since June 2008, and entered a bear market on concern a
slower lending growth may derail a rebound in the world's third-
largest economy. Xie said the index "should be 2000 or less."
    "The market is in deep bubble territory," Xie, 49, who
correctly predicted in April 2007 that China's equities would
tumble, said in an interview with Bloomberg Television.
    China's retreat sent the MSCI World Index of 23 developed
nations down 0.8 percent, while MSCI's emerging-market index
lost 1.5 percent, the biggest drop in two weeks. The Bank of New
York Mellon China ADR Index, tracking American depositary
receipts of Chinese shares, lost 2.3 percent, led by commodity
producers.
     The Shanghai gauge slumped 22 percent in August, the
biggest decline among 89 benchmark indexes tracked by Bloomberg,
as banks reined in lending to avert asset bubbles and policy
makers advised industries such as steel and cement to curb
overcapacity. The decline stopped a rally that had sent the
measure up 103 percent from a November low on prospects the
government's 4 trillion yuan ($586 billion) stimulus program and
a record amount of new credit would ensure the economy grows at
least 8 percent this year.

                         Strong Numbers

   "The local market bears are convinced that tightening is
already underway," said Howard Wang, head of the Greater China
team at JF Asset Management, which oversees $50 billion. Only
"a very strong set of macro numbers in August" or "stronger
statements from central authorities" would change this trend,
Wang said.
     Still, Chinese stocks are trading at the steepest discount
in the world compared with analysts' price targets after the
month-long slump. The gap of 13 percent below analysts' combined
price targets is the largest among the world's 10 largest
markets, data compiled by Bloomberg show.
    Equities in China remain "a bright spot" among global
stocks because of the nation's strong growth potential, Goldman
Sachs Group Inc. said yesterday.

                        'Exit Strategy'

    "We think the market concerns about a near-term 'exit
strategy' appear premature as the government remains pro-
growth," Thomas Deng and Kinger Lau, analysts at Goldman Sachs,
wrote in a research note.
    Goldman Sachs has boosted its growth forecasts for China's
economy to 9.4 percent this year from an earlier estimate of 8.3
percent, it said in the note. Gross domestic product may
increase 11.9 percent in 2010, higher than an earlier estimate
of 10.9 percent, it added.
    The People's Bank of China will also have "very limited
room" to raise interest rates by the end of this year, Deng and
Lau wrote.
    "The A share market is undergoing a correction rather than
a bursting of the bubble," said Richard Gao, who helps manage
$2.8 billion at Matthews International Capital Management LCC in
San Francisco. "Short term trading will be very volatile but we
believe a strong economic recovery is underway in China and
remain quite positive on the long-term growth potential."
    The government will maintain its fiscal and monetary
policies because the economy faces many "uncertainties,"
Premier Wen Jiabao said this month. Economic growth will slow in
the fourth quarter as exports remain mired in a slump, Xie said.
    "The recovery is not sustainable," Xie, who resigned as
Morgan Stanley's chief economist in Asia in 2006 and now works
as an independent economist, said in the interview yesterday
from Shanghai.

                         Expectations

    "This is a short-term negative," said E. William Stone,
who oversees $101 billion as chief investment strategist at PNC
Wealth Management in Philadelphia. "Expectations have been too
high that China would be a driver of everything. Much has to
come out of the expectations balloon."
    At least 150 stocks on the 898-member Shanghai index
dropped by the daily 10 percent limit. Industrial Bank Co. and
Aluminum Corp. of China Ltd. tumbled by the permitted cap after
Caijing magazine reported new loan growth this month may be
almost half that of July. Lower profits dragged Baoshan Iron &
Steel Co., the nation's biggest steelmaker, and China Southern
Airlines Co. down at least 7 percent.
    The Shanghai index trades at 29.39 times reported earnings,
according to Bloomberg data. The MSCI Emerging Markets Index, a
22-country benchmark, trades for 18.9 times profit.

                         New Loans Drop

    China may have 200 billion yuan of new loans in August, the
Beijing-based Caijing reported today on its Web site. That
compares with 7.4 trillion yuan for the first half of 2009 and
355.9 billion yuan in July alone. The government plans to
tighten capital requirements for financial institutions, three
people familiar with the matter said this month.
    An estimated 1.16 trillion yuan of loans were invested in
stocks in the first five months of this year, China Business
News reported June 29, citing Wei Jianing, a deputy director at
the Development and Research Center under the State Council.
    "The government is now pulling the plug on liquidity,"
said Xie, who is a guest columnist for Caijing. "Hopefully,
it's not too late."

Shipping Rates Seen Falling 50% as China Cuts Commodity Imports
2009-08-30 23:01:00.4 GMT


By Alaric Nightingale and Alistair Holloway
    Aug. 31 (Bloomberg) -- Just as global trade starts to recover, the
shipping market is crashing for the second time in a year as China
reduces raw-material imports and record numbers of new vessels set sail.
    The rate for leasing capesize ships, boats three times the size of
the Statue of Liberty, will drop about 50 percent from the current price
of $37,865 a day to as low as $18,000 before the end of the year,
according to the median in a Bloomberg survey of six analysts and fund
managers. Forward freight agreements traded by brokers show the
fourth-quarter average price will be 7 percent lower.
    Shipping rates, which already fell 59 percent from this year's
high, are retreating as the Organization for Economic Cooperation and
Development predicts a 16 percent drop in world trade for all of 2009.
China's State Council called for curbs on steel and cement production
last week. A record 146 capesizes will be added this year, equal to 28
percent of the fleet, according to Fearnley Consultants A/S.
    "The pressure of the new ships will be overwhelming,"
said Andreas Vergottis, the Hong Kong-based research director at Tufton
Oceanic Ltd., which manages the world's largest shipping hedge fund,
with $1 billion of assets. "It will take a lot of time and a lot of pain
before shipping recovers."
    The biggest-ever order book for new carriers, according to Lloyd's
Register-Fairplay, may hurt profits at shipping lines while providing
higher returns for traders. Rates for capesizes have fluctuated more
than 50 percent in seven of the past eight years.

                     Bulk Shipping Fleets

    Mitsui O.S.K. Lines Ltd. and Nippon Yusen K.K., both based in
Tokyo, and China Cosco Holdings Co. operate the world's biggest
bulk-shipping fleets, Mitsui says.
    Nippon Yusen forecast its first full-year loss in 23 years last
month, citing lower demand for container shipping, and expects capesize
rates to average $55,000 in the six months through March 31. Mitsui cut
its full-year profit estimate by 25 percent last month. China Cosco said
on Aug. 27 its commodity ships lost money in the first half.
    Estimates in the survey ranged from $10,000 to $25,000.
Sverre Bjorn Svenning, the analyst at Fearnley Consultants who correctly
predicted last year's collapse in the Baltic Dry Index, which fell 92
percent, was at the lower end.
    The drop in capesizes is consistent with the Baltic Dry Index, a
gauge of the cost of carrying dry bulk commodities such as iron ore,
coal and grain. The index, which includes four types of vessels
including capesizes, more than tripled this year. The index is 44
percent off its high for the year.

                        Operating Costs

    "We've seen several yards that have delivered their first ships,
albeit delayed, and we expect them to increase the pace of deliveries in
the second half," said Svenning, who is based in Oslo. "We will see more
next year than we see this year."
    Even at rates of $18,000 a day, most owners should make money, with
daily operating costs estimated at $7,555 by London- based Drewry
Shipping Consultants Ltd.
    A rebound in trade may also limit the tumble. The Paris- based OECD
said Aug. 19 that the economies of its 30 members collectively stopped
shrinking in the second quarter. Japan, France and Germany emerged from
recessions prompted by the collapse of U.S. real estate that froze
credit markets and left the world's biggest financial companies with
$1.61 trillion of losses and writedowns.
    Economies are showing signs of improving after the Group of 20
industrialized and emerging nations pledged about $12 trillion to combat
the first global recession since World War II, according to
International Monetary Fund data.

                         U.S. Economy

    The U.S. economy shrank less than economists anticipated in the
second quarter and German business confidence exceeded their
expectations in August. The median of 56 analysts surveyed by Bloomberg
shows America will expand this quarter and the euro zone will grow in
the first three months of next year.
    World trade rose 2.5 percent in June, the biggest advance in almost
a year, the Netherlands Bureau for Economic Policy Analysis said Aug.
26. Ships carry about 90 percent of world trade, The Round Table of
International Shipping Associations estimates.
    Rates for capesizes jumped to a record $234,000 a day in June last
year as demand for commodities congested ports. In Newcastle, Australia,
the world's biggest coal export harbor, as many as 43 ships waited to
load that month, Newcastle Port Corp.
data show. Lined up end to end, that many capesizes would stretch more
than 7 miles.

                      Credit Markets

    Charter costs fell 99 percent in the following six months as the
global economy slumped. The record 36 percent drop in the
Reuters/Jefferies CRB Index of 19 of commodity prices last year
destroyed demand for ships and the collapse in credit markets curbed
bank financing for trade. At least 20 percent of capesizes were empty by
November, Lorentzen & Stemoco A/S, a shipbroker, estimated at the time.
    Industrial Carriers Inc. of Ukraine and Armada (Singapore) Pte were
among shipping lines that sought protection from creditors amid the
slump.
    From their low of $2,316 in December, rates rebounded to
$93,197 in June as China imported record amounts of everything from coal
to iron ore, used to make steel. Almost two in every five tons of steel
are made in China, according to the Brussels- based World Steel
Association. The nation consumes the same proportion of the world's
coal, BP Plc estimates.
    Rates are poised to keep falling, the survey shows. China's State
Council, the nation's cabinet, said it's studying curbs on overcapacity
in industries including steel and cement. The government will provide
more "guidance" over parts of the coal, glass and power sectors, the
group said in a statement.

                       Iron-Ore Purchases

    Imports of refined copper fell 23 percent in July from the previous
month. Coal shipments shrank 13 percent, customs data show. Iron-ore
purchases will likely average about 16 percent less in the remainder of
the year than in the first seven months, according to Will Fray, an
analyst at Maritime Strategies International Ltd. in London.
    "China could very easily turn the taps off," Fray said.
"Rates will keep sliding."

Fast Money: Can China lead the world out of recession?

Roubini: I don’t believe China can be the main locomotive of global growth – China GDP is only $3 trillion – the US is $15 trillion. Chinese total consumption is $1 trillion – the US is $10 trillion.

So China is too small to be the main locomotive of engine of global growth, and there are excesses right now in China – like froth in the real estate and the stock market. And there is now the beginning of a correction. And if there was a sharp slowdown in China, that’s going to be again negative for the global economy.

Fast Money Insights

I agree with what Roubini is saying, reveals Tim Seymour. China alone can not do it. But also, I would not underestimate the strength of emerging markets.

I don’t think we’re looking for China to be the locomotive, adds Pete Najarian. We’re just looking for a little push.

China Investment Investing Billions in Hedge Funds (Update2)
2009-08-29 07:33:29.832 GMT

By Bloomberg News
    Aug. 29 (Bloomberg) -- China Investment Corp., the country's
sovereign wealth fund, is continuing to shift its investments away from
cash and is investing billions in hedge funds and private-equity funds,
Chairman Lou Jiwei said.
    China Investment has invested "many times" the $500 million that
CIC was reported to have placed in hedge funds and private-equity firms
in June, Lou said today in an interview in Beijing. He said China
Investment was also investing in fund-of- funds.
    Lou said Beijing-based CIC's performance this year "has not been
bad" following last year's 2.1 percent decline in its global
investments. He didn't elaborate. China Investment Corp.
had $297.5 billion in assets and had 87.4 percent of its global
portfolio invested in cash and cash equivalents at the end of last year,
the fund reported earlier this month.
    In December, Lou said he didn't "dare to invest in financial
institutions" after losing money on investments in Blackstone Group LP
and Morgan Stanley. CIC raised its stake in Morgan Stanley in June by
buying an additional $1.2 billion of shares.
    CIC aims to allocate $6 billion to hedge funds by the end of 2009,
company adviser Felix Chee said in June. Chee, who is a special adviser
to the chief investment officer of CIC, said he will initially run CIC's
hedge fund and proprietary trading effort.

                        Buying Shares

    The fund has also been buying shares in the property and resources
sectors in recent months. It plans to buy shares of Songbird Estates
Plc, a London-listed company that controls the owner of more than half
the buildings in the city's Canary Wharf financial district, Songbird
Chairman David Pritchard said on a conference call yesterday. Songbird,
which is selling shares to institutions to repay 880 million pounds
($1.4 billion) of bank loans, said CIC will buy a significant stake.
    CIC is interested in boosting its Canadian presence after buying a
stake in Teck Resources Ltd. in July, the country's Finance Minister Jim
Flaherty said in an Aug. 11 interview.