A reoccurring theme over the last 18 months has been the shortage of coal.

The first big blowout came during the snowstorm in Febrary, 2 months after China began turning around boats to retrofit them to carry coal, and 6 months after Guangdong was suffering rolling blackouts.

since then, we have had the Guangdong governor issue a letter saying they were short 20%, , power generators were loosing money hand over first,  a couple of weeks ago you had everyone hitting energy usage records, and Chongging (a major benefactor of the 3 gorges dam) had to ration power

With that, here are some new articles that only reinforce the point that China has hit a wall from China Environmental LAw , Xinhua, and Caijing: their rail capacity is tapped, there are no more boats, the drought has continue, the Olympics are coming, and it is HOT.

For me, the situation is now reaching a stage where I am having daily conversations about the situation, and it is a situation that will only continue to get worse.  We are not in the heat of summer yet (only a few days at best), the Olympic will remove small coal plants up north from the grid, the Olympics will increase the load on the grid, and it is not like there is a lot of rail capacity that is going to suddenly make itself available.

My 2 cents - buy coal contracts, investing in commodity shipping companies, and pray that we make it through the big “O” without any major problems.

My plans - hold another What if, What Else, What are the Odds session ASAP, and pursue a few leads on companies I am profiling for my latest venture

China Briefing has just posted SAFE Issues New Regulations to Further Control Foreign Exchange Movement, which confirms the worst case scenario I ran through in my post earlier this month The Next Problem for China’s Exporters: SAFE Regulations.

Confirming what, Michael Pettis’s warned about in his post Hot weather, cold market, I made a trip to the SAFE Homepage to see what I could find, and with the help of google Translate you can get the major points of the document that SAFE posted last week (Google Translation of same page).

Reason for the new rules according to the document is to

“improve monitoring and management of external debt statistics, prevent foreign debt payment risks”.. i.e. reduce the levels of hot money flowing intothe country, and to restrict any potential outflows that may negatively impact the economy (think Thailand June 2007 before the crash on July 2)

and to address this, buyers and investors will be required to clear their money through SAFE before they can spend it, the amount of money that can be cleared at any one time will be limited, if you don’t spend the money within 90 days it must be taken back out, and that to take the money back out it is going to involve an equally painful process.

Now, I don’t think it takes a whiteboard for you to understand the hurdle that has just been put in place for everyone who sources in China.

Effectively, to the best I can tell, cash flow will now be extended at a minimum 30 days.. up to 90 days… and the idea that you need to have a “holding pool” is also now confirmed.

In Pettis’s post he mentioned:

One of my students, whose uncle is a Southern-province-based exporter, told me that he believed (he wasn’t sure) that typically exporters would need to find financing for this period, and since most of them are excluded from commercial bank financing, they would need to take short-term loans from the informal banking sector. This sounds pretty plausible.

From that, here are a few ways to structure this off the top of my head.  I am not sure which is the best in terms of speed, and I am not an accountant/ lawyer so I am not sure how each method would be more/ less in compliance, but here are a few:

1) Set up a WOFE/ Rep Office on the mainland that can establish a bank account and act essentially as a fund manager.  Firms will need to move money in well in advance, clear it, and then put it into this account for future use.  This fund will need to have a safety stock, and need to be well managed, to ensure that any delays in approvals of new funds can be buffered

2) Work with a trusted import/ export firm who will act as your fund.  Depending on the I/E you choose, they may already be the best option as they have a history of bringing in money, pooling it, clearing it, and managing the supplier payments.  The operational issue with this is that you need to give the I/E extra money .. .and backing those funds out is a huge pain.  From a risk perspective, this also adds to the equation as there are stories of I/E firms simply pulling runners

3) ship out a safety stock before Oct 1 that will get you through the end of the year and see what happens.  I am fairly confident that in an attempt to cool off the hot money flowing into this economy, the government is going to find that they are going to have to relent when shown the impact on the manufacturing sector.  this is a nuclear option on hot money (yes… we should be worried)and the innocents appear to be small to medium sized firms (Chinese and foreign)… and the relevant agencies are surely going to be hearing about it.

Things you should do:
1)Read the posts that China Briefing and Michael Petis have put online, to understand the issue
2) Call your accountant, your China based partner, your import/ export partners, etc and work out your exposure.
3) Call your freight forwarder and book vessels in the Sept 20 - Oct 1 time frame.  I can guarantee you that there will be a massive push that week, and you are really better off booking early.
4) If you are still confused, or you are still looking to learn more, check out the SAFE organized training event.  There appear to be a few of them starting next week, and the contact information that I was able to find on the event was:

Contact:, Zhang Wei
Tel: 010-68573886 (Zhang Wei)

Of course, if you have a different work around please email me or comment below.

I would like to post details that allow others to develop work arounds.  I promise… no details that would let anyone work out who it is.

The Growth Commission has released one of the most interesting documents I have read in a long time called Strategies For Sustained Growth And Inclusive Development

Not specific to China, this report looks at how countries develop from agrarian societies to modern ones….and it is fascinating.

If you are someone who is in need of a document to capture what you are seeing in China, or you are external to China what is going on here, take the time this weekend to read it.

Living in China, I can honestly see nearly everything mentioned in part 2 here right now. the issues related to inflation, labor, the movement from low end to high end, removal of subsidies, etc.. the vast majority of it matches… so much so, that I would have a difficult time picking anything out as a best case cause I would need to repeat that 20 times.

Some of the graphs (see my favorite is the one above) are really awesome, and I highly suggest focusing your efforts on Part 3: Growth Challenges in Specific Country Contexts  , Part 4. New Global Trends , and Statistical Appendix: The World Economy and Developing Countries Since WWII

This report is one of my top 3 favorite reports for this year… and I may even read it a second time

Follow this link to learn more or download the report by right clicking here (10.5MB)

For those of you who were alseep last year, there was an issue related to quality control and product safety that rocked US consumers and gave everyone at CNN something to talk about.

My position at the time was that it was firms like Mattel and FTS tire Import who were to blame for not investing in their quality control platform.  Wasn’t a popular position to take at the time, but sure enough… Mattel apologized for their role.

For the 2008 Christmas season though, I have a feeling that we will all be able to look back and point out the recent decision to stop issuing F visas from July 20 to September 20 as the primary culprit.

All fluff aside, I spoke to several people in HK last week wihle I was there about how the visa policy had impacted them (they were in social compliance/ factory audit groups)… and their only comment was that they were glad they had the F visa as having to get a tourist visa every few days was going to be a real issue for many inspectors who operate from HK and go into Dongguan and Shenzhen for inspections.

Another impact that I have heard of - and it is something BOCOG must be hearing about on a daily basis - is that many of those packages that sponsors are given to entertain clients on the Olypmic green are largely going to waste becuase people cannot get the visas.

Looks like the 400m hurdles just got jacked up another notch.

FDI UTILIZATION CONTINUES TO GROW IN TEDA
In this May 10 new foreign enterprises were approved and 15 existing ones increased their investment in TEDA with new foreign investment, contracted overseas investment and actually funded investment adding up to 793 million, 316 million and 212 million US dollars respectively. Another 67 domestic-funded enterprises were registered with a total registered capital of 4.005 billion yuan.

So far this year, TEDA has approved 52 new foreign enterprises and saw 87 existing ones increased their investment. Its accumulative investment hit 3.329 billion, contracted overseas investment 2.004 billion (up by 24.09% y-o-y), and actually-funded investment 920 million US dollars (up 16.46% y-o-y).

Among the new foreign-funded enterprises approved in May, two have invested over 10 million US dollars respectively and another two are invested by multinationals. New comers such as Vitalink Coating (Tianjin) Co., Ltd. and Reichhold Macromolecule (Tianjin) best represents the emerging industries of TEDA while the reinvestment and expansion of star enterprises such as Tianjin FAW Toyota Co., Ltd., Tencent Digital (Tianjin) Co., Ltd., and Tianjin Suanhuan Lucky New Material Co., Ltd. have further fueled up the economic growth of the Tianjin Binhai New Area. (Tr. by Zhang Shanshan)

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Pew Research group puts out some of the best opinion research. they are not the type of organization that interviews 30 people and extrapolates… they go for that last .0012 on the bell curve when analyzing their statistics.

This report has the makings of being one of those that will be required reading for everyone, and I say that after only reading the introduction and peaking at the first few pages.

For anyone watching China right now, there is a lot to stand back in awe of. there is a lot to stand back to see what happens.. and there are some things that we should all just stand back from.

This report has positioned itself to look at all of that from the perspective of Mr. and Ms. Zhou.

Interesting graphic #1 is above, but there is also THIS ONE that shows they were not afraid to ask the real questions either.

I am looking forward to finishing this 50 page report tonight once I have finished writing my other reports.

Download the full report here

With so much going on in China, and only a limited amount of bandwidth, I have created this weekly post to highlight articles that I feel are (1) important, (2) relevant, and (3) interesting.

This week there are 4 articles that I have chosen to highlight as each are quite interesting, they are all relevant, and there are issues within each that I think you the reader should be aware of.

If you have an article that you feel needs to be mentioned, please do so in the comments section.

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