What country does this describe?

The country’s banks are short of capital and will have to go to the financial markets to raise more in 2012—and 2013.

Bank balance sheets have ballooned as a result of lending to real estate developers.

Everyone believes that banks’ official accounts badly understate the number of bad loans on their books.

And, finally, it’s just about impossible in this country to separate bank and government finances.

Spain and Italy? Of course. And you can work your way around Europe adding other names to your list of guesses.

But the country I had in mind was China. China’s banking problem isn’t as far along as that in Europe. Notice that I’m calling it a “problem” rather than a “crisis.” But China’s banking sector is headed toward a crisis—and the government’s efforts to head off that escalation will be one of the major drivers in China’s economic and monetary policy in 2012 and 2013. Want to understand how much stimulus Beijing will pour on its economy—and therefore whether you should be putting money into Chinese stocks or taking it out (and when)?  Take a long look at China’s banks.

If you understand the nature of China’s banking problem, you’ll understand why I believe that China’s government will move sooner rather than later and more aggressively rather than more moderately to stimulate China’s economy. In the short run, China simply can’t afford to let a slowing economy make the problems in its banking sector worse. In the long run? Ahh, a very different question with a much more worrying answer.

Let’s start with the strangest manifestation of the problems in the sector, the need of China’ banks to raise a huge amount of capital. Read more

Nestle buys market share in China’s market for infant nutrition

The news yesterday that Nestlé (NSRGY) would buy Pfizer’s (PFE) infant nutrition business for $11.9 billion has completely overshadowed last week’s stronger than expected earnings report.

For the first quarter Nestle reported organic sales growth of 7.2%. For the full year Nestlé kept its projections for organic growth at 5% to 6%. In the first quarter growth broke down as 3.1% growth in developed country economies and 13% in developing economies.

Which also tells you what you need to know about Nestlé’s acquisition. Read more

Throughout the global financial crisis, even as the crisis changed its focus (and name) from the U.S. mortgage-backed securities crisis to the euro debt crisis—the United States could find solace in the strength of the dollar. It may not have been a currency backed by the largest gold reserves or a well-run fiscal policy, but it only needed to be less bad than its global competitors. And up against a euro that threatens to come apart and a yen backed by a Tokyo government with an even bigger debt problem than Washington has, the dollar looked good enough.

For liquidity, for the depth of its markets, for its ease of transfers and payments, the dollar was relatively strong because the competition was relatively weak. The dollar was a global currency without real competition. That’s been critical to allowing U.S. Treasury prices to rally and U.S. yields to fall even as the country lost its AAA credit rating.

The dollar isn’t without long-term competitive threats, however. The most obvious of those has long been the Chinese renminbi or yuan. (China’s currency is named the renminbi. The units of the renminbi are the fen, jiao, and yuan. It takes 10 fen to make a jiao and 10 jiao make a yuan. It’s as if the U.S. currency was named the dollar, but its units were called the George, the Alexander, and the Benjamin.) But that threat, while acknowledged as real, has always seemed very, very distant.

Well, I think it’s time to at least take one of those “very”s off the timeline. China is moving more quickly than expected to turn its currency into a true global alternative. It still remains to be seen if the Beijing government can fully bring itself to give up the kind of control over its currency that would be necessary to turn the renminbi into a real alternative to the dollar. China’s economic policies are so grounded in the government’s ability to control not just the exchange rate but the flow of its currency in and out of the country that the renminbi may never gain the currency market share that China’s economy and reserves could command. But the global financial crisis—and the damage suffered by the euro, which had looked like a true alternative to the dollar before the euro debt crisis—have pushed Beijing into action faster than projected even just one or two years ago.

Any real challenge to the dollar from the renminbi isn’t going to come tomorrow, but I don’t think investors should take the long-term supremacy of the dollar for granted. The likelihood of slippage in the dollar’s global role has implications for global stock and bond markets, for U.S. interest rates, and for U.S. economic growth rates that you should at least consider in formulating any long-term investment plan.

The latest move—announced just last week and planned to take effect in the third quarter of the year—is to me a bombshell that indicates just how surprisingly fast the currency game is changing for the renminbi. (And it even suggests a few stocks you might want to consider for your portfolio to take advantage of the long-term currency trend.)

What happened last week? Read more

Yum! Brands seems to have fixed its U.S. growth problem (it was called Taco Bell)

Yum! Brands (YUM) just can’t seem to get its two big growth engines, China and the United States, revving at the same time. Still yesterday’s earnings report shows good progress in getting growth going again at the company’s U.S. operations, especially the long-lagging Taco Bell franchise. Growth in China slowed with the Chinese economy but if you believe, as I do, that China’s growth rate is likely to pick up in the second half of the year, then that’s a problem for Yum! Brands that will fix itself.

For the first quarter earnings climbed to 76 cents a share (excluding one-time items.) That was 3 cents a share above Wall Street projections and a 40.7% increase from the first quarter of 2011. Revenue climbed 13% to $2.74 billion. Wall Street had been expecting revenue of $2.71 billion. First quarter 2011 revenue was $2.43 billion.

The big story was the 5% increase in same store sales in the United States led by the beginnings of a turnaround at the company’s Taco Bell franchise. Read more

China’s economy grew at just an 8.1% rate in the first quarter–but traders in Shanghai saw that as modestly good news

China’s economy grew at just an 8.1% annual rate in the first quarter, the National Bureau of Statistics announced today in Beijing. That was a big deceleration from the 8.9% annual growth in the fourth quarter of 2011 and worse than the 8.4% growth rate predicted by economists surveyed by Bloomberg.

Bad news? Certainly talking heads in the U.S. and Europe seem to think so. They’re attributing today’s decline in U.S. and European stocks to this news of slower than expected growth in China. (New figures out this morning showing that Italian industrial production fell at a 6.8% annual rate in February compared to the 5.1% decline expected by economists might have something to do with the weakness in European markets. Hard to reduce your budget deficit when your economy keeps shrinking.)

Chinese stocks markets, though, don’t seem to agree. The Shanghai Composite Index did indeed pull back on the news, falling back to a 0.2% gain at 11:30 Shanghai time after advancing by as much as 0.5%. But the Shanghai market still finished up by 0.35% for the day. Hong Kong’s Hang Seng Index closed up 1.84%.

That may be because Chinese traders are thinking today the way that U.S. and European traders thought yesterday: bad economic news just increases the odds that central banks—in this case the People’s Bank of China—will intervene with a new program of monetary stimulus.

In the case of China traders didn’t have long to wait. Read more