The Fantastic Business that is China Commercial Credit Inc. (CCCR)?

I've been pretty negative on China's financial system. Bottom-line: a large shadow-banking system financing a fixed asset investment bubble. Pivot Capital's 2011 report is applicable here for reference. Now, imagine my surprise when a China-based micro-lender has an IPO this year! 

 China Commercial Credit, Inc.

China Commercial Credit, Inc. (CCCR) is a microcredit company which "provides direct loans and loan guarantee services to small-to-medium sized businesses (“SMEs”), farmers and individuals in the city of Wujiang, Jiangsu Province, China" (Prospectus). Its niche is to fill the gap between large, state-run banks and the underground lenders (subprime-like) which charge exorbitant fees.

My inherent negative bias notwithstanding, There is certainly an argument to be made for this business.  In a country run by relationships ("guanxi"), there may very well be profitable lending opportunities outside the state. After all, subprime lending in the United States existed for decades before the 2007 crash and did provide necessary cash for consumers at relatively low rates. The difference here is that this is commercial lending vs. residential lending. Specifically, CCCR is based in Wujiang City, one of the most vibrant economic areas in China. Much of industry is manufacturing/industrial/technology related (Source). In other words, CCCR is lending to China's best microcosm of China's industrial revolution.

However, why is a Chinese company with only domestic (even local) operations raising money in the United States? The official reason:

a public offering on the Chinese exchanges can be an uncertain and lengthy process for private Chinese companies, especially for microcredit companies

CCCR took advantage of the JOBS act to file as an "emerging growth" company and report less financial information and have a a longer time to fulfill SEC regulatory requirements. But wait - is the company really implying that is easier to go public in the USA vs. Shanghai - that it is more difficult for a Chinese company to list in China than in the USA? It passes all the requirements on the Shanghai exchange, both in terms of profitability and size (60mm usd in equity vs 30mm rmb required).

Furthermore, Mr. Huichun Qin (CEO and Chairman of the Board) was the Vice President of the Wujiang branch of the PBOC (People's Bank of China), the central bank of China. Given that China itself prefers domestic companies to list locally, why aren't such credentials enough to push through a sale?  Especially given CCCR's 7%+ return on assets (pg 39 of prospectus). This is a for bank, mind you. Not some high tech/asset-light company. Now, this is a microcredit lending and so there must be some inefficiencies to profit from. But 7%? Vs. 1-2% of a well-run bank such WFC or even regionals such SunTrust (STI) or even Ag Bank (HKG:1288). 

Something different is happening here - loan losses have ballooned from less than 30,000 to 488,000 usd. CCCR does both lending as well as a guarantee business. The latter in particular is worth investigating more.

This is far from a complete picture, but from this I know that 1) more investigation is necessary and that 2) I remain negatively-biased on this company. I don't consider this a short candidate because of the small float/marketcap (<100mm). Nonetheless, it may be useful to follow this as the modern incarnation of China credit.

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More generally, I've been tied up with portfolio management issues recently (hence the lack of updates). However, there are still many things that are worth writing about recently and I will do so - notably regarding MSRs and Home Loan Servicing Solutions (a position I hold on the long side).

Gold Shortage?

Given the new gold backwardation, bulls have returned back in force (1, 2, 3) to explain how this will push gold higher. But does backwardation correlate with flat price?

Compared with flat price (front month), there doesn't seem to be an easy correlation. The last breakout for gold prices in 2006 happened when there was no backwardation. More generally, a recent paper from the IMF shows that:

"... we find that the forecast from the futures market is hard to beat. We find that the forecasting performance of futures does not depend on the slope of the futures curve"

This means that all else being equal, 1) the current futures price is the best predictor of prices, and 2) the slope of the curve has little to do with futures prices. As a result, are the gold bulls falling into another example of confirmation bias? If supply is so constrained, why are prices not at all time highs?

From articles such as this, one would think that the world was scrambling for gold. With aggregate Jewelery demand up 50%+ yoy, central banks continuing their buying and supply constrained (per the bulls' own argument), why did gld fall nearly 25% in Q2? If the entire world is buying and the price falls, what happens if supply/demand moderates?

It seems like rather than supply and demand, one should be focusing on price reactions to supply and demand. After, commodities (esp. gold) are often purely psychological instruments.


Disclosure: I am short GDX