Monday's Top 10 with NZ Mint: China extends and pretends by rolling capitalising loans to local govts; What Warren Buffett likes to invest in; 'Let them default'; Dilbert

Here's my Top 10 links from around the Internet at 3 pm in association with NZ Mint.

I welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.

I'll pop the extras into the comment stream. See all previous Top 10s here.

My favourite today is the Muppets singing a Tom Waits at #9.

1. Extend and pretend - Reuters reports the FT reporting (via paywall) that China has ordered its banks to extend loans to local authorities that are due to be repaid.

Remember, China unleashed a wave of lending through local state and council developers through late 2008 and early 2009 to build railways, apartment buildings, roads and airports to get the Chinese economy going again.

Most of these loans were capitalising interest loans (ie they didn't have to pay interest and had to be repaid in full with principal plus compounding interest when the loan was due, often within 5 years.)

These sorts of loans are a big favourite with property developers and were responsible for so many finance company blowups in New Zealand.

It meant the likes of Hanover, Strategic and Bridgecorp could truthfully (!#*?!) report they had few non-performing loans because the loans were simply rolled when they were due to be repaid...

Now China's banks are rolling the loans that are due to be repaid. Many of the loans were used to build projects that produce less returns than the interest costs. That's a definition of unproductive investment right there.

Here's Reuters:

China encouraged banks to lend to local governments for new projects during the financial crisis to buoy the economy, but its provinces and cities now face $1.7 trillion in debts. More than half those loans were scheduled to come due over the next three years, the newspaper said.

Banks had started extending maturities for local governments to avoid a wave of defaults, the paper said, citing bankers and analysts familiar with the matter. One person briefed on the plan said in some cases the maturities would be extended by as much as four years, it said.

2. 'Hollowed out economy' - Stuff's Fiona Rotheram reports expat Kiwi business titan Sir John Buchanan is surprisingly nationalisatic about ownership of NZ assets.

He argues the NZ economy has been hollowed out and restrictions should be put in place on those companies that took grants and subsidies and then sold out to foreigners. He didn't mention them, but 3D software company RightHemisphere (sold to SAP) and Navman (sold and then gutted) come to mind.

Here's Buchanan:

''To allow companies just to redomicile when they've had tax breaks, investment grants, training grants, whatever, if companies have benefited in the way then the nation states should be entitled to get those benefits back if someone wants to go elsewhere. You can't be too restrictive on one hand; on the other hand the New Zealand economy has been hollowed out at the top end.''

3. Is PIMCO too big to fail? - Reuters reports via CNBC that monster US bond fund PIMCO (who I link to often) may have become too big to fail.

U.S. regulators are now considering whether PIMCO should be deemed a "systemically important financial institution" - that is, too big to fail, and thus subject to tighter regulatory oversight. The concern: The juggernaut manages so much money for pension funds that it could hammer the economy if it ever went under. The firm has doubled in size to $1.36 trillion in assets since the collapse of Lehman Brothers in 2008.

The firm is lobbying hard to fend off the "systemically important" designation, according to regulatory disclosures. Like other financial firms, it also objects to impending rules that could make some of its derivatives trading more costly.

3. Buffett likes stocks - Here's an excerpt (via Fortune) from Warren Buffett's forthcoming annual letter to shareholders, which many see as a must-read.

He says bond investors have missed out since 1965 and that gold investors are investing in an asset that doesn't produce anything.

He prefers to buy things that make things. Yet bonds have outperformed stocks since the mid 1980s...

However, here's Buffett's thinking:

My own preference -- and you knew this was coming -- is our third category: investment in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment. Farms, real estate, and many businesses such as Coca-Cola (KO), IBM (IBM), and our own See's Candy meet that double-barreled test. Certain other companies -- think of our regulated utilities, for example -- fail it because inflation places heavy capital requirements on them. To earn more, their owners must invest more. Even so, these investments will remain superior to nonproductive or currency-based assets.

Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See's peanut brittle. In the future the U.S. population will move more goods, consume more food, and require more living space than it does now. People will forever exchange what they produce for what others produce.

4. Japan's economy shrank more than expected - Reuters reports on how Japanese GDP fell more than expected. Japan is the zombie economy that much of the west is now modeled on.

5. That's one way to do it - Reuters reports Some desperate American home owners who can't afford to pay the interest on their mortgages are painting their houses as advertising billboards...

First in first served...

In a residential neighborhood without heavy traffic, cars passing by the house slowed and drivers gawked at the vivid colors and a giant Brainiacs From Mars billboard.

Romeo Mendoza, the company's founder and CEO, told Reuters that his ultimate goal is to turn 1,000 homes across the United States into giant advertisements for his marketing firm. And in each case struggling homeowners will get their mortgage paid, for up to a year.

The Bundestag could still derail it, as public opinion in Germany is currently turning extremely nervous at the prospect of a futile €130bn programme. But my central expectation, however, is that the programme will happen. A period of calm will set in, but after a few months it will become clear the cuts in Greek wages and pensions will have worsened the depression. Europe’s policymakers will also find out that, in such a desolate environment, even a reduced target for privatisations is unrealistic.

This is not even the most pessimistic scenario. It still assumes that Greek politics remains broadly supportive. But with fresh strikes and ministerial resignations greeting the latest programme, do we really know whether Antonis Samaras, the leader of New Democracy and most likely winner in the April elections, will co-operate with the current strategy? I cannot see how this is going to work politically. For a new prime minister who contemplates a full term of four years, the temptation must be big to pull the plug and blame the mess on his predecessors. He will then have four years to rebuild the country from the rubble of a eurozone exit.

7. China hoarding Copper - Gordon Chang writes at Fortune that China's government is hoarding copper to ensure its trade surplus doesn't look quite so big. Eventually they'll stop buying. I hope the Australians are watching.

So what does Beijing’s politically motivated copper purchases mean for future demand?  On the one hand, they suggest that Chinese enterprises will continue buying the metal to dress up trade numbers in succeeding months.  At some point, however, Beijing will put an end to the years of stockpiling.  My guess is that will happen in the middle of this year, perhaps early fall.

Why?  First, by then the slowdown in the economy will become evident, and stockpiling will no longer be able to mask the fact that imports, a proxy for domestic consumption and growth, are tumbling.  Second, Chinese enterprises will run out of money to buy unneeded metal.  Soon, China, which accounts for about 40% of global demand for copper, will not be able to support world prices by adding to its hoard.

8. Currency wars - Bloomberg reports Chile's Finance Minister saying the central bank needs to intervene to sell the Chilean peso...

Yet our government seems relaxed about the astoundingly high level of the New Zealand dollar.

Chile’s central bank should consider renewing a dollar-buying program to curb appreciation of the peso, South America’s best performing currency in the past month, acting Finance Minister Julio Dittborn said.

“Obviously it’s a concern that the peso is strengthening so much,” he said in a telephone interview today. “The central bank should evaluate whether it is appropriate to intervene again or not like it’s done in previous years.”

9. Totally the Muppets sing Tom Waits' 'Gods Away On Business'. It made me laugh.

10. Totally Jon Stewart on the very rich and the very poor, and how Mitt Romney doesn't care about either.