EconoChina

A blog on Chinese economy & society

The property lobby is having the upper hand…for now

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Despite global weakness, Shanghai actually went up 2.1% today. This is NOT an indication of faith in the global recovery, or any recovery, but rather an expectation of loosening of governmental controls over the property market.

Due to popular backlashes against runaway housing prices, Chinese government launched a series of cooling measures in April, causing a sharp drop in turnover (Shanghai saw a fall of over 75% in turnover) but the impact on prices has been marginal so far. To date, the developers have refused to cut prices, buttressed by record profits last year. However, the war of attrition is gradually starting to bite, and an association representing the developers has plead with the central government in an open letter to loosen the controls.

Despite repeated government responses of “No”, you can’t blame the public for trusting the developers more, as previous cooling measures all ended in sharp policy reversal in the face of economic slowdown. However, I think the government will hold out for longer this time, at least for one more quarter.

  1. Chinese slowdown will not be apparent until end of Q3. There’s still a wee bit of time.
  2. Popular discontent with extra-orbital housing prices is threatening the CCP’s legitimacy. Contrary to western conception, even an authoritarian government has to deal with popular opinion if it wants to stay in power.
  3. Housing policy is believed to be part of the portfolio of Li Keqiang, slated to the China’s next premier. Failing in a key policy initiative will become a major stumbling block on his personal route to power.

As such, I believe housing policy will remain unchanged (i.e. tight money, anti-speculation) till the end of Q3. Since I expect rapid deterioration of the Chinese economy in Q4, the government might be forced to revert its stance then.

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Written by Cindy Luk

August 16, 2010 at 4:57 pm

Posted in China, Macro

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Battle lines hardened in the Chinese property market

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With the CBRC, China’s powerful banking regulator, banning 3rd mortgages and tightening other banking operations like securitization, it seems like the Chinese government, the central government at least, has hardened its resolve in pricking the property bubble.

However, the push back from the property lobby is forceful as well, especially now it seems that government is serious and the tightening measures might last a while. An economist from TsingHua University had calculated earlier on that if the tightening measures last for more than a year, more than 45% of Chinese property companies will encounter solvency problem.

A strong and faithful ally to the property lobby is China’s local governments. Yes, China is not all synchronized and monolithic, and there is indeed internal politics. Many ocal governments absolutely live on land sales. Due to the tightening measures, land sales had been way below budget during the first half of the year. In Hangzhou, a prosperous coastal city, the government sold only 22% of land budged for 2010. Shanghai, China’s money center, sold 29% of its annual plan during the same period.

So in order to secure more revenue, the local governments will definitely push for more loosening, especially now that the economy has weakened. One can only hope that the sane mandarins, who have been calling for “tolerance for a new lower growth rate”, will prevail, but somehow I’m not particularly optimistic.

Written by Cindy Luk

August 13, 2010 at 5:01 am

Is more money coming for the credit junkie?

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Even though imports slowed drastically and inflation has busted the 3% target, some people at least can breath a little easier. Yes, I’m talking about the credit junkies, and they are making their cries for more stimulus heard. From Bloomberg:

“Policy makers may have more room to sustain growth if needed,” said Sun Chi, a Hong Kong-based economist at Nomura, who previously worked for the U.S. Treasury in Beijing. “The lending quota could be loosened to sustain ongoing investment projects.”

This is largely based on expectation that inflation is peaking and, dare I say it, the economy is weakening.

On the first factor, I think it’s still too early to call inflation peaking. Food has been a major driver behind inflation this year, with no sign of abating so far. And there has been a persistent rumor lately that China has purchased 600k metric tonnes of rice from Vietnam, mind you, the nation imported only 174k metric tonnes in H1/2010. So this could point to a severe shortage of rice in the market. Is this rumor true? I don’t know. But it’s at least credible enough for a Vietnamese minister to come out to assure his people of food security.

Besides persistent worries on inflation, the asset bubble is another cause of concern for China. Considering that the bank regulator has ordered the banks to consolidate off-balance sheet items on Monday and clamp down on their credit card activities today, plus the PBoC has drained an estimated RMB187bn from the banking system with its open market operations in three weeks, the fix is not coming, at least not yet.

Written by Cindy Luk

August 12, 2010 at 6:25 am

Is the RMB going to depreciate?

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After reporting the highest amount of trade surplus in 18 months, and hearing an expected cacophony of calls for RMB appreciation, the spot Yuan rate has actually traded down. The dramatic fall in foreign currency loans undertaken by Chinese exporters has also indicated sharply lowered expectation for any appreciation, if at all.

According to the Century Weekly, foreign currency loans plummeted by USD5.6bn in July, on the heel of USD0.7bn and USD1.4bn declines in June and May, respectively.

Chinese exporters traditionally take out these loans to supplement their income if they expect the RMB to appreciate. The last time these loans fell was during the 7/2008-2/20009 period, at the height of the financial crisis. In fact the RMB was even expected to depreciate in late 2008.

Could this be a rerun?

Written by Cindy Luk

August 12, 2010 at 5:22 am

Posted in China, Macro

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Chinese savings rate to plummet?

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Speaking of collapsing Japanese savings rate, could the Chinese savings rate take the same dive in the not to distant future? BIS has come out with a new report that answers with a resounding yes.

Instead, we argue that tough corporate restructuring……, a marked Lewis-model transformation process…… and rapid ageing process have all played more important roles [in explaining high Chinese savings rate]. While such structural factors suggest that the Chinese saving rate will peak in the medium term, policies for job creation and a stronger social safety net would assist the transition to more balanced domestic demand.

The authors basically see several social and economic factors uniting to drive down Chinese savings rate. First and foremost should be the slowdown in long term economic growth coming from the restructuring of Chinese industries. As China gradually rebalance towards its domestic market, trend growth inevitably slips. You can’t save what you don’t have.

Another factor is simply having less people joining the workforce, having hit the so-called Lewis Inflection Point. The resent labor shortage and unrest in China is another facet of the same demographic change. With less people saving, of course the overall savings will decline.

The last kicker is the aging of the population. Due to the draconian one-child policy, China is aging rapidly. And Japan has already shown the world what happens when your retirees need to draw down on their savings….

If the authors are right, then it doesn’t matter which side of the “savings glut” theory you stand, ’cause it an’t gonna last very long.

What does this mean? Does it imply that China would have to pawn its reserves? Possibly, but I think the reserves would have been long gone by then to pay for the clean up of the bad debts in Chinese banks. It will certainly mean soaring interest rates in China, and across the globe.

Written by Cindy Luk

August 10, 2010 at 6:44 am

Posted in China, Macro

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China buying more JGB

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In an attempt to diversify from the USD, China bought more JGB in June.

China purchased a net 456.4 billion yen ($5.3 billion) of Japanese debt in June, following net buying of 735.2 billion yen in May that was the most in records dating from 2005, according to a report released today by the Ministry of Finance in Tokyo.

This is expected as the nation switched to a soft peg referencing to a basket of currencies.  Although Japan is the 4th largest export market of China, making up about 10% of its exports, the trade is more or less balanced. As such China’s trade surplus against Japan was only about USD20bn in 2009.

Since China has so far bought about USD20bn JGB this year, has it used up its quota then? Not likely. China has been under-weighting JGB in its reserves since 2006. If China does indeed intent to bring its currency to be trade weighted, there’ll be more JGB to buy, at the expense of US Treasuries naturally.

A side effect of buying more JGB is pushing up the Yen and Japanese Finance Minister Yoshihiko Noda commented yesterday that he’s watching the matter. But this may be a price that Japan has to paid, as it becomes increasingly relying on foreign lenders. Savings rate tumbled in  to a mere 2.2% in 2007 from 11.4% of a decade earlier, as economic stagnation and an aging population takes it toll.

Written by Cindy Luk

August 10, 2010 at 4:00 am

Wage hike…in N. Korea

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Something interesting from the S. Korean Yonhap news agency: pay raise for N. Korean workers.

True, 5% wage hike isn’t much. But I think it highlights the problem of raging inflation throughout the developing economies. Only a few days ago, garment workers in Bangladesh protested violently over wage demands, despite an 80% pay rise. With soaring food prices, there’s no way to avoid further rises in wages.

What does this mean? First of all, exporters may be less inclined to leave China for other countries, as wages are rising across the board. More importantly, exporters will demand higher prices to compensate their rising costs. While individual exporter may have minimal pricing power in the global market, developing countries on the whole do have the power and inflation will be exported to the developed economies in the form of higher prices for consumer products. Yes, all that mountains of printed money is coming home to roost in the developed economies.

What about all that invincible deflationary force? It will be there too, QE2 or not. It’s just that inflation and deflation will occupy different sectors of the matured economies. A scenario from hell.

Written by Cindy Luk

August 6, 2010 at 5:48 pm

Posted in Macro

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