A blog on Chinese economy & society

Posts Tagged ‘growth

Andy Xie: Inflation exported from the US will come back to haunt it

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In an interview on Bloomberg, Andy Xie explains how US stimulus is causing inflation in emerging markets and how this will be re-exported back to the US via higher commodity prices.

Stimulus is prescribed as a panacea for recession. In today’s global economy, it isn’t effective in the best of circumstances and is outright wrong for what ails the West now.

Trade and foreign direct investment total half of global gross domestic product. Multinational corporations drive both. They shop around the world for the lowest-cost production centers and ship goods to wherever the demand is. Demand and supply are dislocated. So when a government introduces stimulus, the initial increase in demand doesn’t necessarily boost local supply. More importantly, if multinationals decide to invest somewhere else, there wouldn’t be an increase in jobs to sustain the growth in demand beyond the stimulus.

Before you scream traitors, please bear in mind it’s only natural that capital seeks growth, real growth that comes from either productivity or population growth. And within the developed economies, both are in short supply. Japan’s stagnation is NOT due to any policy failure or “stimulus not big enough”, but rather because it has seen both peak productivity and declining population.

Just as water flows down, stimulus affects low-cost economies more, wherever it is initiated. As the West pours money into the global economy through large fiscal deficits or central banks expanding balance sheets, the emerging economies are drowning in excess liquidity. Everything is turning red-hot.

These words are so true. I have blogged about wage increases in all kind of places before.

However, he then went on to explain how unemployment will not be able to check this imported inflation, and here’s where I disagree with him. While I do believe in imported inflation for the matured economies, I don’t think the workers in these economies are in a position to bargain for wage increases. Instead, inflation will have a double whammy on the average Joes as their assets prices and wages keep falling while everyday living expenses increase. The only spin you can put on this nightmarish scenario is that being squeezed on both sides, the painful adjustment will be quicker, or as Xie put:

The West must wait for the Wangs and the Gandhis to become rich enough so that they demand Western wages and spend like the Smiths and Gonzalezes.

It is a long and painful process for the West. And there is no way around it.


Written by Cindy Luk

August 19, 2010 at 3:14 am

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

China to ban 3rd mortgages in key cities

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The Shanghai and other Asian markets have been choppy lately, mainly on the prospect of the Chinese government backing off from regulating the property market. So much so that property sales doubled last week in Beijing. Some other cities have even racked up price increases.

To prove that it’s indeed serious about pricking the property bubble, the powerful China Banking Regulatory Commission is now banning 3rd mortgages in Beijing, Shanghai, Shenzhen, and Hangzhou all together. Taking out 3rd mortgages in other cities, while still legal for now, will require 60% down payment and almost 200bp over prime rate.

Of course the central government worries about economic slowdown, but failing to regulate the property market risk serious popular discontent. With most full year GDP forecasts still in the 9%+ range, the tightening measures seem to be in place, for now.

As a side note, the 21 Century Business Herald has a follow up story on the stress test that raised so many eyebrows. Assuming a 30% drop in housing prices and 108bp  interest rate hike, the property portfolios of  sample banks would have registered 2.2 percentage point increase in their bad debts, and taking 20% hit to pretax profit.

Yes, painful, and would have been excruciatingly more so with a 60% fall in housing prices, but the system will not collapse. With the hindsight, it seems that the 60% fall stress test was ordered partly as a way to advertise to all speculators that the government is indeed serious and won’t be taken hostage by the property market. However, I expect the economy to slow dramatically in Q4, so it might have to sing a different tune by then.

Written by Cindy Luk

August 6, 2010 at 1:56 am

Sparring of words over the RMB

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All focus has been on the “unusually uncertain” comment by Bernanke, though the hearing touched on Chinese currency issue as well. As reported by Reuters:

Under questioning by one of those lawmakers, Senator Sherrod Brown, Bernanke answered “yes” when asked if he stood by a statement he made several years ago calling China’s exchange-rate policy an effective subsidy.

When pressed how much China’s yuan was undervalued, Bernanke said: “The numbers that you see in the literature range between the 10 and 30 percent range.”

As November approaches, it’s only expected that the US will push harder on this front. But are they going to get their wish fulfilled? This one is from AFP:

“The exchange rate of the currency will decline if it becomes necessary to support exports,” Zhou [Qiren, a member of the central bank’s monetary policy committee] told the Asahi Shimbun [of Japan] in an interview, according to the paper’s English-language website.

I don’t know about you, but I think Chinese exports will weaken substantially in H2 as the US non-recovery recovery sputters and European austerity kicks in. China’s own stimulus is also losing steam, so much so that the banks are quietly relenting on strict lending restrictions.  If you think China’s going to become a good Samaritan in this environment, I’ve got a bridge to sell you.

Written by Cindy Luk

July 22, 2010 at 3:30 am

Stagflation in China

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A new research note from Wu Qing of the Development Research Center of the State Council, which is a key government think tank. I can’t find anything in English, so you’ll have to bear with my translation.

Chinese economy is moving from a temporary high growth, low inflation period towards stagflation. Economic data of May pretty much confirms this.

The inflation call is hardly surprising as many have noted that inflation is being transmitted downstream. What’s more interesting is the call of rapid slowdown of growth.

Since the major economies of Europe are not competitive in labor intensive products and the euro has depreciated against other currencies besides the RMB, Chinese exports to Europe may not suffer too much.

What could possibly impact Chinese exports is the rapidly escalating wages. …14 provinces and cites have hiked the minimum wage by an average of 20% this year, with 10 more to announce soon….

The IMF raised Chinese forecast GDP growth to 10% in April. However, Chinese economic growth is trending downwards, from 11.9% in Q1 to perhaps only 8% in Q4. Without new stimulus, growth may drop below 8% during the first two quarters of next year.

He sees inflation to peak in H2 this year but may lingers till early next year. Coupled with the expected slowdown in growth, China may see its first bout of stagflation in H1/2011.

Written by Cindy Luk

June 14, 2010 at 2:43 am

Posted in China, Macro

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Runaway inflation in China

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China is to release April CPI today and the consensus is about 2.7%. While this seems well within the 3% target, actual inflation on the ground is quite another story. One telltale sign is that PPI is forecast at a scary 6.7%. How long will it take for this to be transmitted downstream, or should we look for the factories bellying up instead?

The inflation story is so worrisome that even the PBoC has repeatedly cautioned against “heightened inflation expectation,” which it sees as a result of excess domestic and global liquidity, raging commodity prices, and rising wages and other domestic costs.

Since China’s growth relies heavily on investment, i.e. capital intensive, it is more sensitive to commodity price swings. The trade figures released yesterday largely confirmed this. Although China reported a surplus in April, as opposed to the slight deficit expected by many economists, it’s still down 87% YOY, despite decent recovery in global demand. The main culprit was surging imports, especially of commodities. Iron ore import was up 27% YOY, soya beans was up 13%…you get the picture. Considering the massive hikes in wages I blogged about earlier, unless China succeeds in reigning in its economy, commodity-induced inflation will eventually be transmitted to CPI, as early as May according to the pessimists.

And CPI may breach the 3% threshold even if  China succeeds in its endeavor. This is because China is mainly relying on policy measures to surgically cool down the property market, which is seen as the main problem, instead of truely mopping up liquidity. As such money squeezed out of property market simply flows to other sectors of the economy like farm produce. After a 40x (!!!) run up in price last year, garlic has gone from RMB9 per kilo in Q4/09 to RMB12.2 in April. 80% of farm produces monitored by the National Bureau of Statistics are seeing similar price increases and this is causing great consternation among the general public. Yes there are climate issues, but speculation definitely plays a significant part.

I had thought that China would hold off interest rate hike for much longer given the uncertainties in the global economy. I’m still of this belief but the Chinese government is now having rapidly diminishing room for maneuver, and might actually be forced into an unilateral hike in Q2, especially now that the ECB has entered into the competitive printing business as well.

From Bloomberg: Europe Rescue Lets China Tackle Asset Prices, PBOC Adviser Says

The European initiative will enable Chinese leaders to “focus more on containing risks in the domestic economy instead of worrying too much about the global risks,” said Li, appointed in March as one of three academic advisers to the People’s Bank of China.

He’s being nice. Helicopter Ben x2 means that China will be submerged in a tide of liquidity if it doesn’t act decisively.

Written by Cindy Luk

May 11, 2010 at 2:33 am

Can China cool its property market?

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While all eyes are on the Hellenic melodrama now, Chinese property companies have taken another beating today on the news of pending property tax. The Economic Observer reported that it will be applied in Chongqing, Beijing, and Shenzhen first, and expanded to Shanghai at a later date. The proposed new tax is effectively a transaction tax, and will likely to be progressive, with bigger homes paying higher rates.

China has already announced a series of measures aimed at tightening credit for 2nd and 3rd homes. With this new tax, it does appear that the government is serious about cooling the property market. However, will it succeed in this endeavor without hiking interest rate for the general economy? Andy Xie and Marc Faber both think the answer is no. By not targeting the underlying loose money supply, a hard landing for the Chinese property market, and the general economy, is seen as inevitable.

Both have their points, but I think we should take some other things into consideration as well. For one thing, the US “recovery” is anemic at best and there’s a not to be written off risk of 2nd dip. There’s also the unfortunate fact that Chinese GDP is 20%-40% property related, depending on to whom you listen to. Kicking it too hard will just send the entire economy into tailspin. More importantly, the recent measures do seem more effective than those China tried in 2007.

Loopholes in the previous rounds of control measures rendered them largely useless. Current efforts tend to pay more attention to the details. One possibility of getting around 1st/2nd/3rd home rule is to buy under the names of different members of the family. But unlike the last try, the current measure include all direct kins (spouse and underage children) in the calculation.

The proposed property tax is also important in taking away an incentive for the local governments to stonewall cooling measures. You see, Chinese local governments rely heavily on land transfer tax for revenue. The released figure is at 20% on average, but the real number should be much higher. Some economists estimated that as much as 50% of Beijing’s city revenue comes from land transfer tax. This gives the local government a natural bias towards more new development. Now, the new tax is a stamp duty, levied at each transaction. This tax can be overlook by homeowners, increase the cost for speculators tremendously, generate revenue for the local governments, and helps control new development at the high end, where most of the speculation is centered.

All these attentions to detail signaling that the current measures might actually have a chance at success. The new guy on the block, Li Keqiang, who is slated to succeed Wen Jiabao as premier when the later’s term ends in 2012, has taken over part of China’s economic portfolio that includes housing early this year. And unlike the current premier, who is well loved by the Chinese people but has worked in the central government most of his career, Li had plenty of local experiences, being the party boss of Henan and Liaoning, the equivalent of being governors of both Texas and Illinois. He knew how to get around central government edicts and he’s using this knowledge to other ends now.

Written by Cindy Luk

April 22, 2010 at 10:09 pm