Is more money coming for the credit junkie?

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.

Inflation data out

And they don’t look good.

April CPI was up 2.8% YOY (consensus at 2.7%), dangerously close to the 3% threshold set by the government. PPI up 6.8% YOY (vs. 6.7% forecast). The banks made RMB774bn new loans in April, a hefty 52% increase over March.

The plan was to tranquilize Chinese economy with policy measures and wait for the global liquidity tide to ebb. Well, this ain’t gonna happen. If anything, there’s more free money  now than ever.

Maybe it’s time to bite the bullet and hike interest rate. Either that, or people will soon start demonstrating ’cause they can’t afford vegetables.  The Tiananmen protest in 1989 started out as demonstration against raging inflation after all.

Runaway inflation in China

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.

Credit card bad debts soar in China

The focus of Chinese NPLs is on its overheating property market and the related bad debts incurred by developers and local governments. Consumers, unlike those in the US, are largely seen as prudent and safe. To a large extent this is still true. Consumption is still mostly paid with cash. Mortgages require 20%-30% down payment. However, there’s a sub-sector within the consumer market that is seeing increasing risk of NPLs, that of credit cards.

Credit cards as an industry is still new in a country that traditionally issued only debit cards. But credit card issuance has been exploding in recent years. Couple this with stone age risk management practices in Chinese banks and the new consumption habit of the post-reform generation, the result is catastrophic. According to a spokesman from Shenzhen Development Bank, 2009 credit card NPLs totaled RMB7.7bn (USD1.1bn) nationwide which may sound peanuts, but in fact was 226% (!) that of 2008.

No the Chinese banking system will not collapse, one of the tiny winy benefits of having real savings instead of just printing press. But a major banking crisis is looming and China’s formidable foreign reserve has already been earmarked for the eventual cleanup.

Taiwan announced end of QE

The central banker of Taiwan announced in the evening of official end to quantitative easing, aka money printing. The central bank plans to issue long-dated repo tomorrow to mop up excess liquidity. Interest rate is held constant for the time being.

Yes, the liquidity tide has turned, at least in Asia.