Chinese Economics Thread

[Norfolk]

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, by Katherine Ng, The Standard, Tuesday, February 19, 2008:

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China's January producer price index has jumped by its highest level in three years to 6.1 percent, as energy and food costs continue to rise after the transport disruptions caused by the harsh snowstorms.

Economists said the high rate of inflation is likely to be sustained, with January CPI - to be released today - expected to hit a 13-year high of 8 percent, up from December's 6.5 percent. This would force Beijing to maintain its tightening measures.

A little bit of news; important news, but not a lot of news. However, although some of the inflationary rise is due to New Year's festivities, there is longer-term inflationary pressure still at work, and that of course is what is of concern here. It could easily take six months, or rather a year, to truly gauge the strength and potential for persistence of the inflationary pressures, as well as their long-term impact upon the economy. External factors, such as the mortage bubble in the U.S. and bank losses and tax-fraud in Europe will not help any.

 

[Schumacher]

As far as short term influences, I think the pork situation plays a bigger part than any new yr festivities. For long term, the pressure is definitely there, just look at the world prices for anything from oil to agricultures like wheat & soy etc.
Read from financial sources that the USN's design for their new ships is factoring in oil price of US$225.
Being a financial source, there was no details on the types of ships or timeframe.

 

[Schumacher]

With recent posts abt inflation, China has chosen has interesting time to implement a long planned tax on fuel oil as part of its policy to reduce wastage in energy intensive sectors.


Title : China charges full consumption tax for fuel oil
By :
Date : 20 February 2008 1652 hrs (SST)
URL :

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SHANGHAI: China began charging the full consumption tax on fuel oil and three other oil products retroactively from January 1, tripling the previous level of taxation, state media reported Wednesday.

The government raised the consumption tax for fuel oil to 0.1 yuan (one US cent) per litre (0.26 gallon) after having collected only 30 per cent of the tax since it was first introduced in April 2006, the China Securities Journal said.

The paper cited a joint statement from the finance ministry and tax administration.

Naptha, a feedstock for producing high octane gasoline and other petrochemical products, lubricants and solvent oil, would also be charged at a full rate of 0.2 yuan per litre, according to the statement.

China started levying a consumption tax on the four oil products almost two years ago as part of efforts to encourage energy saving and curb development of highly polluting and resource-intensive sectors.

But the timing of the latest move came as a surprise to many analysts, who pointed out China is now experiencing its worst inflation in over 11 years.

Consumer prices were up 7.1 per cent in January from a year earlier.

"I cannot figure out what the intention of the policy makers is in selecting such a timing to charge the full tax rate," said Wang Jing, an analyst with Oriental Securities. - AFP/ac

 

[Norfolk]

Some news reports continuing in Schumacher's vein, and then diverging to issues that do not originate in China, but will certainly have an influence (at LexisNexis.com):

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, by Keith Bradsher, The International Herald Tribune, February 20, 2008:

The two economists and Stephen Green, the chief China economist at Standard Chartered Bank, said the Chinese government would continue to pursue austerity policies aimed at controlling inflation. Green predicted that Chinese authorities would raise interest rates four times in the second and third quarters of this year and said that another increase was ''imminent'' in the proportion of assets that banks are required to hold as reserves, which limits lending.


January's consumer price inflation pushed past the most recent high of 6.9 percent, set last November. Inflation in January was the highest since September 1996, when Chinese inflation was still declining after running at more than 20 percent in the mid-1990s.


But inflationary pressures now seem to be accelerating and spreading more broadly across the Chinese economy. Consumer prices jumped 1.2 percent just from December to January. And nonfood prices were up 1.5 percent from a year earlier in January.

Inflation is also spreading to services, with prices up 2.6 percent, a sign that labor costs are also starting to climb.

More at the link.
Steel firm in Russia expanding into China, by Guy Faulconbridge, Reuters, February 20, 2008:

''This investment by Evraz in the Chinese steel sector, our first in the Asia-Pacific region, is a critical strategic move to expand our global footprint,'' said the Evraz chairman and chief executive, Alexander Frolov. ''The Chinese steel market is the largest and fastest growing in the world.''


After the initial 10 percent stake in Delong, Evraz has a call option lasting for six months to buy an additional 32.08 percent from Best Decade, which also has a put option at 3.9459 dollars per share.


Evraz, the largest Russian steel maker by domestic volume, said Best Decade shareholders had agreed to later sell an additional 8.97 percent of Delong, which has a strong position in the Hebei Province.

When it comes to heavy industry in general, and steel in particular, significant news and deals catch my eye - more at the link.

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, by William L. Watts, MarketWatch, February 19, 2008:

Pressure on the dollar continued despite a solidly positive opening on Wall Street. Major stock indexes turned mixed in afternoon trading before closing down, sagging under a rise in crude-oil futures.


Crude surged nearly 5% Tuesday to close above the $100 a barrel mark for the first time ever, as concerns that the Organization of Petroleum Exporting Countries may cut production boosted prices.

More at the link. Watch this one in the coming months.

Inflationary pressures continue to build globally, even in the midst of economic softening in the U.s. and especially at the same time as major Western financial institutions continue to repeat bad old habits and then get ccaught out on them, adding insecurity to an already unstable econmic situation.

And finally, by itself, just to confirm from a Mainland source:

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by Katherine Ng, The Standard, 20 February, 2008:

Despite being slightly lower than average market expectations of 7.5 percent, last month's inflation, according to the National Bureau of Statistics, was the highest in more than 11 years, up from 6.5 percent in December.

The high price of food - which makes up one-third of the consumer basket - was still the main CPI driver.


Food prices which were affected by the recent snowstorms rose 18.2 percent year-on-year last month compared to the 1.5 percent increase in non-food prices. Rising factory-gate prices also appear to be fueling inflation. The January producer price index reached 6.1 percent.

 

[Schumacher]

China looking to invest in Japan's energy sector. The strategic & military aspects of this relates to the dispute in the East China Sea.
A possible way forward for the dispute may be a joint exploration with China holding a significant stake in the Japanese firm doing the exploration.

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China state fund may invest in Japanese energy

LONDON - CHINA'S sovereign wealth fund is poised to invest US$10 billion (S$14 billion) in Japan and is initially expected to set its sights on the energy sector, The Times newspaper reports.


Sun, Feb 24, 2008
The Straits Times
LONDON - CHINA'S sovereign wealth fund is poised to invest US$10 billion (S$14 billion) in Japan and is initially expected to set its sights on the energy sector, The Times newspaper reports.

Sources in the Japanese government told the British newspaper the China Investment Corporation (CIC) may be considering a 'sizeable stake' in one of the country's largest oil and gas companies, Inpex.

But the investment could be controversial as 'Inpex is among a handful of listed groups that are of critical strategic importance to Japan', said The Times.

Inpex, said the newspaper, is also expected to be Japan's 'national champion' as the country pushes to develop resources in the East China Sea.

A dispute over gas exploration rights in the East China Sea has been a sticking point in Sino- Japanese ties.

Analysts have speculated that the discussion of a possible CIC stake in Inpex might portend a 'friendship' investment ahead of the upcoming visit to Tokyo by Chinese President Hu Jintao.

The investment plans are understood to have been formed after a trip by CIC's senior management to Tokyo - the US$200 billion fund's first official visit to Japan since its creation in September last year.



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[Autumn Child]

Bad news for Chinese banks...

Credit tightening may hit bank loan ratios
Last Updated(Beijing Time):2008-02-22 11:24

Chinese banks could face higher bad loan ratios this year amid credit tightening, a research report said yesterday.

China's tightening monetary policies could weaken the dilution of bad loans as the country slows the growth of loans and sees special-mention loans deteriorating to non-performing loans for marginal borrowers, said Ryan Tsang, the senior director for financial institution ratings with Standard & Poor's.

The economic freedom that Chinese banks have enjoyed for the past six years will be lessened by the tight loan growth quotas, said Tsang.

With the tighter monetary policies, companies will find it more difficult to obtain finance and this might interfere with their expansion and possibly lead to a deterioration of their assets.

Banks are under the central bank's "window guidance" tighter lending quota as part of the country's tight monetary policy.

China said in December it had moved its "moderate" monetary policy to "tight" in 2008 to fight inflation.

The consumer price index, the main gauge of inflation, rose 7.1 percent in January, the fastest growth in more than 11 years.

"Lending in China has ballooned in recent years, ratcheting up credit risks," said Liao Qiang, a Standard & Poor's credit analyst. "In a still remote scenario, a large scale deterioration in loan quality could hurt ratings."

A large scale reform of the Agricultural Bank of China could bring down the bad loan ratio but excluding the ABC effect, the NPL is under some pressure, said Tsang.

ABC is the last of the state-owned banks to be reformed. The bank's bad loan ratio is reported to have increased from 23.55 percent in 2006 to 23.64 percent at the end of 2007.

Deputy Finance Minister Li Yong was reported earlier as saying that one third of the China Investment Corp's US$200 billion start-up capital, or US$66 billion, will be injected into China Development Bank and Agricultural Bank for their restructure.

The average bad loan ratio at banks in China dropped from 7.09 percent to 6.17 percent last year, said the China Banking Regulatory Commission.

China is revamping its state-owned banks through bail-outs and helping them shed bad loans.

Industrial & Commercial Bank of China, Bank of China and China Construction Bank have received US$60 billion.

"Domestic credit risks outweigh subprime woes for Chinese banks," Standard & Poor's report said.






Source:Shanghai Daily
Related articles

 

[Autumn Child]

China to be world's largest economy by 2025
Last Updated(Beijing Time):2008-03-06 09:26

China could overtake the United States by 2025 to be the world's largest economy and is anticipated to grow to about 130% the size of the United States by 2050, said Pricewaterhouse Coopers LLP.

Its head of macroeconomics John Hawksworth said the global centre of economic gravity was already shifting to China, India and other large emerging economies and this process had a lot further to run.

Apart from China, he said the fastest growing economy could be Vietnam, with a potential growth rate of almost 10% per annum in real dollar terms that could push it to about 70% of the UK economy by 2050.

In the report, entitled "The World in 2050: Beyond the BRICs (Brazil, Russia, India and China)", PwC said it was still upbeat about China, India, Brazil, Mexico, Russia, Indonesia and Turkey.

Sooner than I expected...

 

[Norfolk]

A couple of news items:

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, City Bulletin, The Daily Telegraph, Monday, March 10, 2008 (via LexisNexis News):

China's inflation appears to have hit a new 11-year high of 8.3pc last month on the back of soaring food prices, making an interest rate increase more likely.

A news blurb, stating little more than this, other than to say that food prices, which rose 22% over last years' level, was to blame.

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, by Katherine Ng, The Standard, Monday, March 10, 2008:

Protectionism was behind rising fears overseas over the set-up of China's sovereign wealth fund, the vice general manager of China Investment Corp, Jesse Wong Jianxi, told The Standard.

Wang for the first time addressed the latest criticisms facing the sovereign fund of the world's fastest-growing economy. CIC manages the mainland's US$200 billion (HK$1.56 trillion) sovereign wealth fund.

He said the mainland's fund is very similar to other foreign public pension funds or college pension funds, adopting a diversified, long-term and passive investment strategy.

More at the link. Sovereign Wealth Funds are quite controversial these days, but as The Standard's article relates, the first $8 billion dollar interest payment will be almost entirely met by the %7.8 billion dollars in dividends generated by the Funds investments. It is certainly a concern for other Governments when large SWF's are present in strength in their economies; after all, an SWF is an instrument of the policy of a foreign Government. That said, given the behaviour of any number of private financial institutions and large corporations and the serious economic consequences of their mistakes and malfeasances, it would seem that the scrutiny that is attaching to SWFs should be applied in at least similar measure to known problem areas. Economics may be global these days, but politics is still quite local when it finds itself at the service of particular interests.

 

[SampanViking]

China could overtake the United States by 2025 to be the world's largest economy and is anticipated to grow to about 130% the size of the United States by 2050, said Pricewaterhouse Coopers LLP.

Those figures do not make a huge amount of sense to me.

Assuming that the US maintains an average growth rate of about 1.5% pa, then we have China making about 10% pa and on target to overtake the US bu 2025. For China then to only grow only another 30% in the subsequent 25 years means a sudden plummit in the growth rate to between 2 and 3% per annum.

Surely the article means being 130% bigger than Americas, which would mean a rather more believable average growth rate of 5% per annum?

 

[Norfolk]

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, by Richard Spencer, The Daily Telegraph, Tuesday, March 11, 2008 (via LexisNexis News):

CHINA'S trade surplus fell by more than half last month in a dramatic indication that the world's fastest growing economy is not immune to economic turmoil in the West.

The surplus for February was $8.56bn ( pounds 4.24bn), down from $19.5bn in January and a drop of 63pc from $23.8bn in February last year.

January and February often see wild swings in Chinese economic data, because of changes in the date of the lunar new year holiday, when factories close for at least two weeks. This year Chinese manufacturing heartlands were also badly affected by a prolonged freeze, with snow bringing down electricity lines and preventing coal being delivered to power stations.

Nevertheless, analysts suggested that the big rises in the surplus seen in the past three years, which sent GDP growth to 11.4pc in 2007 and caused friction with China's major trading partners, America and the European Union, may now be peaking.

More at the link. China is in a bit of a quandary here, as the economy continues to expand rapidly, while both consumption and price inflation (especially for food, fuel, and other vital commodities) rise quickly as well, placing the economic system under increasing strain. The earnings from foreign exports and investments, whilst modest in comparison to the domestic economy, provide a modest margin of additional "safety" against internal domestic economic pressures; as foreign exports decline in response to deteriorating economic conditions elsewhere, and imports of vital commodities (especially) increase in both volume and price, this "safety" margin shrinks.

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, by Gita Dhungana, The Standard, Tuesday, March 11, 2008:

"The slowdown in the US economy - and its ripple effect on the global economy - is starting to have an impact on China's exports," said Lehman Brothers economist Mingchun Sun.

China's export growth slowed to 6.5 percent year on year last month, from 26.6 percent in January, narrowing its trade surplus for the month to US$8.56 billion (HK$66.77 billion), the customs administration said yesterday.

The trade surplus in January was S$19.5 billion.

More at the link. Just to add to the previous article from another perspective.

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, by Rupa Damodaran, New Straits Times, Tuesday, March 11, 2008 (via LexisNexis News):

CHINA is expected to continue its strong economic growth after the summer Olympics in August, led by expansion in various global events that it will be hosting, says the United Nations (UN) coordinator Khalid Malik.

"Investments for the games have been massive and affect the whole country. Already, the country is gearing up for the World Expo in 2010, while every other day there is an event going on in China," he told a media conference in Kuala Lumpur yesterday.

Even if the country's growth turns slower after the Olympics as expected by some quarters, it will not impact the strength of the economy.

China has been trying to slow its growth over the past two years but still chalked a 11.7 per cent growth last year.

With an anticipated global slowdown and weaker external demand, China is expected to see 10 per cent growth this year.

More at the link. All is not gloom and doom, as this article reports that a frenetic 10% growth rate is still on the table for China this year, despite an apparent decline in exports. There are some countries that would love to have a "Problem" like this. Add to that the potential future earnings afforded by Sovereign Wealth Funds (drawing upon China's stupendous foreign reserves), the country is positioned to turn itself into the financial nexis of Asia, if not the world.