Chinese Economics Thread

[Norfolk]

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, by Benjamin Scent, Gita Dhungana and agencies, The Standard, Friday, March 14, 2008:

The US dollar sank below 100 yen for the first time in 12 years yesterday, dragging down every major Asian stock market, as the euphoria over the US Federal Reserve's liquidity injection faded and the implosion of a Carlyle Group bond fund reminded investors that the global credit crunch is not over.

The weak greenback powered US gold futures above the historic US$1,000 (HK$7,800) mark in New York morning trade, while US crude oil futures rose more than US$1 to a record near US$111 a barrel.

"We are entering dollar crisis mode," said BTM-UFJ currency economist Derek Halpenny. "There is a complete loss of confidence."

Mizuho Research Institute senior economist Yasuo Yamamoto said the dollar's downward trend is "irreversible" for now.

More at the link. The US Dollar continues a marked decline in value whilst crude oil futures are approaching $111 per barrel. The effects upon global markets and above all, upon the costs of basic food and fuel staples, actual and potential, are unsettling, to say the least. Global pain is increasingly being felt, whether you live in London or Tsingtao, Sichuan Province or Michigan, and for many of the same sorts of reasons.

 

[Autumn Child]

More about the sliding USD.

The US economy lost the title of "world's biggest" to the euro zone this week as the value of the dollar slumped in currency markets.

Taking the gross domestic product of both economies in 2007, the combined GDP of the 15 countries which use the euro overtook that of the United States when the European currency surged to a record high of more than $1.56 per euro.

"The curious outcome of breaching this latest milestone is that the size of the euro zone's annual output has now exceeded that of the US," the economics department of Goldman Sachs, the Wall Street investment bank, said in a note to clients.

Taking official estimates of 2007 GDP -- $13,843,800 billion for the United States and 8,847,889.1 billion euros for the euro zone -- the economy of the latter passed the United States once converted into dollars, shortly after the euro topped $1.56.

The dollar sank to $1.5688 per euro late in European trading hours on Friday, at which rate the euro zone's 2007 GDP equates to $13,880,568.4 billion.

The 2007 GDP estimates are as published by the US Commerce Department's Bureau of Economic Analysis and provided to Reuters on request for the euro zone by Eurostat, the European Union's statistics office.

 

[Norfolk]

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", The Economist, U.S. Edition, March 15, 2008 (via LexisNexis News):

Manufacturers struggle in southern China's industrial belt

AT FIRST, the managers of the factories spread throughout Guangdong province thought the lack of returning workers after the Chinese New Year break in early February was merely because they had been delayed by the huge blizzard that disrupted rail and power lines, and left roads impassable. But now that the mess has now been cleaned up, it is clear that the vast annual migration of around 20m people that has fuelled the manufacturing boom in southern China over the past two decades is beginning to diminish.

The Guangdong Labour Ministry reckons 11% of the workers did not return after the holiday; other estimates are as high as 30%. Whatever the precise number, many factories are reeling. Wages were already rising; now they will surely go up further, adding to surging costs for credit, materials, energy, environmental compliance and health care. Meanwhile, revenues are falling due to slowing demand from America and a reduction, following pressure from other countries, in China's complex system of export subsidies.

More at the link. This is a new problem for the Chinese economy, one in which Government regulations, quite rightly, mitigate some of the worst abuses of workers' rights at least in some places, and yet cause some manufacturers to seek to relocate where such abuses can be gotten away with. Couple this to the rising standard of living in China and the attendent rise in expectations, and some manufacturers that depended upon the cheapest possible labour are now running into labour shortages. This is in fact a sign of economic progress, though the decline in exports due to deteriorating global demand complicates this.

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", by Teh Hooi Ling, The Business Times (Singapore), Saturday, March 15, 2008 (via LexisNexis News):

INVESTORS who are still holding on to their stocks, especially China stocks, would know how severe a drubbing the stocks have suffered in the past five-and-a-half months.

But given the revamping of the numerous indices - and that now they are not widely available - investors may not know to what extent the various groups of stocks have fallen as a whole.

Here are the numbers - and they are not pretty.

Between Oct 1, 2007 and yesterday, the Straits Times Index has fallen 24.4 per cent. The UOB Catalist Index, used as a proxy for small-cap stocks, has plunged 42.2 per cent.

But the stocks hammered most are China stocks. The Prime Partners China Index has melted to the tune of 56 per cent.

More at the link. As Chinese industrial competiveness with foreign industry suffers modest declines in the face of rising commodity prices abroad and rising labour and manufacturing costs at home as well as interest rate increases by the Government to control inflation, not unnaturally, Chinese stocks lose some of their attractiveness. China is beginning to shift from industry that specializes in relatively inexpensive items to more advanced and "value-added" items; this transition will take time and will cause pain.

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", Staff Reporter, The Standard, Friday, March 14, 2008:

China Development Bank, one of the mainland's three policy lenders, said it will introduce two more domestic strategic investors before its commercialization and listing.

"Our capital has been doubled to US$40 billion (HK$312 billion)," vice governor Liu Kegu said yesterday on the sidelines of the Chinese People's Political Consultative Conference.

Just a little more at the link. This is good news, and bodes well for strategic investment and economic development within China itself.

 

[Norfolk]

Some more news (via LexisNexis News):

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", The Economist, U.S. Edition, March 22, 2008:

Amid nervousness in global markets about risky investments, over-leverage and slowing growth, even China's once impregnable stockmarkets seem to be hitting reality with a bump. There is as yet none of the panic that has afflicted Wall Street. But China's stockmarkets are off by about 30% this year (see chart)—by comparison, the S&P 500 is down by 13%.

China appears to be suffering from a home-grown liquidity squeeze that is not so different from the one afflicting the West. As inflation pushes higher, the Chinese government has curbed lending by the banks. On March 18th the reserve ratio for Chinese banks was raised to 15.5%, the latest in a string of tightening measures.

More at the link.

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", by Natalie Chiu and Maria Chan, South China Morning Post, Thursday, March 20, 2008:

China Merchants Bank is targeting domestic loan growth of just 11 per cent this year, down from 19 per cent last year, to adapt to the state's tightening monetary policy.

The Shenzhen-based lender, the mainland's sixth largest, expects total customer loans to reach 750 billion yuan ($823HK.95 billion) this year, compared with 673 billion yuan last year. Included in the category are corporate loans, retail loans and discounted bills.

Meanwhile, the increase in customer deposits is estimated to slow to 5.98 per cent from 21.94 per cent a year earlier, according to management.

"As we progress from a larger base and given the tightened monetary conditions, loan growth will be much lower," said Qin Xiao, president of China Merchants Bank. "Fluctuations in the capital market will also affect our fee-based business."

More at the link.

The Standard's take on the same matter:

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", by Katherine Ng, Thursday, March 20, 2008:

China Merchants Bank (3968), the mainland's sixth-largest lender, said loan and deposit growth will decline to 11 percent and 6 percent this year, amid tighter monetary policy and the worsening international economic environment.

Its better-than-expected 2007 result and higher net interest margin growth surprised analysts - and most revised upwards their 2008 earnings forecasts for the Shenzhen lender - although president Ma Huihua admitted there could be stiff challenges this year including more nonperforming loans.
"Certain enterprises may have credit risks and incurring possible increase in nonperforming loans, we will adjust our portfolio accordingly," Ma said yesterday.

More at the link. Merchant's Bank is still performing quite well, and certainly better than many of its American and Eurpean counterparts. Nevertheless, the conditions in those latter places are having an effect within China, which is experiencing much the same global inflationary pressures on food, fuel, and other basic commodity prices.

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, by Gita Dhungana and Stephanie Tong, The Standard, Thursday, March 20, 2008:

Two of the city's major lenders, Hongkong and Shanghai Banking Corp, and Hang Seng Bank (0011), will offer an interest rate of 0.01 percent for deposits of more than HK$5,000.

This means that, starting from today, their customers will receive HK$1 interest a year on a deposit of HK$10,000 or HK$100 on HK$1 million.

This will not make people happy, to say the least, and will only add to growing popular frustrations with rising retail prices. Savings may end up coming under some serious pressure down the road.

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, by Benjamin Scent and Kathy Wang, The Standard, Thursday, March 20, 2008:

PetroChina (0857) reported 2007 net profit rose 2.4 percent to 145.63 billion yuan (HK$160.2 billion), missing earnings expectations for the first time in its history after losses in its refining operations and ballooning special taxes almost wiped out the benefits of higher crude-oil prices.

"Although PetroChina has just unveiled Asia's largest profit, the higher-than-expected production costs and refining losses have led to below- consensus growth," CLSA analyst Gordon Kwan said.

"The stock is vulnerable to bouts of post-results profit takings."

Turnover rose 21.2 percent to 835.037 billion yuan.

This is a bit of a surprise, given the red-hot market (and prices) for petroleum. The article mentions that Government controls that regulate natural gas prices, for one, and "windfall" levies on oil prices, cut into earnings.

 

[Norfolk]

A news blurb via LexisNexis News:

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", The Toronto Star, March 22, 2008:

China's foreign exchange reserves jumped $57.3 billion (U.S.) in February to $1.6471 trillion, almost matching January's surprising leap of $61.6 billion, sources familiar with the data said yesterday.

The leap will fan talk of speculative hot money coming into China; the increase is more than three times greater than February's combined inflows from the trade surplus and foreign direct investment. These totalled $8.6 billion and $6.9 billion, respectively.

That China's foreign reserves continue to accumulate at a rate that seems to defy expectations is extraordinary.

 

[Norfolk]

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", China Retail News, March 24, 2008:

According to just-released February statistics from China's National Bureau of Statistics, the consumer price index was up by 8.7 percent over the same month last year.

Of the total, urban and rural areas rose 8.5 and 9.2 percent respectively. The price of foodstuff, non-foodstuff, consumable and services expanded 23.3, 1.6, 10.9, and 2.0 percent respectively. CPI made 2.6 percent growth over that in January of 2008. In terms of different categories, the price of foodstuff increased 23.3 percent year-on-year.

More at the link.

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" by Michael Pettis, SinaBlog, 21 March, 2008:

The trade surplus contributed $25 billion and FDI contributed $11 billion to reserve growth in January. In February they contributed only $8.6 billion and $6.9 billion, respectively. So even with sharply lower contributions from trade and FDI ($16 billion versus January’s $36 billion), reserve growth in February has been extremely high. Let’s assume that valuation mark-ups and interest income added around $10 billion. That still leaves us with over $30 billion to explain. It can’t all be hot money, of course, but all the circumstantial evidence seems to suggest that hot money is accelerating. No big surprise, perhaps, given the pace of RMB acceleration.

I am not sure what exactly is going on to account for all this inflow, but it seems that with reserve growth accelerating, and with it the monetary expansion that occurs as the PBoC is forced to buy the reserves, it is going to be almost impossible to rein in the overheating and inflation that plague the economy. I am afraid that for all the talk and action, things are getting worse, not better.

If this level of reserve growth adversely impacts the fight against inflation, which I expect it will, a recent PBoC survey bodes ill. A 50-city quarterly survey conducted by the PBOC found that in the first quarter, 49.2% of the 20,000 respondents said prices had become “intolerable”. According to the results, released yesterday, the proportion was a record high, up from 25.9% in the first quarter of 2007.

More at the link. Michael Pettis, from his academic post at Beijing University, has chronicled recent economic events in China, and offers some interesting perspectives - and on the ground info - from time to time. He has been chasing the inflation angle for a little while now, and some of his older blog posts may be worthwhile reading.

 

[SampanViking]

The short answer is quite incredible!

Investors in China and the region see the Chinese domestic economy as fundamentally stable and therefore the RMB as a more secure currency than the Dollar!!

Sounds crazy doesn't it, but last weeks Fed Auctions were a disaster and all the pundits are talking about a global race to the bottom.

No doubts though the Dollars Reserve currency status appears to be unravelling right before our eyes and everybody is looking for a new safe haven.

Interesting times!

 

[Norfolk]

The short answer is quite incredible!

Investors in China and the region see the Chinese domestic economy as fundamentally stable and therefore the RMB as a more secure currency than the Dollar!!

Sounds crazy doesn't it, but last weeks Fed Auctions were a disaster and all the pundits are talking about a global race to the bottom.

No doubts though the Dollars Reserve currency status appears to be unravelling right before our eyes and everybody is looking for a new safe haven.

Interesting times!

That's for sure! And the Euro just doesn't have the stability that folks are looking for, nor the Yen because it lacks long-term space to really grow, so to speak. As such, it has to be the RMB, which has lots of room to grow, is "comparatively" stable, and is rooted in a dynamic economy.

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", The International Herald Tribune, Monday, March 24, 2008 (via LexisNexis News):

The top Chinese securities regulator has issued a set of proposed rules for a long-planned Nasdaq-style domestic stock exchange to fund business start-ups.

The rules, published in major securities newspapers Saturday to solicit public opinion, take China one step closer to starting the new exchange, which has long been delayed partly because of the burst of the Internet bubble in 2000.

The exchange, to be located in the southern city of Shenzhen, will provide a new outlet for private equity investors, who have poured billions of dollars into China, which has the world's fastest-growing major economy.

More at the link. This is potentially good news - provided that the stock market doesn't turn turtle in the meantime.

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", by Mandy Lo, The Standard, Tuesday, March 25, 2008:

The market value of shares held by the National Council for Social Security Fund has fallen by about 20 percent due to the continuous slide of stock prices in China.

According to the NCSSF's report, it became a top 10 shareholder in 47 listed companies, holding about 334.49 million shares, excluding those in moratorium, up 7.35 percent compared to 311.58 million in the previous quarter.

However, in the past three months, the face value of those holdings slumped to 6.478 billion yuan (HK$7.143 billion), down 16.88 percent from 7.794 billion yuan at the end of 2007.

More at the link. This is unsettling, and one may wonder if a stock market bubble may be about to reoccur a la the late 90's, throwing a fairly substantial monkey into the wrench in the process. More of this sort of thing might derail the anticipated new Shenzhen Exchange.

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", by Langi Chiang (Reuters), The International Herald Tribune, Monday, March 24, 2008:

Scores of South Korean-owned factories are closing surreptitiously in eastern China as their owners flee rising costs, leaving behind embittered workers like Li Hua.

Li and more than 200 colleagues have been fighting for a year to get the six weeks' wages they were owed when the owner of the toy factory where they worked fled during the 2007 Lunar New Year holidays.

''I went to work on the first day after Spring Festival, only to be told that the Korean boss had run away and the factory had been closed,'' Li, a 30-year-old mother of a little boy, recalled.

Her case is not a rarity in Qingdao, a major seaport and industrial city in eastern China that sits across the Yellow Sea from South Korea. A two-hour flight from Seoul and home to about 100,000 South Koreans, the city is a hub for South Korean factories benefiting from cheap labor.

But lately, a growing number of South Korean factories have abruptly closed down and the South Korean owners have disappeared as a slew of policies, including rising labor costs and an end to tax breaks, bite into their profit margins.

More at the link. This is a growing problem, and even as the economy improves and the Government seeks to mitigate the worst abuses, the very success of said in turn make China less competitive with, and attractive to, foreign interests. As the Chinese economy begins to turn towards more value-added goods and services, some of this loss of competitiveness in the cheap-goods markets will be
compensated for, but it will take time, and a great deal of domestic investment and development. In the meantime, more of this sort of "fly-by-night" investment will reveal itself.

 

[Norfolk]

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", by Gita Dhungana and agencies, The Standard, Wednesday, March 26, 2008:

The Hang Seng Index rose 1,356.30 points or 6.43 percent - its biggest daily gain in percentage terms in two months. The index finished at 22,464.52. The blue-chip measure had lost more than 5 percent over the past week.

Turnover on the main board was relatively strong at HK$100.6 billion.

"It is too early to say that it is time for bottom-fishing, but a lot of stocks look cheaper now in terms of valuations," said William Fong, fund manager of Asian equities at Baring Asset Management.

More at the link. We'll see soon enough if US Federal Reserve interest rate cuts can keep this going.

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", byKatherine Ng, The Standard, WednesdayMarch 26, 2008:

Bank of China (3988), a top three lender, yesterday said it has cut its subprime portfolio to less than US$5 billion (HK$39 billion), from US$7.947 billion at the end of September, after selling all its collateralized debt obligations, and has ceased investing in any US subprime asset-backed securities.

The Beijing lender, which was the most heavily involved mainland bank in subprime woes, said it has prepared US$1.3 billion to set aside as provision for possible further losses due to US subprime investment, said its president, Li Lihui, in Hong Kong.

"We have factored in the latest market changes in the subprime market during the past two months, and are keeping an additional US$285 million as reserve [for any provision]," said Li.

More at the link. At least the Bank of China will be out of the US mortage mess.

Also, the

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has decided to raise the RMB reserve requirement ratio by 0.5% as of today. And

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is the PBC's official figures for Change in Corporate Goods Prices, February 2008.

Check out the Inflation Graph (using the National Bureau of Statistics of China's official inflation figures) by Michael Pettis today on "

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", China Financial Markets:

A quick calculation (which is not included in the graph) indicates that from May 2007 to now China has suffered from double-digit inflation (11.1% annualized). The same calculation also suggests that if the next three months show price increases that on average equal the price increases of the past eight months (around 1% month-on-month) we will have double digit year-on-year inflation in China by May.

 

[Norfolk]

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", by Michael Pettis, China Financial Markets, 26 March, 2008:

Scattered throughout this blog are references about the way I view China’s currency regime, why I believe monetary policy is out of control, why I have insisted since 2003 that China’s trade surplus and foreign exchange reserves could only grow, and why I claim that the authorities are increasingly going to have to consider a maxi-revaluation as the only solution to a worsening problem. I have been asked several times to summarize this argument. Here is a very brief summary (with apologies to readers of this blog who are tired of all my repetition):

Much more at the link. Basically, Mr. Pettis lays out 8 Points in his argument for a maxi-revealuation of the yuan, anticipating a 15-20% appreciation in its value as a consequence. Now, as even contemplating the prospect of a rise of a comparatively modest 5% in the RMB's value causes some disquiet, contemplating an appreciation of 3 or 4 times that might conceivably cause some to nearly stroke.
Yet, as Pettis observes,

The main argument in favor of a maxi-revaluation, however, is not that it will be painless. The main argument is that the alternatives are much more painful.

While I am not entirely convinced by Mr. Pettis' argument, and shudder to think of the immediate fallout from such a drastic action, it may be that the Government's options may become increasingly constrained to the point where the "best" solution to China's inflation problems may amount to a simple recognition of a necessity to cut one's losses. We will see.