China Economics Blog

Is China spawning systematic financial risks?

2009-07-13T15:26:00.000-07:00

Yes say local commentators. I agree.

The China recovery is built on sand - where has the money all gone when trade is still falling, profits are falling and output is falling.

Asset bubbles are forming as we speak. Sell China.

Risks Emerge as Bank Loans Hit Overdrive [Caijing.com.cn]

Record bank lending in China is spawning systematic financial risks that may lead to a credit crisis.

New lending in the January-May period totaled 5.84 trillion yuan, 3.72 trillion yuan more than during the same period last year. That's an unprecedented pace for new loans, as lending levels never even reached 5 trillion yuan for an entire year between 2001 and '08.

This huge influx of borrowing, aimed at stimulating China's sluggish economy, is leading to overcapacity.

Most scholars believe China's recovery is solid and strong, but economic statistics suggest otherwise. Industrial enterprise profits and trade volume have fallen remarkably.

Between January and May, industrial enterprises with annual revenues of more than 5 million yuan booked a combined decline in profits of 22.9 percent year-on-year. Profits for big state-owned enterprises declined 41.5 percent year-on-year.

Meanwhile, China's trade volume fell between January and May by 24.7 percent year-on-year, with imports off 21.8 percent and exports down 28 percent.

Those numbers show that the world market for made-in-China products is shrinking. If China's production-driven growth model continues, the country soon may face a predicament that combines "low interest rates, high capacity and finally low growth" – a scenario that's plagued Japan since the early 1990s.

The global economy is now caught in a vicious cycle: The world expects China to lead a recovery, while China is relying on the international market to absorb its products.

And if excessive lending is a power keg, an interest rate hike will be the fuse that sets it off. Indeed, a credit crisis would ensue if China's central bank raises its interest rate.

Interest rate increases were the immediate causes of the 1988 U.S. credit crisis, implosion of Japan's economic bubble in the 1990s, and the 2007 subprime credit crisis.

China's central bank will be reluctant to raise the interest rate, however, so overcapacity in the real economy will continue.

Due to a lack of investment opportunities in the real economy, speculative investment appears to be a reasonable alternative. That leads to high prices on the stock and real estate markets. Meanwhile, low bank interest rates encourage people to transfer cash from savings deposits to asset markets.

In May 2009, total bank deposits increased by a mere 188.6 billion yuan – down 47.8 billion yuan from the same period last year.

If enterprises and individuals use bank loans and deposits to engage in high-risk speculation, assets bubbles can be expected. Commercial banks would then reduce lending to avoid high credit risks, and market interest rates would rise, puncturing asset bubbles and ruining a financial system pillar.

Debt sale flounders

2009-07-13T15:18:00.000-07:00

China's stimulus plan is large. I just don't like the size of it. Nor it appears does the market.

The plan has already caused a bubble in the stockmarket in my opinion.

China Fails to Attract Enough Buyers in Bill Sales [Bloomberg]

July 10 (Bloomberg) -- China failed to attract enough bidders in a government debt sale for a second time this week on speculation record bank lending will spark inflation in the world’s third-largest economy.

The Ministry of Finance sold 25.1 billion yuan ($3.7 billion) in bills of the 35 billion yuan it had sought, according to statements on the Web site of Chinabond, the nation’s biggest debt-clearing house. The government fell short of its target in a bond sale for the first time in almost six years on July 8.

The auction’s failure reflects concern that Premier Wen Jiabao’s 4 trillion yuan stimulus package will cause bubbles in stock and housing markets, forcing the central bank to tighten monetary policy. The People’s Bank of China this week pushed up money-market rates and drained cash from banks, the biggest investors in the nation’s $2.2 trillion debt market.

“The central bank’s open-market operations suggest concerns that the rapid surge in new bank lending in the first half of this year could fuel inflation,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore. “Some people speculate the central bank will raise interest rates this year but I don’t think they can as global growth slows.”

Rising Yields

The Ministry sold 12.48 billion yuan of 91-day bills at 1.15 percent, compared with 0.84 percent at the last such auction on June 19. It issued 12.65 billion yuan of 273-day bills at 1.25 percent, up from 0.88 percent at a previous sale on June 5.

The People’s Bank of China yesterday resumed one-year bill sales after an eight-month pause, signaling a shift from an “extremely loose” policy, Goldman Sachs Group Inc. said.

Chinese banks extended 1.53 trillion yuan of new loans in June, more than double the amount in May, the central bank said on July 8. Housing sales surged 45.3 percent in the first five months of this year, the National Development and Reform Commission said today.

The Shanghai Composite Index has jumped more than 80 percent from last year’s Nov. 4 low. Guilin Sanjin Pharmaceutical Co. and Zhejiang Wanma Cable Co., the first two companies allowed to go public in China since September, were suspended in Shenzhen trading after surging on their stock market debut today.

More IPOs

“More initial public offerings will come, which will further tighten liquidity,” said Shi Lei, an analyst in Beijing at Bank of China Ltd., the nation’s third-largest lender. “Investors are quite bearish on short-term bonds.”

The yield on the 2.29 percent treasury note due April 2014 surged five basis points to 2.53 percent, and the price of the security dropped 0.20 per 100 yuan face amount to 98.95, according to the Interbank Bond Market. A basis point is 0.01 percentage point.

“We doubt their aim was to cause distress in the government’s deficit financing effort,” Christian Carrillo, a bond strategist at Deutsche Bank AG in Singapore wrote in a research report today. “It appears the signaling aim of the PBOC has gone wrong especially given our understanding is that top level governors are very uncertain about the economic recovery.”

Rate Outlook

China’s bond market swelled in size by 16 percent in the year-ended March 31, paced by corporate bond sales, according to the Asian Development Bank. Demand has been waning in recent weeks. Before this week’s failed one-year auction, a sale of five-year government securities on July 3 drew bids for 1.42 times the debt on offer, compared with a 1.65 bid-to-cover ratio in a sale of 10-year notes on June 17.

Investments by China will help developing economies regain their growth momentum in the second half of this year, pulling the global economy out of the worst recession in six decades, the International Monetary Fund said on July 8. The IMF forecasts China’s expansion will accelerate to 8.5 percent next year from 7.5 percent in 2009.

Policy makers will probably refrain from raising interest rates as the government aims for 8 percent economic growth this year to create jobs and maintain social stability, according to a Bloomberg survey of economists. China’s consumer prices dropped 1.4 percent in May from a year earlier, after falling 1.5 percent in April, according to the statistics bureau.

The benchmark one-year lending rate will stay at 5.31 percent and the deposit rate at 2.25 percent this year, according to the median estimate of 15 economists surveyed by Bloomberg News.

China’s exports fell for an eighth month, dropping 21.4 percent in June from a year earlier, the state-run Xinhua News Agency reported today, citing customs data.

“Despite the lack of success in selling the intended amount of bills, it is unlikely that the government would switch its tactics to hiking interest rates,” said Sherman Chan, an economist with Moody’s Economy.com in Sydney. “They are trying to mop up excess liquidity without raising rates.”

Unrest in Xinjiang - live discussion

2009-07-09T12:31:00.000-07:00

From the inbox:

The Director of George Washington University’s International Development Studies Program and Cultural Anthropologist Sean Roberts will be available to discuss the growing unrest in Uighur. He has studied the region for 20 years.

The live discussion will take place today (July 8th) at 1 pm ET at the following link:

http://www.washingtonpost.com/wp-dyn/content/discussion/2009/07/07/DI2009070701491.html

Kicking off the discussion, Roberts says:

"The current unrest in Xinjiang is another chapter in a long history of tensions between Han Chinese and Uighurs, but it is mostly the result of the frustrations experienced by Uighurs over the last decade as the rapid pace of Chinese development in the region has brought scores of Han Chinese migrants to Xinjiang and has displaced Uyghurs from their traditional livelihoods and communities. While the violence that has emerged on both sides of the conflict is shocking, the most surprising aspect of the events may be that the tensions had not boiled over into direct confrontations until now.”

Please feel free to submit questions, or share this discussion with your readers. If you have any questions please let me know.

.

Chinese lending - a recovery built of sand

2009-07-09T12:19:00.000-07:00

China is new to the capitalism game and I have been concerned for some time about the size of the stimulus plan. One problem is that the spike in lending is resulting in more risk being taken.

The Chinese recovery may well be built on sand and stimulus packages. This leaves me uneasy. The problem (as it was in the previous stockmarket bubble) is the lack of alternative investment homes for all the cash that is still sloshing around.

Risks Emerge as Bank Loans Hit Overdrive [Caijing.com.cn]

(Caijing.com.cn) Record bank lending in China is spawning systematic financial risks that may lead to a credit crisis.

New lending in the January-May period totaled 5.84 trillion yuan, 3.72 trillion yuan more than during the same period last year. That's an unprecedented pace for new loans, as lending levels never even reached 5 trillion yuan for an entire year between 2001 and '08.

This huge influx of borrowing, aimed at stimulating China's sluggish economy, is leading to overcapacity.

Most scholars believe China's recovery is solid and strong, but economic statistics suggest otherwise. Industrial enterprise profits and trade volume have fallen remarkably.

Between January and May, industrial enterprises with annual revenues of more than 5 million yuan booked a combined decline in profits of 22.9 percent year-on-year. Profits for big state-owned enterprises declined 41.5 percent year-on-year.

Meanwhile, China's trade volume fell between January and May by 24.7 percent year-on-year, with imports off 21.8 percent and exports down 28 percent.

Those numbers show that the world market for made-in-China products is shrinking. If China's production-driven growth model continues, the country soon may face a predicament that combines "low interest rates, high capacity and finally low growth" – a scenario that's plagued Japan since the early 1990s.

The global economy is now caught in a vicious cycle: The world expects China to lead a recovery, while China is relying on the international market to absorb its products.

And if excessive lending is a power keg, an interest rate hike will be the fuse that sets it off. Indeed, a credit crisis would ensue if China's central bank raises its interest rate.

Interest rate increases were the immediate causes of the 1988 U.S. credit crisis, implosion of Japan's economic bubble in the 1990s, and the 2007 subprime credit crisis.

China's central bank will be reluctant to raise the interest rate, however, so overcapacity in the real economy will continue.

Due to a lack of investment opportunities in the real economy, speculative investment appears to be a reasonable alternative. That leads to high prices on the stock and real estate markets. Meanwhile, low bank interest rates encourage people to transfer cash from savings deposits to asset markets.

In May 2009, total bank deposits increased by a mere 188.6 billion yuan – down 47.8 billion yuan from the same period last year.

If enterprises and individuals use bank loans and deposits to engage in high-risk speculation, assets bubbles can be expected. Commercial banks would then reduce lending to avoid high credit risks, and market interest rates would rise, puncturing asset bubbles and ruining a financial system pillar.

WTO looking closely at Chinese trade restrictions

2009-07-02T13:24:00.000-07:00

After spending so long trying to get into the WTO China now spends a long time trying to get around the rules.

Even in the face of a global recession or indeed perhaps because of the global recession the US and EU are fighting back over the Chinese restrictions on exports that are aimed at protecting the domestic steel industry.

This is really a none issue and will not save global trade. China will dig in and the US and Europe will give up.

Duties call [Economist]

DESPITE the periodic sighting of green shoots elsewhere in the economy, the landscape of global trade remains resolutely bare. The World Bank said on June 22nd that world-trade volumes, reeling from a drastic collapse in global demand (see chart), will shrink by nearly 10% this year. That would be the sharpest fall since the Depression, and the first decline in trade since a small dip in 1982.

Unsurprisingly, tempers are fraying as governments struggle to find ways to protect their own. The latest salvo was fired on June 23rd by America and the European Union, which complained to the World Trade Organisation (WTO) about China’s restrictions on the exports of nine minerals, including bauxite, coke, magnesium and manganese. These are important raw materials for the steel industry, among others, and China restricts their exports on the grounds that they are exhaustible resources. But America and the EU argue that by hindering their export, China is unfairly favouring domestic industries.

John Veroneau, a former American deputy trade representative, believes the case against China is a strong one. He also argues that this week’s move can be seen as an effort to foster more trade (as there surely would be if China were to ease its export restrictions) at a time when trade is in a great deal of trouble. In practice, it is unlikely to have that effect. If the case proceeds to the stage where a formal WTO panel is formed to decide on its merits, it could drag on for several years, by which time trade will, with luck, have recovered from its current moribund state.

Jeffrey Schott, a trade expert at the Peterson Institute for International Economics, a think-tank, says that the case against China may also help the cause of open trade in other ways. If Ron Kirk, America’s new trade representative, demonstrates that he is actively enforcing the agreements already in place, he may get “the authority to negotiate Doha and other accords”.

That may be too sanguine. True, America and the EU are not resorting to imposing fresh barriers of their own in this dispute; for that matter, China’s export restrictions are not new either. But trade experts warn that protectionism remains a serious worry. Of particular concern are the so-called “Buy China” requirements added to China’s stimulus package this month. These require recipients of money from China’s mammoth fiscal expansion to choose domestic suppliers “unless products or services cannot be obtained in reasonable commercial conditions in China”. This sounds like out-and-out protectionism. But America, which included similar “Buy America” provisions in its own stimulus bill, may find it hard to raise a stink.

China, Iraq and the collapse of the dollar

2009-07-02T13:14:00.000-07:00

A title to chew over that is for sure.

This is an interesting New York Times article. The implications are potentially very serious. Imagine China selling up it's US paper - work it through and the dollar is in deep trouble. Will China risk it? Perhaps it will for oil.

As Iraq Stabilizes, China Bids on Its Oil Fields [New York Times]

HONG KONG — Oil companies from China, the world’s second-largest and fastest-growing consumer of oil, bid aggressively on Tuesday as Iraq began auctioning licenses in six large oil fields.

../

It is common in the oil industry for initial auction results to be followed by weeks of dickering over details. But the bidding in Baghdad on Tuesday was particularly contentious, as multinationals demanded that the Iraqi government allow them to keep more of the revenue from each extra barrel of oil they pump beyond levels previously sustained by Iraq’s chronically corrupt and technologically weak national oil industry.

Few Americans or Iraqis may have expected China to emerge as one of the winners in Iraqi oil, particularly after six years of war. But signs of stability in Iraq this year, and a planned American military pullout from Iraqi cities on Tuesday, happened to coincide with an aggressive Chinese push to buy or develop overseas oil fields.

The Chinese companies “have been interested in Iraq,” said David Zweig, a specialist in Chinese natural resource policies at the Hong Kong University of Science and Technology. “They were interested in Iraq before the war, and now that things have improved somewhat there, it’s on their agenda.”

Some experts contend that the West should not be concerned about a substantial Chinese presence in Iraqi oil fields, because it gives China greater stake in improving stability in the region.

“If you want China to be a responsible stakeholder in the world, you need to let China buy stakes in the world,” said Mark P. Thirlwell, the program director for international economics at the Lowy Institute for International Policy in Sydney, during a speech in Hong Kong on Tuesday.

The Iraqi government originally tried last year to award oil fields to Western companies through a no-bid process. That prompted objections from a group of United States senators, who wanted greater transparency, and the plan was replaced with the auction, which had the effect of letting Chinese companies play a much larger role.

China’s leaders were surprised by the steep rise in commodity prices early last year, which exposed the vulnerability of their country’s huge manufacturing sector to high raw material prices. When oil prices plunged in the autumn, China began buying, importing and storing oil in huge quantities, helping to drive a partial rebound in world oil prices in spring. And China stepped up its hunt to acquire foreign oil.

Chinese officials, economists and advisers have been almost unanimous in recent weeks in saying that their country needed to invest more in natural resources, while also voicing concerns about the long-term creditworthiness of the United States and the buying power of the dollar.

China has $2 trillion in foreign exchange reserves, mostly invested in dollar-denominated bonds, and has been looking for ways to diversify gradually into other assets like commodities, said a Chinese government adviser who spoke on the condition of anonymity because of the secrecy of Chinese reserve policies.

China’s central bank, the People’s Bank of China, called Friday for the development of an international currency other than the dollar that would be a safe repository of value, in the latest sign of China’s search for other ways to invest its international reserves.

Philip Andrews-Speed, a specialist in China’s oil industry at the University of Dundee in Scotland, said Iraq was clearly attractive for China and its oil industry.

Chinese IPOs are back - but for how long?

2009-07-02T13:01:00.000-07:00

Here we go again. The thirst of Chinese investors to own stocks appears undiminished despite the recent bloodbath.

I have been surprised by the strength of the recovery in the stockmarket and the return of IPOs is an interesting development that needs watching carefully.

Thirst-quenching [Economist]

IT IS like a downpour after a drought. In 2007 and early 2008, hundreds of Chinese companies worked feverishly with accountants and bankers to prepare for initial public offerings. Their work came to nothing. Collapsing share prices, a contracting economy, unrealistic expectations on the part of sellers and, finally, restrictions from regulators crushed the IPO market. Now the companies and bankers that have managed to survive a brutal year are once again seeking capital, through listings on bourses in the mainland and beyond.

The first raindrop in China has been Guilin Sanjin, a manufacturer of Chinese medicine, which is expected to issue shares on June 29th on the Shenzhen Stock Exchange, the market for the country’s smaller companies. The size of the offering is likely to be a bit under $100m—a mere rounding error compared to the mega-deals of two or three years ago, but a sign, nonetheless, that business has resumed.

Another 30 companies have reportedly received regulatory approval to list and have begun final preparation and marketing; 400 more sit in a queue waiting to be approved. Several state enterprises that went public on offshore markets, including China Mobile and CNOOC, an oil firm, are also expected to list at some point in Shanghai. So too may a handful of non-Chinese companies, with interest already expressed by HSBC, in deference to its Shanghai roots, and the New York Stock Exchange (NYSE).

In Hong Kong, a few companies did manage to float in the past few months but the going was tough, with price estimates cut repeatedly prior to the offering, buyers corralled from friends, families and affiliates, and a lacklustre aftermarket. Conditions have turned. Many of these deals are now up significantly. Three small companies have gone public since June 16th, with shares in each case rising by at least 20%.

Bawang, a Chinese toiletries company, is in the final stages of a roadshow and appears likely to price at the top of its pre-marketing estimate. More sizeable deals are expected by the year’s end, including a listing of the Asian life-insurance operations of AIG, and dual China-Hong Kong listings for Agricultural Bank of China and two Chinese electrical-distribution firms.

America’s capital markets are benefiting too. Two Chinese companies, one producing specialty chemicals (Chemspec) and another water-treatment equipment (Duoyuan Global), made splashy debuts on the NYSE on June 23rd. In every case, regardless of where the listing venue might be, the underlying appeal is the same. Says Jonathan Penkin of Goldman Sachs in Hong Kong: “People are looking for growth. You can find it here.”

University productivity in China

2009-06-10T01:19:00.000-07:00

There is no doubt that Chinese Universities are rapidly increasing in quality. However, there remains a productivity and quality gap with US and UK Universities. This interesting topic is discussed in a recently China Economic Review paper.

I am not keen on the techniques employed in this paper but the results that productivity is increasing but from a low base matches my expectations (always a good sign) :-)

Efficiency and productivity growth in Chinese universities during the post-reform period

Ying Chu NG and Sung-ko LIa

Abstract

The social science research performance of Chinese universities is examined using panel data. The universities are found to be very inefficient in general, with not much difference between regions. By far the largest single cause of universities′ overall technical efficiency is pure technical efficiency, along with a considerable amount of scale inefficiency and a modest amount of congestion. No obvious regional differences in the universities′ productivity growth are apparent between 1998 and 2002. Decomposition of the Malmquist productivity index indicates that although there has been technological progress over the years, poor scale efficiency and technical efficiency have resulted in deterioration in the universities′ average productivity. There are signs of increasing congestion during the period studied.

Keywords: Technical efficiency; Congestion; Malmquist productivity index; Research; Chinese universities

JEL classification codes: I20; L30

Why Do Institutions of Higher Education Reward Research While Selling Education?"

2009-06-08T07:29:00.001-07:00

One of the initial motivations for this blog was to ensure that prospective Chinese students wanting to study abroad made sure that they invested wisely in the highest quality education at the top Universities.

To that end, the side bar on the right lists some of the top courses in the UK.

The Universities listed tend to be the "best" Universities in terms of research. That raises the question of why or if the best research Universities offer the best education.

My advice holds. A degree from a "top" University is a signal of the quality of the student (given these Universities are often harder to get into). If a student is to invest heavily in human capital accumulation then the returns need to be maximised. Employers are far more likely to take students from the well known "top Universities".

The following paper sheds light on this interesting topic.

Why Do Institutions of Higher Education Reward Research While Selling Education?"

NBER Working Paper No. w14974

DAHLIA REMLER, City University of New York - Baruch College - School of Public Affairs, National Bureau of Economic Research (NBER)
Email: Dahlia_Remler@baruch.cuny.edu
ELDA PEMA, Naval Postgraduate School
Email: epema@nps.edu

Higher education institutions and disciplines that traditionally did little research now reward faculty largely based on research, both funded and unfunded. Some worry that faculty devoting more time to research harms teaching and thus harms students' human capital accumulation. The economics literature has largely ignored the reasons for and desirability of this trend. We summarize, review, and extend existing economic theories of higher education to explain why incentives for unfunded research have increased. One theory is that researchers more effectively teach higher order skills and therefore increase student human capital more than non-researchers. In contrast, according to signaling theory, education is not intrinsically productive but only a signal that separates high- and low-ability workers. We extend this theory by hypothesizing that researchers make higher education more costly for low-ability students than do non-research faculty, achieving the separation more efficiently. We describe other theories, including research quality as a proxy for hard-to-measure teaching quality and barriers to entry. Virtually no evidence exists to test these theories or establish their relative magnitudes. Research is needed, particularly to address what employers seek from higher education graduates and to assess the validity of current measures of teaching quality.

China and the concept of "speed intensity"

2009-06-08T02:55:00.001-07:00

The remarkable growth of China and before that Taiwan and Hong Kong was based on exports. This much is clear. The nature of these exports is however worth looking at more closely.

A recent World Economy paper puts Asian growth in context by considering the concept of "speed intensity". This makes a lot of sense.

The demand for fast and disposable fashion in the West has lead to need for cheap goods that can be made quickly to hit the shops shortly after the catwalk shows.

Speed Intensity and the Rise of the Chinese Economies

Kelly B. Olds 1

National Taiwan University

ABSTRACT

Producers of speed-intensive goods, e.g. clothing or electronics, face markets that are in constant flux due to changing fashion or technology. Throughout the twentieth century, Chinese business networks have had a comparative advantage in producing speed-intensive goods due to their quick reaction time. This comparative advantage was of relatively little value prior to the Second World War, but since the war, international telephone and air services have made international trade in speed-intensive goods practical. This has caused the demand for speed-intensive goods on the international market to grow at an extremely rapid pace. This growth in demand can explain the post-Second World War economic booms experienced by Hong Kong, Taiwan and finally China.

Research Paper: "Economics in the Backyard"

2009-06-08T02:50:00.000-07:00

This paper by Hughes Hallet and Richter looks at a series of interesting questions related to the Chinese integration of Hong Kong (and indirectly Taiwan).

These results reinforce some of my own previous results. The results are as expected. It is always useful to have ones intuition verified.

Economics in the Backyard: How Much Convergence is there between China and her Special Regions?

Andrew Hughes Hallett 1 and Christian Richter 2
1 George Mason University, University of St Andrews and CEPR; School of Public Policy, Fairfax, USA , and 2 School of Economics, Kingston University, UK

ABSTRACT

This paper tests the hypothesis that the links and dependency relationships between China and her special regions have changed over the past 20 years with the industrialisation of China, and the emergence of Taiwan as a source of investment and sophisticated manufactures, and Hong Kong as financial centre and supplier of services. Has this changed the size and direction of spillovers in the region, and has it curtailed or eliminated American economic leadership? We use time-varying spectral methods to decompose the links between six advanced Asian economies and the US. We find: (a) the links with the US have been weakening, while those within a bloc based on China have strengthened; (b) that this is not new – it has been happening since the 1980s, but has now been reversed by the surge in trade; (c) that Taiwan is more integrated with, and dependent on, the Chinese economy, while Hong Kong continues her separate development based on specialisation and comparative advantage; (d) that the links with the US are rather complex, with the US able to shape the cycles elsewhere through her control of monetary conditions, but the China zone able to control the size of their cycles; and (e) there appears to be no real evidence that pegged exchange rates encourage convergence; in fact the reverse may be true.

.

Chinese company results - does anyone believe the numbers?

2009-06-05T02:21:00.000-07:00

I am glad it not just me. This Chinese stock market rose and then fell and is beginning to climb again.

First, it should never have risen so high (we have previously covered why it did so).

Second, it should have fallen further (and may still do so).

Third, the recent rally will not last.

My personal worries again relate to what Chinese companies are reporting. I have had my doubts and this links in with my view that I simply do not believe the data that these companies are reporting.

It was reassuring therefore to see that the Economist has picked up on this and about time.

The issue of Chinese subsidies is very important. This is the mother of all stimulus packages and it is clearly helping companies survive but to what cost and to what end?

It is tempting to take a large short position on China at the moment.

Red flags [Economist]

CHINA’S stockmarket has been one of the best performing in the world this year, and the country’s firms have so far steered through the global financial crisis better than many of their global peers. Partly they may have been buoyed by robust business conditions in China. But two recent studies, which raise serious questions about the credibility of China’s corporate earnings, suggest that companies may also have had an artificial boost.

The less damning of the two is issued under the auspices of the Hong Kong Monetary Authority and written by Giovanni Ferri, of Italy’s University of Bari, and Li-Gang Liu of BBVA, a bank. It argues that the profits of China’s large state-owned companies are entirely a product of subsidised financing by state banks, which lets them borrow much more cheaply than private or foreign firms (see chart).

To reach that conclusion the authors sifted through government data from 1999-2005. Mr Liu believes that such subsidies may have even increased since last summer, because the big state-owned enterprises have been the main beneficiaries of China’s economic stimulus. In the short term the subsidies will have boosted profits, not least compared with the firms’ credit-starved private peers. But in the longer term Mr Liu believes that the political component of the loans will mean capital is being allocated inefficiently, raising the prospect of future losses.

At least the academics are convinced that the profits are genuine, even if they are subsidised. But an exhaustive working paper by TJ Wong and Danqing Young, of the Chinese University of Hong Kong, and Xianjie He, of Shanghai University of Finance and Economics, reaches a more alarming conclusion. It suggests investors have little faith in the numbers.

To measure this they looked at Chinese firms before and after the country broke with its accounting traditions in 2007, adopting something akin to international accounting standards, which base valuations on market prices. They then dissected earnings in three ways. First, they compared how shifts in earnings correlated with shifts in share prices under the old accounting system and the new. An improvement in accounting practices should have meant a closer correlation between earnings and the performance of the share price. Not only did this not happen—there were some signs that things got worse.

Nor were there correlations between the share price and the shift in reported value of investment instruments, goodwill and the impairment of assets—all typically critical to an investor’s analysis. Lastly, the academics examined a nuance in the new standards that allowed Chinese firms to book profits by restructuring debt that was owed to affiliated companies. Before the change in accounting standards, this kind of debt restructuring was rare. Afterwards, it was common: more than 200 companies, or over 15% of those in the study, did it in 2007. This resulted in clear gains to earnings but no impact on share prices. So is there anything in the company reports that investors do consider to be meaningful? That, says Mr Wong, is the subject of the next study.

"Unfair West" threatens climate change progress

2009-06-05T02:07:00.000-07:00

Apologies for a lack of recent posting. My senior academic management role is taking up more time that I initially expected. Fire fighting is almost under control now though so hopefully normal service can resume. I have missed some big stories but hope to recap some of them soon.

We begin with a return to the climate change problem. China has a lot to do but the government will is there. Of course this is largely a result of self interest - China is a country that is likely to suffer the brunt of climate change on its economy and environment.

Whilst the EU is doing a fair amount the US is still dragging its feet. Obama is trying but facing the brick wall of congress who are paid by the large lobby groups. Is this how democracy is supposed to work?

Yu is correct to state that it is a matter of political will in the West. The recession and current crisis (that will surely get worse) means this "will" will be in short supply.

INTERVIEW-China to act on climate, warns of "unfair" demands [Reuters]

BONN, Germany, June 2 (Reuters) - China promised on Tuesday to step up actions to fight climate change and cautioned that "unfair" new demands by rich nations could sabotage a new U.N. treaty due to be agreed in December.

"We will continue to focus on the improvement of energy efficiency, expansion of the use of renewable energy, more use of nuclear power and on reforestation," China's climate ambassador Yu Qingtai told Reuters of long-term plans beyond 2010.

And he said China was already doing a lot.

"We are pretty certain that our track record would not pale against anybody else in the world," he said on the sidelines of June 1-12 U.N. climate talks among 181 nations in Bonn.

He said China, for instance, was seeking to raise efficiency by cutting the amount of energy burnt per unit of economic output by 4 percent a year.

Washington says that China, which by most estimates has overtaken the United States as the top emitter of greenhouse gases, must do more to fight climate change under a U.N. pact due to be agreed in December in Copenhagen.

But Yu accused rich nations of introducing proposals that go beyond a roadmap for U.N. negotiations agreed in Bali in 2007.

"Copenhagen is only six months away -- instead of introducing new concepts, controversial concepts, unfair concepts, the world would be better served if we could focus on what is already agreed upon in the Bali roadmap," he said.

"If you start (questioning agreed principles), that can only meant that countries are not serious about future international cooperation. They are trying to create problems to sabotage the whole process," he said.

SINGAPORE Many developed nations, for instance, want a new yardstick that would redefine the existing group of 130 developing nations and demand more actions by the wealthier developing countries in slowing global warming.

Countries in the group of developing nations at the U.N. talks such as Singapore or the United Arab Emirates are wealthier per capita than many countries which have to cut emissions under the existing Kyoto Protocol.

"That would definitely not succeed," Yu said of an effort to redefine developing nations.

He said a 1992 U.N. Climate Convention made a basic split between nations that have caused climate change since the Industrial Revolution 200 years ago and victims -- including those that have recently become rich or major emitters.

Yu said that China's rejection of a new sliding scale did not mean however that all developing countries were able to do the same to slow climate change, such as more droughts, floods and rising seas. Under a separate principle, national circumstances vary. "We are aware that, as a country of 1.3 billion people, as a country that has enjoyed an impressive growth rate, we can do a lot more than a least developed country with a couple of million population," he said.

He said rich nations should focus on keeping pledges to curb greenhouse gases rather than place new demands on the poor. China wants the rich to cut emissions by at least 40 percent below 1990 levels by 2020 -- far deeper than cuts on offer.

A study by the Potsdam Institute for Climate Impact Research on Monday showed that promises by the rich so far amount to cuts of between 8 and 14 percent by 2020.

Asked if 40 percent was realistic when many nations say it would cripple their recession-racked economies, Yu said, "If there is political will...they can certainly do better than 8 or 14 percent. It is basically a question of political will."

"Dollar Trap" snaps shut

2009-05-25T06:03:00.000-07:00

One of the most intriguing political games being played out at the moment is the ongoing "death grip" between China and US over China's massive (and growing) holdings of US paper.

Both countries stand to suffer massive losses if either country deviates off the current, unsustainable path. How China and the US can get out of this is not clear to me but the only answer I can see if for there be a slow unwinding of positions over 5 to 10 years. Speculators will not make this easy.

I happen to believe the dollar will come under increasing pressure and opens up some interesting futures trading opportunities although there are other good FEX deals out there at the moment (on which more another day).

Stick the following title into google to read the whole story.

China Stuck in "dollar" trap [FT]

"China's official foreign exchange manager is still buying record amounts of US government bonds, in spite of Beijing's increasingly vocal fear of a dollar collapse".

The article goes on to say that China has little choice but to keep buying US paper. It is in a dollar trap. The massive volumes involved means that Chinese buying of any other currency would distort the market. Likewise, selling dollars would cause a collapse in the dollar.

I suspect Chinese outbound FDI will increase with less emphasis on US paper but this will be a long process. Look what happened to Japan when it went down this route in the early 90s.

China is overextending itself and its expertise.

.

UK's ONS gets retail figures wrong

2009-05-18T03:15:00.000-07:00

OK, hands up. I have criticised the reliability of Chinese data regularly on this blog to the extent that I do not believe a lot of the published Chinese macro data.

Interestingly, I did wonder about the robust UK retail numbers that were coming out of the ONS in the UK. Surely UK statistics can be trusted. Surely.

Only now do we get the truth. How hard can it be - honestly. OVERSTATED by 56% - that is simply dreadful.

It is becoming clear that this financial crisis is great for getting the world back on a more realistic track - the party is over - we now need to clear up the mess left behind.

Heads should roll at the ONS. China's statistical office can still learn a lot from this sort of misguided confidence that the head of the ONS showed in their own ability to collect a simple series of data.

There is political capital from posting wrong numbers whether it is to convince a domestic or overseas audience.

ONS gets sums wrong on retail sales [FT]

One of Britain’s most closely watched economic indicators has heavily overstated the quantity of high street sales over the past two years, the Office for National Statistics admitted on Friday.

Britain’s supplier of official statistics conceded that since the financial crisis began in August 2007, it has overstated the volume of retail sales growth by 56 per cent.

Many economists have been worried for some time that the published retail sales figures were too strong and have always received a furious response from the ONS.

Karen Dunnell, the national statistician, wrote to newspapers last October, insisting that “ONS retail statistics are the best available and are not inaccurate”.

She stuck to the same theme in another article, saying economists who had expressed surprise at the strength of ONS retail figures were upset because “City analysts also have a vested interest in not being proved wrong”.

Yet while the ONS head was defending the accuracy of the retail figures, industry experts knew the outdated nature of price measurement in the retail sales index was much more than a triviality.

The ONS previously said that between August 2007 and March 2009 retail sales volume grew 3.6 per cent. The changes announced on Friday mean it will now say the real rise in sales volumes was only 2.3 per cent.

Such a large difference in the one indicator that has persistently given a more positive account of Britain’s economy will cause red faces at the ONS, especially as it had insisted on the superiority of its retail data to unofficial estimates.

So confident has the ONS been that it warns users of the CBI or the British Retail Consortium sales data every month that these figures might not be “fit for purpose”.

The BRC on Friday welcomed the changes, saying they meant the official data would now be more in line with its figures.

The ONS’s old methodology failed to take sufficient account of goods that had risen strongly in price and so under-estimated the true rate of inflation in calculating the headline retail sales volume figures.

The ONS said on Friday it was changing the way it compiled its retail sales data to make sure it “more accurately captures recent trends in retail sales, including where consumers switch purchases to goods that have fallen in price’’.

.

.

"Manchurian Paradox" - Can China see the wood for the trees?

2009-05-15T09:01:00.000-07:00

Thanks to a comment on this blog directing me to an article by Stephen Roach who is the chairman of Morgan Stanley Asia.

It raises some interesting points. This is a long article. Highlights only below.

I agree entirely - I do not think that China sees the danger it is getting itself into. They are simply too optimistic. Having not experienced how ugly capitalism can get they are walking into a whole pile of trouble.

It is reassuring to read that I am not the only one who is calling that the emperor has no clothes.

Manchurian Paradox [The National Interest Online]

THE CHINESE word for crisis, weiji, includes elements of both danger and opportunity. This symbolic meaning has taken on especially great significance in recent years. The emergence of modern China as a global economic power can, in fact, be dated to the nation’s willingness to seize critical moments of adversity. That was very much the case during the Asian financial crisis of 1997–98, which marked a critical turning point in the ascendance of China as a major economic power. And it could also be the case today.

But there is an important catch: unlike earlier crises, it is not altogether clear that China senses the gravity of the current danger. That leaves it caught in something much closer to denial—making it difficult to seize the opportunity that peril can provide.

../

There is nothing wrong with China’s gathering sense of self-confidence and its concomitant contribution to the global debate. In fact, it is to be encouraged. China has earned its place at the table. For a nation steeped in five thousand years of inward-looking experience, China is looking outward as never before. The world can only benefit from this sea change. But that underscores the biggest danger of all—the risk that China takes its newfound external dependence too far and ignores the lasting and serious pitfalls of a postcrisis world. If it fails to rebalance its unbalanced economy, China’s power play could be surprisingly fleeting.

"Sickness of Savers in China"

2009-05-13T08:22:00.000-07:00

Excellent piece on the FT on the role of health care provision in China and the link with savings.

This problem has been clear for the last ten years. Chinese consumers will not save the global economy when the social security and health care provision is so poor. The Chinese need to save such a large percentage for education, old age and health care.

Improving health care will help but it is only one part of the jigsaw. I disagree that the savings problem is primarily health related. Education I would argue is far more important. A well employed son or daughter can then pay the health bills of the parents in later life.

Sickness of the savers [FT]

China’s economy has turned the corner. Government banks have been lending at a rapid rate, factory output is rising again and the local stock market is blazing ahead. But just how quickly the world’s most populous country emerges from the global economic crisis will depend, in part, on places such as the cancer ward of Jingdong hospital in Sanhe, not far from Beijing, and how they treat patients like Cao Jun.

../

If the US economy stored up problems for itself through consuming too much, China has distorted its economy by saving too much and spending too little. In recent years, the savings rate has risen as high as 50 per cent of gross domestic product, including the retained earnings of state-owned companies, and even families with incomes of less than $200 a year still save 18 per cent of their income, according to the World Bank.

One of the main underlying causes is the weakness of the social safety net. Many Chinese put a large chunk of their wages into bank accounts because they are worried about pensions, education expenses and – most of all – the prospect of a big hospital bill if a family member falls seriously ill.

Exports just keep on sliding

2009-05-13T08:11:00.000-07:00

I am becoming more and more convinced that politicians all over the world are making non stop comments on "green shoots", "bottoming out" and similar phrases just for the sake of "talking up" the global economy - this is perhaps no surprise at all. I just don't buy it when you look what is happening on the ground.

The Chinese growth story is another one of the great falsehoods of our time. I do not believe the figures. If you take oil consumption as a REAL proxy for output it is continuing to fall despite the massive stimulus package.

The FT reports on the continued decline in exports. This is NOT a surprise to anyone with any sense.

When will anyone report what is really going on. Now I might be on the "extremely" dismal end of dismal scientist line but I can still not see any green shoots from where I sit.

Look at the FT first two lines. What I want to know is WHO said the worst was over and WHY?

This article at least puts things in perspective. I agree - China is massively ill prepared for a continued decline in demand for its exports. The world economy will not bounce back that quickly (or as quickly as some analysts believe).

Rant finished. Apologies.

Slide in Chinese exports will hit growth strategy [Financial Times]

Chinese exports fell steeply in April for a sixth month in succession, suggesting that the worst might not be over for the world's third largest economy.

The total value of Chinese exports fell 22.6 per cent to $91.9bn (£60.2bn) last month compared with the same month a year earlier - a faster rate of decline than the 17.1 per cent year-on-year drop in March.

Imports fell 23 per cent from a year earlier to $78.8bn in what some analysts said was a sign that domestic investors remained unwilling to invest in new capacity. Exports rose 6.9 per cent between March and April. However, the month-on-month figures are not seasonally adjusted and are regarded by analysts as misleading.

JPMorgan said it estimated that month-on-month exports fell 2.8 per cent on a seasonally adjusted basis after gaining 6.1 per cent month on month in March.

The monthly trade figures are being watched closely after some economists criticised Beijing's stimulus efforts for relying too heavily on an assumption that there would be a quick rebound in global demand for cheap Chinese exports.

"The top leaders have made the calculation that this crisis is nothing like the 1930s and the global economy is going to rebound quickly, at which point China will take a greater role in the world," one senior retired government official told the Financial Times.

That view is questioned by some economists. Stephen Roach, Asia chairman of Morgan Stanley, argued in an article that the Chinese government had miscalculated and was "clinging to antiquated policy and economic growth strategies that presuppose a classic snapback in global demand.

"That leaves China illprepared for what could well be the defining feature of the post-crisis world - an enduring US-led shortfall of external demand."

In its effort to boost growth, Beijing is investing huge sums in new infrastructure projects, while also providing ample support for its export industries in the form of favourable policies, cheap loans and tax rebates.

This strategy is "strikingly reminiscent" of the Chinese response to two earlier external demand shocks - the Asian financial crisis of 1997 and the bursting of the dotcom bubble in 2000 - according to Mr Roach.

In both those instances the Chinese export-led economy emerged from the downturn in an excellent position to take advantage of the rebound in global trade.

On a more positive note, the government said yesterday that fixed-asset investment in Chinese urban areas rose faster than expected in the first four months, jumping 30.5 per cent from a year earlier.

China, the collapsing dollar and independence

2009-05-05T07:12:00.000-07:00

China is well aware that independence from the dollar is an important step that it needs to make in the next five to ten years. The problem is that there is little alternative at the moment.

There is something I don't like about this article but cannot quite put my finger on it at the moment. I think it relates to the treatment of ethnic Chinese savers in the text.

The broad issue has been covered in this blog before but it raises some important points worthy of great discussion.

I suspect the US would be happy to inflate away some of its dollar debts with China and petrodollar holders losing. Seems a good way out of the crisis for the US.

Will the dollar really collapse? The problem is that China is in too deep. In a way, China is too dependent on the dollar now so the current situation is "too big to change" for both the US and China.

If China loses faith, the dollar will collapse [FT]

Emerging economies such as China and Russia are calling for alternatives to the dollar as a reserve currency. The trigger is the US Federal Reserve's policy of expanding the money supply to prop up the banking system and its over-indebted households. Because the magnitude of the bad assets within the banking system and the excess leverage of its households are potentially huge, the Fed may be forced into printing dollars massively, which would eventually trigger high inflation or even hyperinflation and cause great damage to countries that hold dollar assets in their foreign exchange reserves.

The chatter over alternatives to the dollar mainly reflects the unhappiness with US monetary policy among the emerging economies that have nearly $10,000bn (€7,552bn, £6,721bn) in foreign exchange reserves, mostly in dollar assets. Any other country with America's problems would need the Paris Club of creditor nations to negotiate with its lenders on its monetary and fiscal policies to protect their interests. But the US situation is unique: it borrows in its own currency, and the dollar is the world's dominant reserve currency. The US can disregard its creditors' concerns for now without worrying about a dollar collapse.

The faith of the Chinese in America's power and responsibility, and the petrodollar holdings of the gulf countries that depend on US military protection, are the twin props for the dollar's global status. Ethnic Chinese, including those in the mainland, Hong Kong, Taiwan and overseas, may account for half of the foreign holdings of dollar assets. You have to check the asset allocations of wealthy ethnic Chinese to understand the dollar's unique status.

The Chinese love of the dollar began in the 1940s when it held its value while the Chinese currency depreciated massively. The renminbi remains a closed currency and is not yet a credible vehicle for wealth storage.

The US could repair its balance sheet through asset sales and fiscal transfers rather than printing money. The $2,000bn fiscal deficit, for example, could have gone to over-indebted households for paying down debts instead of dubious spending to prop up the economy. When property and stock prices decline sufficiently, foreign demand, especially from ethnic Chinese, will come in volume. America's vast and unexplored natural resource holdings could be auctioned off.

The global environment is extremely negative for savers. The prices of property and shares are not yet good value and may decline further. Interest rates are near zero. The Fed is printing money, which will inflate away the value of dollar holdings. Other currencies are not safe havens either. As the Fed expands the money supply, it puts pressure on other currencies to appreciate. This will force other central banks to expand their own money supplies to depress their currencies. Hence major currencies may take turns devaluing. The end result is inflation and negative real interest rates everywhere. Central banks are punishing savers to redeem the sins of debtors and speculators. Unfortunately, ethnic Chinese are the biggest savers. Diluting Chinese savings to bail out failing US banks and bankrupt households will eventually destroy the dollar's status. Ethnic Chinese demand for it is waning already. China's bulging foreign exchange reserves reflect the lack of private demand for the US currency.

US policy is pushing China towards developing an alternative financial system. For the past two decades its entry into the global economy rested on providing cheap labour to multinationals and pegging the renminbi to the dollar. The dollar peg allowed it to leverage the US financial system for its international needs, while domestic finance re-mained state-controlled to redistribute prosperity from the coast to the interior. This dual approach has worked well. China could have its cake and eat it. Of course, the global credit bubble was what allowed the approach to be effective; its inefficiency was masked by bubble-generated global demand.

China is aware it must become independent from the dollar at some point. Its recent decision to turn Shanghai into a financial centre by 2020 reflects its anxiety over relying on the dollar system. The US will not pay attention to something so distant. However, if global stagflation takes hold, as I expect it to, it will force China to accelerate reforms to float its currency and create a single, independent and market-based financial system. When that happens, the dollar will collapse.

China survives recession without a scratch?

2009-05-04T16:39:00.000-07:00

A couple of rather remarkable stories suggesting China has suffered relatively little in the current recession and that it survived without a scratch?

How do they define scratch - millions losing their job and high levels of poverty?

China: What world recession? [Salon]

Back when the Asian financial crisis ravaged the world, China surprised nearly everyone by bulldozing through the downturn while suffering hardly a scratch. Could it be possible that the Middle Kingdom is about to repeat that amazing feat, in the face of a much, much worse economic crisis?

Goldman Sachs appears to think so. Last week, Goldman upgraded its estimate of Chinese GDP growth in 2009 from 6 percent to 8.3 percent. Even more astoundingly, the investment bank forecast that GDP growth in 2010 would be back to a robust 10.9 percent.

This article is way off the mark, not least because the recession is far from over. We may even by some way off the bottom. At least William Buiter has been correctly included for balance.

Next we have:

China cashes in on crisis [Asia Times]

The global financial crisis is proving a boon for a resurgent China, which is poised to exert ever greater influence in Southeast Asia.

While drawing neighboring countries back into China's economic orbit has been part of Beijing's strategy for restoring what it sees as the country's rightful place on the global stage, recent months of recession have furnished Beijing with new opportunities to further its leadership ambitions in the region.

This article is closer to the action. China has large surpluses and it has used them fairly well in the recent stimulus package. I am not sure I mean "well". China has spent a lot of money. Other Asian countries have not. There is every possibility that China will be more powerful in the region at the end of all this.

Where the end is, nobody knows.

.

Financial news operations banned in China

2009-05-03T12:44:00.000-07:00

I hope this does not mean China finance related blogs will be banned as well - opps I forget - China Economics Blog has been banned shortly after its inception although I lose track whether "blogger" blogs are banned or not these days.

China bans foreign financial news operations [FT]

China raised the spectre of renewed international trade friction over market access for foreign financial information providers as the government said such businesses must not engage in news gathering in China.

The surprise ban on this business area is seen by industry executives as backtracking on an agreement China reached with the US, the EU and Canada in November last year on allowing companies like Bloomberg, Dow Jones and Thomson Reuters to distribute information to financial and corporate clients.

The November deal adopted a loose definition of financial information, including news rather than limiting such information to data such as stock market indices and exchange rates.

It was reached after the US, the EU and Canada lodged a complaint against China at the World Trade Organisation earlier last year over Beijing’s move to make Xinhua, its official news agency and a competitor for the foreign providers in the financial information business, its de facto regulator.

In regulations published on the cabinet’s website on Thursday, the government said foreign financial information providers would be allowed to set up businesses in China and would be regulated by the State Council Information Office. But the rules also said: “foreign financial information providers set up in China ... must not undertake news gathering activities".

The industry had seen the memorandum of understanding signed late last year as a victory of advocates of opening over protectionism.

But on Thursday, people close to the situation said they had the impression that forces intending to protect Xinhua had intervened in the last minute. “There will have to be communication and clarification,” one source said.

Industry executives praised the rules in general as a breakthrough giving foreign players a clear legally-defined role for the first time.

“Thomson Reuters has developed an excellent relationship with SCIO over many years and looks forward to working with them on the successful implementation of the new measures to ensure that financial markets in China are as well informed as their counterparts outside China,” said Henry Manisty, global head of government and regulatory affairs at Thomson Reuters.

Dow Jones and Bloomberg were not immediately available for comment.

China has required foreign news agencies to distribute to media clients only through Xinhua for more than 50 years. This will not change, and the foreign players do not challenge this arrangement for their news agency business which helps the Chinese government ensure news does not reach the public uncensored.

The companies’ financial information services business had been relatively unrestricted until 2006, when China took the controversial step of ordering distribution through an agent wholly-owned by Xinhua.

China to annex California?

2009-05-02T02:14:00.000-07:00

Here is a newly drawn map of the US following its inevitable breakup as predicted by a Russian professor. After so many "Soviet empire" breakup stories this map makes a refreshing change.

From the always great "Strange Maps"

The break-up predicted by Panarin would be the result of mass immigration, economic decline and moral degradation, all of which would trigger a second American civil war, and the collapse of the dollar. This would then lead to the break-up of the United States, by mid-2010, into half a dozen regional sub-entities. These would be dominated or absorbed outright by foreign powers.

* Alaska would revert to Russia, and Hawaii would become Chinese or Japanese.
* The West Coast (the three Pacific states, joined with Idaho, Nevada, Utah and Arizona in a Californian Republic), would fall to China or at least be under Chinese influence.
* A Texas Republic, which would also include New Mexico, Oklahoma and all the other traditionally southern states (except the Carolinas, the Virginias, Kentucky and Tennessee), would similarly be either directly or indirectly under the sway of Mexico.
* The aforementioned southern exceptions would join the northeastern states in forming a bloc that might join the European Union.
* The rest - all midwestern and western states - would be at Canada’s mercy.

Imagine Chinese overlordship of Utah - another Tibet waiting to happen -, the Maple Leaf flag flying at the Gateway Arch and the European Union and Mexico meeting just south of there, on the Mississippi. As far-fetched as that may sound, Mr Panarin is no fringe looney. He heads the Russian Foreign Ministry’s academy for future diplomats (and Russia will need quite a few more of those, if his prediction comes true). Mr Panarin also is one of the talking heads on (Russian state) tv whenever US-Russian relations are at issue.

"Globalization" in China

2009-05-01T05:29:00.000-07:00

The Globalist have an interesting article looking at the relationship between the Chinese state and "globalisation". It is interesting that the very phrase "globalisation" has such negative political connotations in China.

I am not convinced by a lot of this article but it does raise some interesting points.

“Democracy Is A Good Thing,” [Globalist]

While China has undoubtedly reaped many benefits from the process of globalization, many of its people are still skeptical of the true nature of this market-integrating phenomenon.

In the early half of the 1990s the word "globalization" itself was so politically sensitive that Chinese scholars avoided mentioning it in articles and books.

On a practical level, globalization was long-regarded as synonymous with capitalist development, a fact that explains the previous ideological sensitivities it carried.

China and the dollar trap

2009-05-01T02:09:00.000-07:00

I have written on numerous occasions how China's massive holdings of US paper is distortionary.

Paul Krugman explains the "dollar trap" well in a recent article that was picked up by the FT yesterday HERE.

The key point that Krugman makes is about China's expectations. They have been and remain far too high. How the Chinese government manages expectations is crucial.

I happen to agree wholeheartedly with Krugman on this issue - the crisis probably does have years to run and some tough decisions will need to be made.

Apologies for the lack of posts recently - my large new academic administrative job is proving rather time consuming. Hopefully normal service can resume again soon.

China’s Dollar Trap [NY Times]

Back in the early stages of the financial crisis, wags joked that our trade with China had turned out to be fair and balanced after all: They sold us poison toys and tainted seafood; we sold them fraudulent securities.

But these days, both sides of that deal are breaking down. On one side, the world’s appetite for Chinese goods has fallen off sharply. China’s exports have plunged in recent months and are now down 26 percent from a year ago. On the other side, the Chinese are evidently getting anxious about those securities.

But China still seems to have unrealistic expectations. And that’s a problem for all of us.

The big news last week was a speech by Zhou Xiaochuan, the governor of China’s central bank, calling for a new “super-sovereign reserve currency.”

The paranoid wing of the Republican Party promptly warned of a dastardly plot to make America give up the dollar. But Mr. Zhou’s speech was actually an admission of weakness. In effect, he was saying that China had driven itself into a dollar trap, and that it can neither get itself out nor change the policies that put it in that trap in the first place.

Some background: In the early years of this decade, China began running large trade surpluses and also began attracting substantial inflows of foreign capital. If China had had a floating exchange rate — like, say, Canada — this would have led to a rise in the value of its currency, which, in turn, would have slowed the growth of China’s exports.

But China chose instead to keep the value of the yuan in terms of the dollar more or less fixed. To do this, it had to buy up dollars as they came flooding in. As the years went by, those trade surpluses just kept growing — and so did China’s hoard of foreign assets.

Now the joke about fraudulent securities was actually unfair. Aside from a late, ill-considered plunge into equities (at the very top of the market), the Chinese mainly accumulated very safe assets, with U.S. Treasury bills — T-bills, for short — making up a large part of the total. But while T-bills are as safe from default as anything on the planet, they yield a very low rate of return.

Was there a deep strategy behind this vast accumulation of low-yielding assets? Probably not. China acquired its $2 trillion stash — turning the People’s Republic into the T-bills Republic — the same way Britain acquired its empire: in a fit of absence of mind.

And just the other day, it seems, China’s leaders woke up and realized that they had a problem.

The low yield doesn’t seem to bother them much, even now. But they are, apparently, worried about the fact that around 70 percent of those assets are dollar-denominated, so any future fall in the dollar would mean a big capital loss for China. Hence Mr. Zhou’s proposal to move to a new reserve currency along the lines of the S.D.R.’s, or special drawing rights, in which the International Monetary Fund keeps its accounts.

But there’s both less and more here than meets the eye. S.D.R.’s aren’t real money. They’re accounting units whose value is set by a basket of dollars, euros, Japanese yen and British pounds. And there’s nothing to keep China from diversifying its reserves away from the dollar, indeed from holding a reserve basket matching the composition of the S.D.R.’s — nothing, that is, except for the fact that China now owns so many dollars that it can’t sell them off without driving the dollar down and triggering the very capital loss its leaders fear.

So what Mr. Zhou’s proposal actually amounts to is a plea that someone rescue China from the consequences of its own investment mistakes. That’s not going to happen.

And the call for some magical solution to the problem of China’s excess of dollars suggests something else: that China’s leaders haven’t come to grips with the fact that the rules of the game have changed in a fundamental way.

Two years ago, we lived in a world in which China could save much more than it invested and dispose of the excess savings in America. That world is gone.

Yet the day after his new-reserve-currency speech, Mr. Zhou gave another speech in which he seemed to assert that China’s extremely high savings rate is immutable, a result of Confucianism, which values “anti-extravagance.” Meanwhile, “it is not the right time” for the United States to save more. In other words, let’s go on as we were.

That’s also not going to happen.

The bottom line is that China hasn’t yet faced up to the wrenching changes that will be needed to deal with this global crisis. The same could, of course, be said of the Japanese, the Europeans — and us.

And that failure to face up to new realities is the main reason that, despite some glimmers of good news — the G-20 summit accomplished more than I thought it would — this crisis probably still has years to run.

Does booming car sales equal trouble ahead?

2009-04-22T00:55:00.000-07:00

So why exactly are Chinese car manufacturers enjoying booming sales? Does the average Chinese citizen realise that growth is only 6.1%?

The big question is where is the money coming from to buy these cars? Please don't tell me it is cheap credit from banks with massive amounts of bad loans.

Perhaps LEX can help me out:

Cars in China [FT]

Isn’t it great when a plan comes together? A few months ago Beijing was fretting about an apparent collapse in demand for cars. Muted sales data – passenger cars fell 35 per cent between March and August – suggested that China would be lucky to get anywhere near its target of shifting 10m vehicles in 2009. Some blunt instruments later – tax cuts and subsidies for smaller vehicles – and cars are flying off forecourts. With 2.7m new vehicles shifted in the first quarter (up 4 per cent year-on-year), China has zoomed past the US (2.2m, down 38 per cent) as the world’s largest market. At that rate, Beijing will beat its 2009 target by early December. No wonder this week’s Shanghai auto show is more festive than similar events in the west, which are being scaled back or canned.

But delegates should keep some champagne on ice. Carmakers are not necessarily looking at better profits: minivans mean mini-margins. Sales of vehicles with bigger engines are falling, as they are everywhere else. This year’s overall pick-up in sales is almost certainly linked to rampant credit growth, which the banking regulator last week said it intends to tame. And the industry still has structural demand problems. Take cars: sales growth averaged about 40 per cent a year in the six years to 2008, when annual growth slipped to 7 per cent. Even with the punchy start, 2009 is set for about 5 per cent, estimates Citi. For a country with third-world penetration – 32 cars per 1,000 people in 2007 (compared to 800 in the US) – that kind of growth is hardly spectacular.

Chinese savings rates are among the world’s highest, implying huge potential for consumption to rise. But as Morgan Stanley points out, given off-book liabilities such as retirement, healthcare and education, the average consumer is practically in negative equity. Despite inducements from Beijing, households may continue to prioritise these invisible debts over a new set of wheels.