Black China Blog

The following article is from London’s Financial Times.    

Consumer prices in China rose 2.8 per cent in April from the same month a year earlier, the fastest pace in 18 months but below Beijing’s full-year target of 3 per cent, data released on Tuesday showed.

Adding to fears of potential overheating, Chinese property prices jumped 12.8 per cent in April from a year earlier, the biggest increase since records began in 2005, although sales volumes have already fallen substantially in many big cities in reaction to a string of government measures to cool the market.

Producer prices rose 6.8 per cent in April, up from March’s 5.9 per cent rise, indicating that consumer prices are likely to increase faster in the coming months.

“Virtually everything is on the rise in China, from wages to grain and vegetables and we expect inflation above 5 per cent by the end of the year,” said Dong Tao, chief regional economist for non-Japan Asia at Credit Suisse. “Inflation will be the biggest worry in the second half of this year and everybody in China except government economists seems to have realised inflation won’t peak in the middle of the year.”

New bank lending in April reached Rmb774bn ($113.3bn), higher than most economists had forecast but less than in the first two months of the year and well below the frantic pace in the first half of last year.

Food prices make up about a third of China’s consumer price index and were the main driver of higher inflation in April, rising 5.9 per cent from a year earlier, while non-food prices rose 1.3 per cent.

“China is at risk of overheating, with spot fires breaking out in various parts of the economy, most notably in the property market and bank lending,” according to Brian Jackson, a strategist at Royal Bank of Canada in Hong Kong. “We expect Beijing will soon move to hike lending rates and allow moderate currency appreciation against the dollar.”

With the benchmark one-year bank deposit interest rate at 2.25 per cent, Chinese savers are already faced with negative real interest rates, making investments in the booming property market more attractive.

Credit Suisse estimates China’s coastal areas are experiencing a labour shortage of at least 6m workers, with the shortfall now spreading from manufacturing to the service sector and adding to inflationary pressures.

China’s statistics bureau said on Tuesday that the country was facing higher inflation in the near future but insisted the government would probably meet its full-year inflation target of 3 per cent.

The following article is from Reuters.

China returned to familiar territory in posting a trade surplus in April, but exports only narrowly topped imports, providing limited comfort for policymakers fearful of another round of global economic turmoil.

China recorded a $US1.7 billion trade surplus last month, defying expectations for a second straight deficit after March’s $US7.2 billion shortfall.

Exports rose an annual 30.5 per cent in April, topping forecasts for 28.9 per cent growth. Imports were up 49.7 from a year earlier, missing forecasts for a 53.8 per cent increase.

“Expectations for yuan appreciation will continue to exist, but April’s strong export figure alone will not have a big impact on timing,” said Sun Wencun, an economist with CITIC Securities in Beijing.

China has frozen its currency against the dollar since mid-2008, trying to cushion its exporters from the global financial crisis.

Speculation had swirled in recent weeks that it was only a matter of time before Beijing let the exchange rate resume appreciation, but many analysts believe that international jitters in the wake of Greece’s debt crisis could stay its hand.

“These numbers largely pre-date the escalation of the euro-area sovereign debt crisis and the sharp sell-off in the euro, so it is still too soon to tell whether we will see weaker European demand for Chinese exports in the months ahead,” Brian Jackson, an economist with the Royal Bank of Canada in Hong Kong, said in a note.

Back to surplus

China’s leaders have said they want to be sure that external demand has made a sustained recovery before unwinding policies introduced at the height of the global credit crunch, including the yuan’s de facto peg and a range of tax rebates given to exporters.

But the world’s third-largest economy slipped into trade deficit in March — its first in six years — more because of domestic strength than external weakness.

With China growing 11.9 per cent in the first quarter from a year ago, its appetite for energy and raw materials has been voracious.

April may prove something of an inflection point, with base effects over the rest of the year likely to push export growth rates higher, while the pace of import increases slows.

Grace Ng, an economist with J.P. Morgan in Hong Kong, forecast that China would run a $US100 billion trade surplus this year.

“We’ve been saying that the March trade deficit was temporary. We are looking for the full-year trade balance to come back into a solid balance situation,” she said.

The following article comes from Associated Press.

China’s economic growth surged to 11.9 per cent in the first quarter of 2010, but inflation was lower than expected, easing pressure on Beijing to hike interest rates and slow the economy’s rapid recovery from the global slump.

Consumer prices rose 2.2 per cent compared with a year earlier, the National Bureau of Statistics said on Thursday, well below the government’s ceiling of 3 per cent for the year.

The data suggested Chinese leaders are succeeding in their effort to keep stimulus-fuelled growth high while preventing inflation from spiking up. Analysts were closely watching today’s data to see whether interest rate hikes or more drastic action was required to prevent overheating.

The surge in economic expansion was up from just over 6 per cent in the same quarter a year ago and 10.7 per cent in the final quarter of 2009. It was supported by a 19.6 per cent rise in industrial output over a year earlier and a nearly 26 per cent rise in investment in factories and other fixed assets.

Chinese leaders face a challenge in checking inflation and curbing reckless, stimulus-fuelled spending on unneeded factories and other assets that could leave a mountain of bad debts.

Beijing raised fuel prices Wednesday in a show of confidence about its ability to keep inflation in check.

Inflation rose to 2.7 per cent in February compared with a year earlier, adding to expectations prices may be getting out of hand. The statistics bureau said March inflation eased slightly to 2.4 per cent.

On Wednesday, the government reported housing prices in 70 major cities rose 11.7 per cent in March from a year earlier – adding to alarm over a potentially dangerous bubble in real estate prices.

‘‘We believe Beijing now needs to take another small step to exit from its stimulus policies,’’ said Stephen Green, an economist for Standard Chartered Bank in Shanghai. ‘‘There are a number of reasons to be concerned that a nastier bout of inflation is in the works.’’

Beijing reported its first monthly trade deficit in six years for March as imports surged, reflecting China’s faster recovery from the global crisis than its key trading partners.

Lending by Chinese banks fell 43 per cent in the first quarter from a year earlier as the government tightened credit controls while trying to wind down its stimulus.

Also helping to cool inflation, prices for farm produce have fallen for seven weeks, suggesting food costs would ease.

Regulators have renewed efforts to assess risks from loans and each day brings fresh reports of projects found to be unprofitable or ill-conceived.

This article comes from Australia’s Fairfax newspapers. I do not agree with this man’s fears.   China has a long way to go yet.

Edward Chancellor, a member of the asset allocation team for Boston-based GMO and, interestingly, the author of a recent Financial Times piece on Australian property, is a financial historian and bubble expert.

His 1999 book, Devil Take the Hindmost: A History of Financial Speculation, examined past speculative manias. Perhaps you’ve read articles comparing the tech boom and 1990s’ bull market to tulipmania in 1630s’ Holland.

The difference is that Chancellor was making that comparison before the tech bubble burst, some years before Alan Greenspan claimed it was futile trying to predict bubbles at all.

Chancellor’s timing may have been fortuitous. To accurately predict something once might mean little. To repeat the feat perhaps means something more.

His next major piece – Crunch time for credit: An enquiry into the state of the credit system in the United States and Great Britain – included this prescient paragraph:

”The growth of credit has created an illusory prosperity while producing profound imbalances in the British and American economies…When credit ceases to grow, the weakened state of these economies will become apparent.”

That report was written in 2005, years before the credit bubble burst. Chalk two up to Chancellor.

Third time lucky?

He’s now turned his attention to China, a fertile ground for his fertile mind. Released last week on the GMO website, China’s Red Flags is split into two parts.

Crisis checklist

Section one identifies speculative manias and financial crises, offering a checklist for those trying to identify bubbles in advance of their bursting. Chancellor offers 10 criteria for what he calls ”great investment debacles” over the past 300 years (the report explains each in far more detail);
1. A compelling growth story;
2. A blind faith in the competence of authorities;
3. A general increase in investment;
4. A surge in corruption;
5. Strong growth in money supply;
6. Fixed currency regimes, often producing inappropriately low interest rates;
7. Rampant credit growth;
8. Moral hazard;
9. Precarious financial structures;
10. Rapidly rising property prices;

Although all these criteria need not be present in order for a bubble to be present, you can see where Chancellor’s heading: not-so-subtly steering readers towards his own conclusion. In section two he takes each factor and applies it to the case of China.

Ponzi scheme

His conclusion is alarming; The very factors that have allowed China to grow so rapidly over the past few years despite the global slowdown – an investment boom, a credit boom, massive increases in money supply, moral hazard and risky lending practices – are all factors that investors and the mainstream press feel they can safely ignore because China is growing so rapidly.

After the past few years, we should all understand the potential negative implications of such major imbalances. But there seems to be general agreement that a “build it and they will come” approach is warranted in China because it keeps growing rapidly. There’s a Ponzi-like element to the circularity.

Chancellor is concerned that China’s high GDP growth is no longer a function of impressive natural growth. Instead, growth is being engineered to achieve high GDP numbers. It’s producing a system that’s unsustainable and prone to collapse.

This, in essence, is Chancellor’s argument:
- Investors are adopting an uncritical attitude to China’s growth forecasts;
- Because of the way local officials are incentivised, it’s likely that migration of the population from country to city is much further along than the official numbers suggest. So when you hear of another 350 million internal migrants arriving in cities by 2025, many of them are actually already there;
- Hence, future productivity growth will be much more reliant on efficiency gains than urbanisation. China’s record in this area isn’t at all strong;
- Beijing imposes GDP growth targets on local governments. Thus, “GDP growth is no longer the outcome of an economic process, it has become the object”. `When the allocation of resources, whether at the corporate or national level, becomes all about “making the numbers” then poor outcomes are to be expected’;
- In 2009, Chinese fixed asset investment contributed 90% of total economic growth (an incredible statistic and a natural consequence of the previous point);
- Significant overinvestment is present in many areas. For example, capital spending in the cement industry increased by two-thirds despite capacity utilisation running at an estimated 78%;
- The efficiency of investment (incremental GDP growth for each additional unit of investment) is trending downwards towards wasteful levels;
- Interest rates have been kept way too low for decades, sparking economic growth but also imbalances and bubbles;
- China’s enormous foreign exchange reserves are not necessarily a plus. As Michael Pettis pointed out recently, only two countries have previously accumulated such large foreign reserves relative to global GDP – the United States in 1929 and Japan in 1989. Oh dear;
- The Chinese stockmarket is in bubble territory. Last October, a new Nasdaq-style exchange opened in Shenzhen with 28 new listings. The minimum price rise (the laggard of the 28) rose 76% on the first day. Price/earnings ratios averaged 150;
- The residential property market also appears to be in a bubble. In Beijing, the house price to income ratio has climbed to more than 15 times, versus 9 times in Tokyo in 1990.