China expects further rate hikes to cool property market

China expects further rate hikes to cool property market
(Xinhua)
Updated: 2011-01-03 10:50


BEIJING - The new year may be tough on people who plan to buy homes and those who already bought homes using bank loans, as China is very likely to announce new interest rate hikes this year after two increases in 2010, which will add to the financial burdens of home buyers.

"I thought I could pay off the mortgage ahead of schedule. But it seems impossible for me now after the government raised interest rates by 25 basis points on Dec 25," said Wu Jing, a female white-collar worker employed at a foreign-funded enterprise in Beijing.

China raised its benchmark one-year lending and deposit rates to 5.81 percent and 2.75 percent, respectively, beginning on Dec 25, 2010.

"The latest interest rate hike will add about 170 yuan ($25.76) to my monthly payment," Wu said.

She took out a one-million-yuan loan to buy a second home at the beginning of 2010.

The Christmas Day rate hike came after the government raised rates in October for the first time in more than two years to tame inflation and prevent asset bubbles.

Also, six times last year China ordered banks to set aside more money as reserves in a bid to control liquidity.

Further, the December hike will not be the last one in this cycle of interest rate increases, as the problem of excessive liquidity cannot be solved quickly in the world' s fastest-growing major economy, said Yu Yongding, a researcher at the Chinese Academy of Social Sciences.

Chinese banks extended 7.44 trillion yuan of loans in the first 11 months of 2010, just shy of the government' s annual target of 7.5 trillion yuan.

Also, though shrinking from the previous month, the country' s trade surplus in November reached almost $23 billion, with imports and exports both hitting record highs.

"The rise in bank lending, trade surplus and hot money inflows pumped more money into the economy, already awash with capital, prompting the government to take more measures to drain liquidity this year," Yu said.

Guo Tianyong, a professor with the Central University of Finance and Economics, said interest rate hikes would help control liquidity, curb soaring property prices and keep the real estate market stable, despite added pressure on the balance sheets of home buyers and developers.

"It will be more difficult for developers to secure loans after further interest rate hikes," said Lian Ping, chief economist at the Bank of Communications, China's fifth-largest lender.

China's property prices climbed 7.7 percent from one year earlier in November, the slowest pace in a year, according to data from the National Bureau of Statistics.

"If interest rates continue to rise in the first quarter of 2011, the government's efforts to cool the property market will show more noticeable effects in the second half," Lian said.

The rise in interest rates also prompted banks to adjust their lending structure.

China Construction Bank (CCB), the country's second largest lender, said it would increase investment in the construction of affordable housing this year, while raising the threshold for commercial property developers to receive loans.

CCB has extended more than 20 billion yuan to support the building of affordable housing and individuals' purchases of such homes, vice president Zhu Xiaohuang said.

The bank's move was in line with the country's effort to increase the construction of affordable housing to 10 million units this year from 5.8 million units in 2010.

It also reflected the country's shift to a prudent monetary policy in 2011 from a moderately loose stance adopted to buoy the economy during the financial crisis.

Further, Lian Ping said the government should ensure adequate capital supplies for new projects and emerging industries this year, despite its decision to tighten bank lending, in order to minimize the effect of reduced liquidity on the real economy.

Chinese shares tumble over tightening policy speculation

Chinese shares tumble over tightening policy speculation
(Xinhua)
Updated: 2010-11-16 15:54


BEIJING - Chinese equities slid Tuesday as investors worried prospects of higher interest rates and inflation control policies would hurt companies' earning.

Property developers, metal companies and banking shares fronted the sell-off with the benchmark Shanghai Composite Index down 3.98 percent, or 119.88 points, to close at 2,894.54.

The Shenzhen Component Index fell 4.61 percent, or 590.82 points, to end at 12,217.27.

Combined turnover expanded to 398.13 billion yuan ($59.96 billion) from 355.3 billion yuan the previous trading day.

Losers outnumbered gainers by 774 to 115 in Shanghai and 898 to 191 in Shenzhen.

http://www.chinadaily.com.cn/business/2010-11/16/content_11558056.htm

Can you picture China in five years (2011-2015)?

Can you picture China in five years (2011-2015)?

Will it still be difficult to buy a house in big cities like Beijing? Will the income gap between the rich and poor narrow or widen? Is the growth model relying on exports or domestic consumption? How about the investment environment in China? In what areas will the government provide policy support? Are we prepared for an aging Chinese society? Is China ready to shoulder its global responsibilities？

There are no easy answers to these questions, which nonetheless need prudent analysis and well-informed strategies, to realize the ultimate goal of development, reform and opening up.

What goal? “To give all Chinese people a happy life,” in the words of Chinese Premier Wen Jiabao.

The Communist Party of China (CPC) Central Committee's Proposal on Formulating the Twelfth Five-year Program (2011-2015) on National Economic and Social Development was adopted at the Fifth Plenary Session of the 17th CPC Central Committee, which ended Oct 18. The draft is subject to approval by the National People's Congress, China's top legislature, when it convenes its annual session next year.



This special coverage focuses on the proposal and the extensive issues that will shape the country's development over the next five years.

http://www.chinadaily.com.cn/china/2010-11/08/content_11513304.htm

Beware a trillion dollars lying under Chinese mattress

Beware a trillion dollars lying under Chinese mattress
William Pesek
August 16, 2010 - 7:51AM
Now that's one big mattress.

Last week, we learned China's households hide as much as 9.3 trillion yuan ($US1.4 trillion) of income not reported in official figures - 80 per cent of it by the nation's wealthiest. This massive pile of stashed cash is equal to about 30 per cent of gross domestic product.

There may be both good and bad news in the above study conducted for Credit Suisse Group AG. The good: it lends credence to the domestic-demand story for Chinese growth. It turns out, the average urban disposable household income is 32,154 yuan, or 90 per cent more than official figures. The bad: China's rich-poor gap may be much bigger than we realise.

China's "Gini coefficient," a statistical measure of wealth equality, has long been too high. In May, the Economic Information Daily, a government-affiliated newspaper, said the figure reached 0.47, higher than the recognised "warning level" of 0.4.

Things may be far worse in the most populous nation. A widening wealth disparity will lead to trouble down the road for 1.3 billion Chinese and investors betting on stability in an economy that may already be the second-largest.

Nothing spooks the Communist Party like social unrest. Its conviction to snuff it out whenever and wherever it occurs was behind the 4 trillion-yuan stimulus package in 2008. Reducing income disparities is a top goal of President Hu Jintao and Premier Wen Jiabao to stave off riots, strikes and other unrest that might threaten the party's six-decade rule.

Harder, Faster

They need to work much harder and much faster. The risk is that they may start believing their own press.

The story getting the most mileage is China's economic brawn. Its $US2.5 trillion of currency reserves is viewed as a nice insurance policy against trouble in markets. News that China bought $US20 billion more Japanese bonds than it sold in the first half of 2010, the fastest pace of purchases in at least five years, is seen as a passing of the torch in Asia.

In a way, it is. Japanese officials have done a poor job of disguising their glee over China supporting their debt. Government and Bank of Japan officials are concerned about their own nation's ability to finance a widening budget deficit. The desperation was fairly clear in a recent advertising campaign that suggested Japanese women are attracted to guys who invest in government bonds.

China's Fragilities

Investors haven't gotten rich betting against China. Yet China's fragilities need tending to, and now, if its development is to be sustainable.

The condition of China's state-owned banks is a concern for investors, and rightfully so. China plans to stress-test banks to assess how a big drop in property prices would affect the financial system. Officials should make sure the process is more thorough and transparent than in the US, Europe or Japan.

Social unrest is a bigger risk. Much of China's hidden income may be "illegal or quasi-illegal," according to the Credit Suisse study, published by the China Reform Foundation.

It should be no surprise that a nation growing 10 per cent has a healthy gray economy running in parallel. That's what happens when an all-powerful, top-down government mixes with vast supplies of capital. Crony capital thrives, be it kickbacks from construction projects, gifts to officials at weddings, payoffs from state monopolies such as the tobacco industry or spreading profits from land transfers.

Corruption's Price

This corruption comes at a huge price. The inefficiencies it breeds feed disparities in economic opportunities, income and the distribution of assets, such as property. The degree of social conflict inherent in China's rise is becoming more apparent. Just ask the folks at Toyota Motor Corp and Honda Motor Co dealing with strikes and demands for higher wages.

The most dangerous aspect of China's trajectory is how, well, American it looks. The concentration of wealth among the richest Chinese helps explain a surge in spending on luxury goods. As Japanese sales wane, posh brands can't open Chinese stores fast enough. Last year, Gucci opened one in Shijiazhuang, the capital of Hebei province, selling $US4000 snakeskin purses. That's about twice the city's official annual per-capita income.

China's social fabric is under pressure. This year's employee suicides at Foxconn Technology Group are a case in point. So is the spate of deadly attacks on schoolchildren, which press reports suggest are related to grievances with local governments. Last week, the New York Times reported on growing violence against doctors in the northeastern city of Shenyang.

China has done a remarkable job raising living standards for millions. The reason it sucks up so much attention and investment is genuine progress. While its challenges are many, China is leaving India far behind in tackling poverty. Now, its wealth balance is heading in the wrong direction.

You can censor Google Inc.'s search engine. You can't hide the fact that a handful of Chinese are getting very rich from the billion-plus workers being left behind. Anger will rise, tempers will flare and things could get out of control. Try stuffing that under a mattress.

Bloomberg

Hard choices as China's boom fades

Hard choices as China's boom fades
July 13, 2010

Australia's export prices remain about as good as they have been in a century, but the peak is now behind us. What we have seen in the past few years is as good as it will get.

Last week alone iron ore spot prices fell 9.4 per cent and Brazil-China freight prices fell 20 per cent. China's trade figures showed iron ore imports fell 14 per cent last month, measured year-on-year, after rising an average 8.4 per cent each month until May.

Given that China bought 70 per cent of the world's iron ore exports last year, and Australia's iron ore exports this year will be worth about $US50 billion, it is not hard to see that the huge Chinese tail wind for Australia's national income is no longer blowing like it was.

The underlying reason for Australia's once-in-a century resources boom was that China's heavy industry sector has been growing much faster than its overall economy. The boom was inflated by distortions in the economy linked to China's hybrid market-authoritarian form of government.

Now a series of command-economy edicts has flipped this pattern around. Steel production has been falling in absolute terms for two months and the rate of decline accelerated through June. That was despite a surge in exports as mills pocketed export rebates before they are scrapped today.

Over the coming decade the trend in Chinese resource consumption - and therefore Australian national income - will be determined partly by consumer and investor preferences. But the aggregate of those private choices will be trammelled by policy and political choices that the Chinese leadership will either face or evade.

Many of those challenges will be outlined tomorrow at the Australian National University's China Update conference. Zhongxiang Zhang will look at China's efforts to reduce fossil fuel consumption, and its equally serious challenges. Last year China installed more wind power turbines than any other nation. And yet, in the first quarter of this year, 60 per cent of wind power generation capacity was wasted because it was not hooked up to the grid.

Huang Yiping will look at the price distortions that fed China's heavy industry boom, including cheap industrial land, cheap energy and cheap capital.

Huw McKay and Ligang Song will calculate how China's per capita steel consumption could peak earlier and at a higher rate than previously assumed - at double the present rate of consumption in little over a decade.

However, for my money these policy debates will be swamped in coming years by the core question of whether and how a one-party state can make itself accountable.

Over-construction will continue so long as officials receive great financial incentives and few political and legal disincentives against bribery and stealing land. State-dominated heavy industry will continue to over-produce so long as the services sector is stunted by politically powerful state monopolies.

That is why Yongsheng Zhang, at the State Council's Development Research Centre, will tomorrow tackle the question of whether local officials can ever be held accountable to their people when they are appointed from above.

And Yang Yao, the director of Peking University's China Centre for Economic Research, goes even more directly to the heart of things. He writes that the key to China's reform-era success is that the party did not allow policy to be hijacked by special interest groups at the expense of other sectors of the population. But that is now changing, as cadres meld seamlessly into the world of crony capitalism.

''While the private business community is realising the importance of cultivating the government for larger profits, it is the government itself, its cronies and government controlled [state owned enterprises] that are quickly forming strong and exclusive interest groups,'' he writes.

''All this suggests that some form of explicit political transition will be necessary to counterbalance the formation of strong and exclusive interest groups. The Chinese Communist Party must soon realise that there is no alternative to fuller democratisation if it wishes to maintain both high economic growth and enhance social stability.''

China's chief auditor warns mounting local government debt a risk to economy

China's chief auditor has warned that high levels of local government debt could derail the country's economy, with some observers suggesting that a number of Chinese provinces are even more fiscally-troubled than Greece.

 

By Malcolm Moore in Shanghai
Published: 1:20PM BST 24 Jun 2010

China's chief auditor warns that mounting local government debts could be a threat to the economy. Visitors discuss in front of a model of a real estate development at a property fair in Beijing Photo: Reuters

Liu Jiayi, the head of China's National Audit Office said the financial crisis had left some Chinese provinces with serious debt problems.

"The scale is large, and the burden is quite heavy," he said, in an annual report to the Chinese government.

 

Related Articles

• US hits out at China over protectionism

• China invests 'billions of euros' in debt-laden Greece

• China tightens stranglehold on rare earth minerals

• Beijing in a sweat as China's economy overheats

• China's economy shows signs of slowing, says World Bank

• Property bubble threatens China rally

Chinese provinces are, in some cases, equivalent in size to major European countries and run with a degree of fiscal autonomy. The southern province of Guangdong, for example, has the same population size as Germany.

However, provincial budgets have been classified as state secrets until now and this is the first time that China has disclosed the level of local government debt.

Mr Liu said the ratio of debt to disposable revenues at some local governments was over 100pc and in the highest case it was 365pc.

He said the audited debts of 18 of China's 22 provinces, together with 16 cities and 36 counties amounted to 2.79 trillion yuan (£279bn) in 2009.

Several observers believe the situation is far worse. The China Daily newspaper, which is run by the government, suggested that the total sum could add up to between 6 trillion and 11 trillion yuan (£590bn-£1.08 trillion).

Victor Shih, a professor at Northwestern University in the United States, believes the sum in 2009 was 11.4 trillion yuan, equivalent to 71pc of China's nominal GDP.

Mr Shih has warned that local governments have also succeeded in rapidly funnelling large amounts of debt off their balance sheet and into public-private investment vehicles.

China's banking regulator said outstanding loans from banks to local government financing vehicles was 7.38 trillion yuan at the end of 2009, rising 70pc year-on-year.

Mr Shih, who researched more than 8,000 of these "local investment companies", said that orders to ramp up spending on infrastructure after the financial crisis could leave China with widespread debt problems.

"I collected data from thousands of sources, including regulatory filings, bond-rating reports and press releases of government-bank agreements," he said, although he admitted that comprehensive data was difficult to track down.

Next year, he is forecasting government debt to hit 96pc of gross domestic product as infrastructure projects continue to eat up cash and produce negligible returns.

"The worst case is a pretty large-scale financial crisis around 2012," he said. "The slowdown would last two years and maybe longer," he added.

The US debt-to-GDP ratio is close to 90pc while Greece's is 130pc.

With Europe's debt problems in the spotlight, the Chinese government has moved to try to fix the problems in its provinces.

Earlier this month, the State Council, China's cabinet, ordered local governments to stop borrowing using special vehicles which rely solely on government income for their revenues and to shut down the public-private partnerships as soon as possible.

The State Council said local government vehicles had "in many cases illegally guaranteed the debt of those vehicles" and had "experienced some problems that demand urgent attention".

The government ordered a progress report to be completed by local governments by the end of the year.

Financial crisis has left China stronger, says HSBC head

Financial crisis has left China stronger, says HSBC head

The chief executive of HSBC in China has said the financial crisis has only made the country stronger, with its exporters becoming leaner and more efficient.

By Malcolm Moore and Adrian Michaels in Shanghai
Published: 7:30PM BST 30 May 2010

"As demand comes back, people are going to find that China has a better and more efficient export machine," said Richard Yorke, who has presided over a dramatic expansion plan for the bank on the mainland since 2005.

The Government's decision to pour an additional 7 trillion yuan (£70bn) of new bank loans into the economy last year, coupled with 4 trillion yuan of stimulus cash, allowed China's exporters to invest in new plants, many of them inland where costs are lower. The stimulus cash also paved the way for vast improvements to China's road, rail and port infrastructure, further cutting costs.

Mr Yorke said China's exports were poised to bounce back so strongly that the country could take an appreciation of the renminbi in its stride. "The currency can go up because costs have gone down.

Manufacturing inland means low or no housing costs and lower wages."

Chinese policymakers have remained cautious about the outlook for exporters, especially given the concerns over the eurozone, which is still China's biggest foreign market, accounting for 25pc of overall exports once the shipping routes through Hong Kong are factored in.

In March, China ran a $7.2bn (£4.9bn) trade deficit, although this was mostly due to the timing of the Chinese New Year holiday on factories and reversed to a $1.7bn surplus again in April. Mr Yorke said HSBC was continuing to build its China business, 70pc of which is presently made up of offering banking services to foreign multinational companies. However, he said that the mix of loans that HSBC is offering is shifting away from manufacturers and towards retailers, property developers and companies selling consumer goods as China moves into the next phase of its development.

He confirmed that HSBC is now looking for a joint venture with a Chinese partner that will allow it to trade securities. As Shanghai moves to become a major financial centre, Mr Yorke said the government would "continue to deregulate" the financial system "but sensibly". "The country is managed extremely well and has a very competent central bank," he said.

He also took a swing at the various Western banks, including Royal Bank of Scotland, which have sold down their stakes in Chinese financial institutions. "You cannot change your China strategy every quarter," he said.


http://www.telegraph.co.uk/finance/financetopics/recession/china-economic-slowdown/7786913/Financial-crisis-has-left-China-stronger-says-HSBC-head.html

Beijing in a sweat as China's economy overheats

Beijing in a sweat as China's economy overheats

China is struggling to contain the threat of an overheating economy in the face of rising house prices, inflationary wage increases and a continuing surge in money supply, the head of the country’s second-largest bank has warned.

By Peter Foster and Adrian Michaels in Beijing
Published: 8:40PM BST 30 May 2010

China is contending with a continuing surge in money supply

Guo Shuqing, chairman of China Construction Bank, said that the latest figures for China’s M1 money supply – a key predictor of inflation – had raised concerns that the country’s vast stimulus and bank-lending was running too hot.

“I saw the figures for last month and M1 is still very high, increasing 31pc from last year, which is one per cent higher than last month,” he said in an interview with The Daily Telegraph.

“We are seeing a lot of money coming to China which is creating a current and capital account surpluses.”

China’s regulators have introduced a raft of measures in recent weeks in an attempt to cool down the economy, forcing banks to raise the capital adequacy ratios and hitting second home buyers with regulation designed to drive speculators out of the property market.

However, Mr Guo warned that the effectiveness of measures to cool house prices, which have risen by up to 40pc this year in some major cities, could be blunted by the massive reserves of cash still being held by private developers. “Sales are falling but prices are not,” he said.

“Developers have a lot of cash, so they’re not too concerned at the moment.”

“Property prices are definitely seeing something of a bubble, but it differs from city to city. You can see prices going very high on the coastline, but in the inland areas and western areas, even in provincial capitals, it’s still not so high.”

China has moved quickly to apply the brakes after first quarter figures showed the economy expanding at 11.6pc year-on-year, driving down sentiments on the country’s benchmark Shanghai index, which has fallen 27 per cent this year.

However, while loan growth is slowing from 2009, huge amounts of fresh loans continues to pour into the Chinese economy with the total outstanding loans still growing at a rate of 18pc this year.

After issuing 10 trillion yuan (£1 trillion) of new loans in 2009, Chinese banks are targeted to inject another 7.5 trillion yuan this year, a reduction but still nearly twice the 4.6 trillion yuan of the loans disbursed in 2008.

Mr Guo warned that the continuing splurge in lending also raises the risk of a sharp rise in non-performing loans among smaller Chinese banks that have funded local government infrastructure projects, often of dubious viability.

“I think that small banks last year newly issued loans grew even fast, some even doubled their liability and assets,” Mr Guo said.

“At the moment the banks seem healthy but I think that small banks, because we don’t know the structure of their assets, maybe have got more risk exposures because they are growing too fast and their risk management is not as good as big banks.

“And secondly because they are very small and their loans are going to a more concentrated number of customers, that also could definitely cause a problem.”

Mr Guo added that with such massive stimulus Chinese inflation, currently running at 2.8pc, was at growing risk of rising. Almost all the coastal provinces that make up China’s manufacturing heartland had granted wage increases averaging 20pc this year.

Analysts add there is an increasing anecdotal evidence to suggest that China’s official inflation figures do not reflect the true pace of price rises being felt by people on the ground. The price of some foodstuffs is up 20pc this year.

Tom Miller of the Dragonomics consultancy in Beijing said: “The Chinese government recently mooted that food subsidies be handed out to rural low-income families, which is a sure indication of the government’s true concerns on inflation.

“The last time the government took that kind of measure was in April 2008 when consumer price inflation hit 8pc for three months running, which suggests the government knows that real inflation is higher than the official numbers suggest.”

The growing inflationary strain has increased pressure in the country for a rise in interest rates, a tool that China’s central bankers have been reluctant to use for fear of damaging exporter competitiveness and piling more burdens on the loan bills of already over-stretched provincial governments.

However, Lu Feng, professor of economics at Beijing University, said that time was running out for China’s monetary authorities to act.

“Although the Chinese government’s efforts to control inflation are impressive, the prospects for fighting this inflation without effectively addressing the problems of loose money are not very encouraging,” he wrote this week on Forbes.com.

“In order to control inflationary pressures effectively, China needs to use the policy instrument of interest rates as a matter of urgency.”

http://www.telegraph.co.uk/finance/financetopics/recession/china-economic-slowdown/7786996/Beijing-in-a-sweat-as-Chinas-economy-overheats.html

The China bubble: don't predict, prepare

GREG HOFFMAN

April 16, 2010 - 9:42AM

Even dyed-in-the-wool, bottom-up stockpickers like me have to accept one inalienable fact; economies and markets are now so interconnected as to be systemically linked; a problem in one area of the system rapidly moves to another.

That fact does not demand predictions as to what will go wrong, when or where. But it does imply preparation for scenarios that would impact your investments. Don't predict, prepare.

For Australian investors, leveraged as we are to the China growth story, that preparation should include an assessment of how your portfolio would stand up were China's growth to slump, if only temporarily.

''Up ahead they's a thousand' lives we might live,'' counselled Ma in John Steinbeck's The Grapes of Wrath, ''but when it comes, it'll only be one.'' And so it is with our portfolios.

It's prudent not to weight your portfolio wholly towards any single possible ''life''. And, several factors are leading The Intelligent Investor's analysts to recommend investors consider building some protection into their portfolios.

These factors include the fact that many previously unloved stocks are now back in vogue, the possibilities of China's growth slowing, inflation and the substitution of private for public debt by governments around the world.

I'd encourage you to consider your own exposure to currently fashionable cyclical stocks like One.Steel, Seek and Amcor. If you find you're a bit heavy, then it might be a reasonable time to think about re-weighting your portfolio.

Bolstering your cash balance is a great way to build capital stability and also maximise your flexibility for any future dip or downturn in the market; the proverbial financial ''dry powder''.

We're also looking to build in another layer of protection through careful re-investment. A number of top-class blue chip stocks have been left behind by those rushing back into cyclicals and some of these might make great additions to a long-term portfolio.

Current stock recommendations

Stocks such as Foster's Group, Santos and Insurance Australia Group are on our current shopping list, as are several quality stocks with significant offshore income (such as QBE Insurance and Sonic Healthcare).

These stocks offer the potential for significant gains if the Aussie dollar were to take a tumble for any reason (bear in mind that a little over a year ago, our dollar was fetching less than 70 US cents).

We also have a few carefully-selected infrastructure stocks on our buy list as well as a property developer or two. We expect the latter to provide more cyclical oomph if Australia manages to skirt any major economic setbacks from here. 

By combining a higher cash balance with a re-weighting towards less cyclical stocks, we hope to maintain a sensible equilibrium between offence (should markets continue higher) and defence. But how you react from here will be crucial.

We're now recommending investors begin changing their stance in the expectation that further gains will be much harder fought. A number of commentators seem confident that the Australian business sky is blue as far as the eye can see.

It's an increasingly fashionable idea and we've been around long enough to know that in financial markets, danger can lurk in such trendy consensus views.

Our preference is to begin buttressing our portfolios for any potential bumps in the road. Our weapons of choice are increased cash holdings and a higher weighting to more stable, defensive businesses, which currently strike us as offering better value than the more expensive and volatile cyclicals.

This article contains general investment advice only (under AFSL 282288).
Greg Hoffman is research director of The Intelligent Investor

http://www.smh.com.au/business/the-china-bubble-dont-predict-prepare-20100416-sif2.html

The China bubble

GREG HOFFMAN

April 12, 2010

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;

Assuming Chancellor is right, what are the implications for Australian investors? That's what we'll look at on Wednesday.

This article contains general investment advice only (under AFSL 282288).
Greg Hoffman is research director of The Intelligent Investorwhich provides independent advice to sharemarket investors.

http://www.smh.com.au/business/the-china-bubble-20100412-s34b.html

'China faces the 'greatest bubble' in history'

'China faces the 'greatest bubble' in history' 18 Mar 2010, 0300 hrs IST, Bloomberg

HONG KONG: China is in the midst of “the greatest bubble in history,” said James Rickards, former general counsel of hedge fund Long-Term More on Financial crisis Lighter side of recession Top 10 US bankruptcies Where has US bailout money gone? Capital Management. The Chinese central bank’s balance sheet resembles that of a hedge fund buying dollars and short-selling the yuan, said Rickards, now the senior managing director for market intelligence at consulting firm Omnis. “As I see it, it is the greatest bubble in history with the most massive misallocation of wealth,” Rickards said at the Asset Allocation Summit Asia 2010 organised by Terrapinn in Hong Kong on Tuesday. China “is a bubble waiting to burst.” Rickards joins hedge fund manager Jim Chanos, Gloom, Boom & Doom publisher Marc Faber and Harvard University professor Kenneth Rogoff in warning of a potential crash in China’s economy. The government has raised banks’ reserve requirements twice this year after economic growth accelerated and property prices rallied. China has pegged the yuan to the dollar since July 2008 to help exporters weather the global recession. The central bank buys dollars and sells its own currency to prevent the yuan strengthening, driving foreign-exchange reserves to a world-record $2.4 trillion as of December. The Shanghai Composite Index of stocks jumped 80% last year and property prices rose at the fastest pace in almost two years in February, helped by a record 9.59 trillion yuan ($1.4 trillion) of new loans in 2009. Also Read  → China unyielding on yuan as US raises pressure  → World Bank says China should grow 9.5 pc in 2010  → Yuan appreciation: Will China listen?  → World Bank urges China to let currency rise  → Time for China to revalue yuan: US Treasury official ‘MASSIVE STIMULUS’  The World Bank indicated on Wednesday that China should raise interest rates to help contain the risk of a property bubble and allow a stronger yuan to help damp inflation expectations. The nation’s “massive monetary stimulus” risks triggering large asset-price increases, a housing bubble, and bad debts from the financing of local-government projects, Washington-based World Bank said in a quarterly report on China released in Beijing. “People making comments about bubbles possibly don’t have all the facts,” HSBC Holdings chief executive officer Michael Geoghegan said in Shanghai on Tuesday. Regulators are in control of the banking industry, and have the ability to curb lending as needed, he said.  Rickards said leveraged speculation in the stock market, wasteful allocation of resources by state-owned enterprises, off-balance-sheet debt More on Financial crisis Lighter side of recession Top 10 US bankruptcies Where has US bailout money gone? through regional governments and the country’s human rights record are concerns. “Take Russia and China together, neither of them is really deserving any investment” except for short-term speculation, Rickards said. India and Brazil are two of the “real economies” among the developing countries, he said. HARD LANDING  China is poised to overtake Japan as the world’s second-largest economy this year, according to the International Monetary Fund , and Nomura Holdings forecasts it will contribute more than a third to global growth. The nation has surpassed the US as the world’s largest auto market and Germany as the No. 1 exporter. Harvard’s Rogoff said February 23 that a debt-fuelled bubble in China may trigger a regional recession within a decade, while Chanos, founder of New York-based Kynikos Associates, predicted a slump after excessive propertyinvestments. Investors Bob Doll and Antoine van Agtmael say China’s stock market isn’t a bubble. Equities will gain by the end of the year as the government takes measures to prevent the economy from overheating, Doll, BlackRock’s CIO for global equities, said. China is unlikely to face “chaos” or experience a hard landing, Van Agtmael, chairman and chief investment officer of Emerging Markets Management said . ‘VERY SOUND’  The banking industry has “very low impairment charges compared to what you’d expect this time in the cycle,” HSBC’s Geoghegan said. “I wouldn’t be surprised if there’s a gradual increase in impairments, but long term, I’m confident that the structure of the banking industry is very, very sound.” Rickards disputed an argument that China could hold US policies hostage through its Treasuries holdings. The nation remained the largest overseas owner of US debt after trimming its holdings by $5.8 billion in January to $889 billion. China will suffer massive losses if the debt was dumped, reducing the funds available in the US securities market and forcing the prices lower, he said. http://economictimes.indiatimes.com/news/international-business/China-faces-the-greatest-bubble-in-history/articleshow/5695593.cms