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Is China talking down its economy?


Blind spots

In the last few years, the Chinese economy and administration has changed – unannounced and in a very subtle way. There is an interesting openness and candour, which are new elements in the China-mix.

Instead of the usual three themes of real-estate bubble theory, the mega infrastructure projects and the impending dollar-yuan revaluation, this post will look at four other elements. These  four elements are usually ignored in most China analysis – which this post will address.

The US recruited Europe, Japan, Asian Tigers - and now China in this manner for the last 60 years.

The US recruited Europe, Japan, Asian Tigers - and now China in this manner for the last 60 years.

China opens up

In March 2010, China appointed three economic advisors to ‘help’ the People’s Bank Of China. Drawn from academic backgrounds, the names of the advisors were leaked to the press.

Zhou Qiren, Xia Bin and Li Daokui will replace Fan Gang, formerly the sole academic member of the committee, the People’s Bank of China said in a statement on its Web site today, citing decisions by the State Council, the top cabinet. Zhou and Li have spent much of their careers in teaching and academic study, while Xia has worked as a researcher at government agencies.

Li Daokui has been a forthright and hawkish tone in flagging China’s problems! What gives. The way it seems, these economists are talking down the yuan! An orderly devaluation of the yuan and a negotiated recapitalization awaits Chinese banks.

For the first time ever, China is talking down their economy! (© Copyright 2010  Dave Granlund - All Rights Reserved).

For the first time ever, China is talking down their economy! (© Copyright 2010 Dave Granlund - All Rights Reserved).

“The housing market problem in China is actually much, much more fundamental, much bigger than the housing market problem in the US and UK before your financial crisis,” he said in an interview. “It is more than [just] a bubble problem.”He was speaking ahead of Monday’s announcement by the State Council that it had approved a plan to reform real estate taxes, the clearest indication yet that the government will for the first time impose an annual tax on some residential housing in order to rein in rising prices. The news sent shares in China down 2.4 percent. (via China Property Risk Is Worse Than in US – CNBC).

Euro-slide Effect

EU is the largest market for Chinese exports.The change in the Euro-yuan equation in the last 6 months has made Chinese exports to the EU more expensive. This will still not take US pressure off yuan revaluation – and anyway there was no much pressure from EU for a Euro-yuan reset!

Graph courtesy - The New York Times

Graph courtesy - The New York Times

Chinese leaders reached a consensus in early April to break the renminbi’s peg to the dollar. That ended a dispute that had spilled into public view in March when Commerce Ministry officials warned in speeches and interviews in Beijing and Washington about the dangers of any change in the renminbi’s value. The ministry halted those warnings immediately after the consensus was reached, and Chen Deming, the commerce minister, even reversed himself publicly by saying that China’s trade deficit in March was nothing to worry about.

Trade finance out of China

A few quarters ago, China’s trade froze due to lack of trade credit. Chinese banks were unable to get intra-bank limits – and in turn were unable to fund letters of credit for Chinese exporters.

A hiccup in the Chinese realty markets could freeze wheels in China – freezing trade wheels in Asia. As reported earlier in April 2009,

China’s exports rose 7.6% in March from February, after six straight months of contraction. “While exports growth is likely to remain weak in the coming months,” Goldman Sachs economists Yu Song and Helen Qiao commented about China, “we believe the worst sequential slowdown probably is behind us now.”

Some of the revival is due to the greater availability of trade finance, which had dried up as banks clamped down on lending in late 2008, hamstringing global trade.

The Shanghai Composite

In 2010, even as global markets recovered or stabilized, the Chinese Shanghai Composite Index is in bad shape.

In the rankings of the world’s worst-performing stock markets this year, nations drowning in debt feature heavily. Greece is number one, closely followed by Slovakia, Cyprus and Spain. But then, in fifth place, there is China.

Shanghai’s decline – the index is down 16 per cent since January – has caught many investors by surprise, since China is widely seen as a beacon of growth in a world that is still reeling from the financial crisis.

Having fallen to a eight-month low on Thursday, the Shanghai Composite is this year’s worst performing index in Asia.

This may no longer be an issue!

This may no longer be an issue!

Is the Chinese catastrophe overstated

Mass media usually ends-up following, herd-like, some high-profile ‘opinion makers.’

The China Bubble theory has been pushed by people like Jim Chanos, who cut his teeth by predicting Enron and Tyco. In January this year, he made a widely reported prediction that China is “Dubai times 1000” and is likely to burst any time soon. Chanos’ Biblical imagery and descriptions about China’s, “Treadmill to Hell’ gives the game away. Marc Faber is another boom-and-doom theorist, who has predicted a China bust up! Another economic commentator, Hugh Hendry, in a similar vein, says,

“They suggest a new era reminiscent of Protestant Capitalism. They want us to believe the atheist Chinese are prepared to work harder and defer their gratification for longer.”

These commentators are seemingly painting this economic scenario with theocratic hues! A modern version of the medieval crusades?

Andy Xie, an ex-Morgan Stanley /World Bank expert on China, earned his spurs, with closer to reality, secular reports on bust-and-doom scenarios in China.

The logic of China-busters is very well refuted by those who who are closer to China market and economy – unlike some American Sinologists, who talk to other Sinologists, whose ‘unquestioned’ expertise is based on other Sinologists’ opinion.

The Chinese economic ‘bubble’ may yet burst. But, methinks, the causes, effects and intensity will be, well …

Different!

Some other China posts by 2ndlook

  1. Galeo Rhinus
    June 6, 2010 at 3:46 pm

    excellent analysis… and I think the “different” outcome will probably emerge from an aspect of china that is probably not covered so far…

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