Don't Bank On China

[Alert]

For those of you banking on China to lead the world out of recession, think again....this article certainly provides some interesting food for thought:

Credit tightening threatens China's 'giant Ponzi scheme'

China's loan growth plunged in July while exports fell 23pc from a year ago after grinding lower for nine months as consumers in the West tighten their belts further.

The data raise fresh doubts about the strength of global trade and whether the world can rely on China's growth miracle to power recovery.

Separately, the Baltic Dry Index – measuring freight rates for bulk goods – has tipped over, dropping 25pc since late July. The shipping figures buttress reports that China has stopped building up stocks of metals and other commodities after a spate of frantic buying over the early summer.

China's central bank said loan growth fell to $52bn (£31bn) from $248bn a month earlier, although it is too early to tell whether Beijing has begun to rein in credit after the explosion of bank loans in the first half of the year.

The loan figures are being watched closely by analysts and traders in the City. Excess liquidity in China has been a key driver of global markets since the rally began in March.

Beijing is walking a tightrope by trying to offset the collapse in exports – almost 40pc of GDP – with an investment blitz in roads, railways, and industry through state-owned companies.

The real economy cannot absorb the money, so it is leaking into asset speculation. The central bank estimates that 20pc of fresh credit has ended up in equity markets. The Shanghai index is up 80pc this year, though profits have fallen by almost a third. The pattern echoes the final phase of Japan's Nikkei bubble in 1989.

"China is a big fat tail risk for world markets," said Hans Redeker, currency chief at BNP Paribas. "Shanghai equities have reached the same extreme as in late 2007. The country will have to cut credit growth, and when this happens, Shanghai equities and commodities will suffer. That is what could bring this global rally to a halt."

China Construction Bank, the number two lender, is cutting loans by 70pc over the second half of the year. "We noticed that some loans didn't go into the real economy. Housing prices are rising too fast," said the bank's president, Zhang Jianguo.

Andy Xie, a leading consultant, said China's boom was a "giant Ponzi scheme" that was likely to "bring very bad consequences" for the country.

"The stock market is in a final frenzy again. The most ignorant retail investors are being sucked in by rising momentum," he said. Equities are overvalued by 50pc to 100pc.

Mr Xie, who wrote his doctoral thesis on Japan's bubble in the 1980s, said China's ratio of property prices to incomes is seven times higher than in the US. It costs three months' salary per square meter of space – arguably the highest in the world – though tower blocks are sitting empty. Prices are being propped up by state enterprises, abetted by local Communist bosses.

Mr Xie said Chinese booms and busts follow a political rythm. There is a deeply-rooted belief that the authorities can keep the game going – the "Panda put", China's answer to the "Greenspan Put" – and that the Communist Party will not let the rally fizzle before the 60th anniversary of the revolution on October 1. This belief is self-fulfilling, for a while.

Mr Xie expects China's rally to falter around October, followed by fresh shots of liquidity before the economy falls into a deeper slump by 2012. "Property prices could drop like Japan's in the last two decades, which would destroy the banking system," he said.

Mr Xie said China's asset boom is the flip-side of the weak US dollar. US monetary stimulus is in effect leaking across the Pacific. Bust will follow when the dollar rallies, draining liquidity again. If the Fed tightens abruptly as it did under Paul Volcker in the early 1980s, the denouement could be painful for China.

Beijing deserves praise for trying to switch reliance from exports towards the domestic economy. It has had some success. Retail sales have risen 15pc over the last year. But Professor Michael Pettis from Beijing University said it is proving very hard to induce the Chinese to alter their spending habits. The cultural barriers will take years to overcome.

Instead, the stimulus is feeding more industrial investment, leading to more excess capacity worldwide. While Chinese GDP continues to grow near 8pc, this is based on output. In the West, GDP growth is based on spending. These two definitions are chalk and cheese.

The underlying story has not changed. The East-West imbalances that lay behind the Great Recession of 2008-2009 are getting worse, not better.

[no no no no no]

But vulcan said China is the savior.

Did you not hear, Asia will come on top as it has to.

What argument can the writer possibly have that betters that piece of logic?

[dumb mum]

Thanks, Alert - interesting article, but can you quote source, please?

[Alert]

It's by Ambrose Evans-Pritchard writing in the UK Daily Telegraph.

[Not Banking On China]

Three things need to happen for the recovery to have legs. First, the financial system needs to be fixed. Next, industrial output needs to recover after the massive de-stocking "heart attack" that convulsed the world economy last autumn. Lastly, consumers must recover their confidence. Each of these three areas has three indicators, making nine in all.

For the three financial measures, the story is pretty much all positive. First, Libor, the interest rate at which banks are prepared to lend to each other, has returned to levels last seen before the collapse of Lehman Brothers. The gap between Libor and the base rate has declined sharply since last November's peak as bank lending has begun to normalise.

The second indicator is another spread, the gap between the cost of borrowing for higher-risk companies and the risk-free rate at which governments can borrow. This high-yield spread has narrowed dramatically since March, as the Armageddon-scenario priced into the market then has seemed increasingly unlikely. As a result, high-yield bonds have been one of the best-performing assets of the rally.

Thirdly, the VIX index – Wall Street's fear gauge and a measure of the expected volatility of the stock market – has fallen significantly. Three out of three – the financial indicators are all showing green.

What about the industrial measures? If we are to feel confident that conditions are improving then we will want that to be confirmed by the people at the coal face. So the expansion in the purchasing managers' manufacturing index (PMI) in July - the first since March 2008 - was encouraging. New orders rose too, suggesting there is more to the rally than just a rebuilding of inventories.

My second industrial indicator is the price of oil and copper. One is the basis of the hydrocarbon economy while the second is an important material for an urbanising society and a good indicator of its economic health. Both have risen steadily since last December, although they have wobbled recently on worries about recovery. Those concerns have affected the third industrial measure, the Baltic Dry Index. This indicator of the cost of shipping goods across the world's oceans collapsed last year in anticipation of slumping production, recovered in April and May but has since lost steam. All in all, the industrial indicators are a mixed bag.

The last group, the consumer indicators, is another curate's egg. New figures today are expected to show another big rise in unemployment. Rising jobless figures are the main reason I remain sceptical about the final two indicators, house prices and retail sales.

Although unemployment data is the most backward-looking of the nine, it will be a key determinant of whether the recent uptick in house prices can be sustained if and when supply increases to a more normal level. Mirroring the recent stabilisation of house prices, retail sales have been surprisingly resilient (up by 3.6pc in July we learned yesterday) but they too are vulnerable to lengthening queues at the Job Centre.

By my reckoning, that's six risers, one faller and two where I can't tell what's really going on. In stock market terms, that translates to something like cautious optimism. It will be interesting to see how they look again in the autumn.
 

[kaki11]

PP's comment looks the same as the bulk of Tom Stevenson's comment in the Daily Telegraph - please attribute.
http://www.telegraph.co.uk/finance/comment/tom-stevenson/6011670/More-green-lights-than-red-on-the-rocky-road-to-a-sustained-recovery.html

[buy now]

Personally it just sounds like more western journo rubbish.  At least out here we get the facts and not the fiction.

I myself see china to emerge as the world leader out of all this and still agree that the power in the world will shift to asia.

Yes the financial system needs fixed and it will be fixed.

This is the place to be living & working nowadays.

[Kudos to you]

Personally it just sounds like more western journo rubbish. 

Thanks for that detailed, well-researched rebuttal of the arguments in the article. Your comments really put the conclusions in the article to shame! Well done! Let me guess...you're a professional economic analyst?

[buy now]

No not an analyst I am a financial planner.  I have heard all this mumbo jumbo before and we have seen just how wrong these western journos can be and the way they sensationalise everything.  Singapore is strong and stands on it own 2 feet.  It will reinvent its self and do what it takes to get through anything.

When the world throws lemons, we get on our feet and make lemonade in this part of the world. 

No matter what negative rubbish you copy & paste here it will make no difference.

Stick that in your pipe & smoke it and if you dont like it you know where the airport is.

[OMG!]

Buy now - you sound more stupid each day. Soon I can't even bring myself to read your ravings anymore... Unless I need a good laugh 

[rather listen]

To a western journo than your propoganda filled rubbish.

[Kubes.SG]

I have called out a few times here, that what is happening in the region (esp: Singapore), as being very much like what I saw and experienced in Japan nearly 20 years ago.  I landed there as an innocent into a place were people thought they ruled and owned the world.  The Yen was high, property prices were astronomical (1 sq meter of land near the Imperial Palace would cost USD450,000), 1,000sqft apartments in Roppongi cost USD10 million;  the Nikkei was at 39,000;  banks lent trillions to wheelers and dealers to buy up the world;  Japanese office ladies (OLs) saved the European luxury goods industries;  nightclubs charged and Companies would pay USD10,000 for a magnum of champagne; OLs would sprinkle gold flakes onto their ice cream, and into their lattes.

The Japanese had worked hard, been disciplined and were smart.  Now they had the world at their feet in just a couple of generations.  Ohhh, it was so fantastic.  Glorious Capitalism.

But has stated in the article, the Japanese Treasury Minister had to act to control the insanity, and he squeezed off the credit markets and raised interest rates.

Japan had reached its peak and would never ever be the same again.

-------------------------------

What a coincidence that I am here, still in Asia, in August 2009,  at the point that could well be start of the next great financial meltdown in Asia.

To the idiots and retards who think that China and tiny Singapore are on verge of truly great things and have therefore leveraged themselves to the hilt  - let me tell you,  you have not seen what I have seen.   You don't know what I know.   Instead, you are greedy, stupid and very short-sighted - and you are in for a major change in your quality of life.

-----

And to "buy now" - others have said it more politely than I could.  You are retarded.   That is not me being rude, just stating a fact.   You should not be allowed to advise others - you don't know anything.

[Walking cliche]

No not an analyst I am a financial planner.  I have heard all this mumbo jumbo before and we have seen just how wrong these western journos can be and the way they sensationalise everything.  Singapore is strong and stands on it own 2 feet.  It will reinvent its self and do what it takes to get through anything.

When the world throws lemons, we get on our feet and make lemonade in this part of the world. 

No matter what negative rubbish you copy & paste here it will make no difference.

Stick that in your pipe & smoke it and if you dont like it you know where the airport is.

Yeah, those Western journos are bad, not like those outstanding journos of the ST and the BT which contributes to this country's media being the laughing stock of the civilized world.

As for the airport thing, it was at least two post I hadn't seen you mentioning it, I was starting to be slightly worried.

You truly are a lemon, I'll give you that.

[buy now]

hey nugget, I have been to overseas and read the newspapers thank you very much.  Well...seems like I am wasting my time trying to get through to you.  If you dont take my word for it, why dont you read what some of the country's top analysts have forecast.  This is based on actual data and not the hype you get in tabloids back home. get the numbers takek them home and read them and see if you can deny the upward trend.  At least we invest in our future and dont sit around resting on our acheivements of yesterday.

[Sure...]

hey nugget, I have been to overseas and read the newspapers thank you very much.  Well...seems like I am wasting my time trying to get through to you.  If you dont take my word for it, why dont you read what some of the country's top analysts have forecast.  This is based on actual data and not the hype you get in tabloids back home. get the numbers takek them home and read them and see if you can deny the upward trend.  At least we invest in our future and dont sit around resting on our acheivements of yesterday.

The country's top analysts? The same that came out twice in the space of one week in the ST to explain how great Temasek has done recently by recording virtual gains on the market of $ 145 million...after making an actual loss estimated at $ 3.5 billion on BofA and Barclays (but shush, can't say this part in ST: the boss' wife is running the thing). Were BofA and Barclays your "investments in your future"?

And by the way, there is no such thing as "actual" data in Singapore. Only "official" data.