Saturday, December 17, 2011

China's Economy : Many problems, many bullets....

In April 2010 Jim Chanos spoke about China being on a threadmill to hell[Link]. It turned out that it was Europe not China that was on that threadmill.

China is “on a treadmill to hell,” said Chanos, who saidin January the nation is Dubai times a thousand. “They can’tafford to get off this heroin of property development. It is theonly thing keeping the economic growth numbers growing.”  

Actually the Chinese govt did have the foresight to cool their property market since 2010. Numerous draconian measures including increasing down payment, restricting buyers to only two properties, restricting bank lending etc. Measures that can only be implemented in a country like China. China's red hot economy caused inflation to rise and Chinese govt restricted lending by raising the reserve ratio slowly choking off credit to the economy. Between July 2006 and June 2011, China’s reserve requirement ratio was changed 35 times. This is the tool of choice for China's policy makers to control the liquidity in the system.

The estimated banking reserves today is 30% of its GDP which means China has the tightest monetary policy in the world today. At some point bank lending was so restrictive, small businesses couldn't get loads from the banks and went to underground lenders. Thinks happen quickly in China and by the time the authorities came around discover the lending it is estimated that as much as large  US$600B[Link].

An economy slowing down is not in itself a problem if the central bank has bullets in its arsenal to fight it - and China has kept plenty of bullets due to its tight policies. The US economy is muddling along and still growing but the US Fed has pushed interest rates to zero and Bernanke is left with very little if a recession comes along. Why is all this important?

The Singapore economy is clearly slowing down looking at the export figures. Europe is going to into recession and the US will probably stay flat barring any economic shock from Europe due to the debt crisis - this is a big risk if Europeans can't stabilise the situation and some kind of disruption occurs. What happens in China will probably tip the balance.

China is in the midst of transforming its export-led economic growth to one led by domestic consumption. It will import more, get its domestic economy fired up and become less dependent on exports. We see some of this in its latest trade figures[China looks to bring in more imports, keep exports stable]/  China exports more to Europe than it does to any other country so it has to ram up its domestic economy to keep growing and creating jobs. The purchasing power of China is huge and exceeds that of US [China tops US as biggest-economy by purchasing power].

The Chinese economy is now slowing like the rest of the world and actually the policy makers wanted that because inflation was their biggest problem. Inflation appears to under control and the are starting to ease and put more liquidity in back with the first cut in bank reserve ratio on 28 Nov 2011[Link]. There is plenty of room to cut ..and if that does not do the job, they can reduce interest rates and reverse all the restrictive polices on the property market.

Despite Chanos dire predictions for China crashing into the abyss, China may end up being the sole rescuer of the global economy. While China has many problems, bad bank debts, excessive borrowing by local govt and over investment in infrastruture, it does not borrow money from foeign lenders and hence cannot be held hostage by the financial markets like Europe. There is also the positive side effect of not being a democracy, the guy on top can just give the command and things get done. Compare that with 17 democracies in the Eurozone - they have all the resources to end the crisis but just can't get it done. Before the Asian crisis, Chinese banks were asked by the central govt to increase lending to state own enterprises. When the Asian crisis hit close to $300B of these loans become bad and would have crippled the Chinese banking system. In the US, politicians will deliberate and debate for weeks and months as the economy sinks about moral hazard etc but in China they simply buried the problem. The Chinese govt set aside $300B to buy up all the bad loans to clean up the bank's balance sheet. A few years later, the same banks had successful IPOs and took in plenty of money from investors around the world.

You may have heard this advice from pundits and investment advisors a few years ago to invest in Chinese stocks because its economy is growing very fast. Well, as the Chinese economy grew in 2009, 2010, and 2011 rapidly, China's stock market has been sinking lower and lower. The stock market in China does not correlate with economic growth but with liquidity in the system. As the Chinese economy was growing, the govt was tightening by pushing up the reserve ratio and later on the interest rates. That kept money out of investments in the stock market even as the economy grew continuously for more than 2 years and the stock market went no where. Every major stock market rally in China's Shanghai Composite (and  in Hong Kong?) coincide with the start of monetary easing in China. .Chinese stocks have fallen to the lowest levels in 2.5 years and while its economy slows from the problems in Europe, the govt will have to ease monetary policies to maintain growth which what is needed to give its stock market a boost.

For many resource rich countries, China's growing domestic economy will provide a backstop to the problems in Europe and slow growth in USA. In the previous crisis in 2008, a number of analyst spoke about decoupling but it did not happen because the shock to the global economy was too sudden and severe. Aggregate demand simply collapsed and plunge the world into a global recession. This time we have a crisis that has gone on for 2 years and policy makers appear to understand most of the possible ramifications including the Singapore govt that warned of dark days ahead. There are even radio adverts telling people their bank accounts are protected to prevent a run like in the 2008 crisis. I'm not optimistic about Europe given that they appear to be behind the curve all the time and are reactive to market stress. Some kind of economic shock may occur if the situation get so bad that some countries want to leave the Eurozone or default on the crippling debts. Italy is indeed on the threadmill to hell as it is paying more than 7% to borrow money unless something is done soon.. The outlook is uncertain but global recession is not inevitable. There are opportunities coming for those who can see through the fear but be careful of potential shocks from Europe.

9 comments:

Anonymous said...

"There is also the positive side effect of not being a democracy, the guy on top can just give the command and things get done."
Lucky Tan

Exactly lah.

But if you have democracy, you can still give the command and things get done by having 93% seats in Parliament with only 60% votes.

So this is a positive side effect of being a democracy like Singapore.

But only in Singapore. Sorry lah, other countries cannot follow.

Anonymous said...

No wonder lah, Singapore is so stable, peaceful and prosperous.

Anonymous said...

Wah so good ah?

Why not give command and;

a)maybe the 4 stranded MRT trains can start moving?

b)maybe Singaporeans can become creative?

Let's hope 140,000 affected commuters will vote wisely in GE 2016.

Anonymous said...

Your gold will turn to dust.

Anonymous said...

There is no doubt that the East is on the rise and the West is in decline. China is definitely very much on top of their financial and economic situations.I am not sure they are ahead of their corruption problems which is a bigger threat to China than anything else.
Europe will overcome their problems in a year or two. I don't see a global recession. There will be small pockets of recessions around the world concentrated in some parts of Europe. The global economy is very different these days. Asia is powering ahead. The central banks are much better in overcoming financial problems - just print $$$$$. So the real problem is inflation when the dusts in Europe settle. All these $trillions lying around earning nothing now will be put to work. There will be a mad rush for good assets and then not so good assets.
The weak US$ is quietly doing some wonders to the American economy. The cheap American real estate is attracting lots of foreign funds.
So don't get caught out with too much $ when the hyper inflation sets in.

Anonymous said...

Smaller the class room, easier to manage but the bigger the classroom, expect kids to throw chalks at the teacher while she busy marking papers.

Raymond Toh said...

I am impressed by your vast knowledge and will add your blog to see more postings .. keep it up, very intriguing to read the stuffs you wrote

Anonymous said...

USA may not end up like Japan. They are more flexible. Programs like this help :http://www.nytimes.com/2011/12/19/nyregion/new-york-developers-take-advantage-of-financing-for-visas-program.html?_r=1&hp

Anonymous said...

since china is able to prevent recession and manage inflation, it does seems that she might be able to go through all these without too much of issuse.

what your view of singapore? do you think that singapore is able to do the same thing too by opening the flood gate further when there is a recession?

take note that opening the flood gate is the singapore version of printing more money via the man hours channel.

company will then be able to cut labor cost and ride the wave better and weather through a recession.