Icbccss&p500usd Discussion Threads

[mcbeanburger] 15/4/2004 18:34

I don't know about that E there are rumours that China has stockpiled Ni. They now only need to wait for the price drop to take the the buying again.

Nickel is down 3% today and expect to head down to 5.50 a pound.

[energyi] 15/4/2004 18:15

Inco (N): China's bellwether.
Why? Nickel is 25-30% of stainless steel

[energyi] 15/4/2004 16:13

CHINA... is where the US STIMULUS is showing up.
WHY? They are LINKED to the US Dollar.

But that could change:
from Bloomberg:
Yuan Peg Presents China With Monetary Dilemma
China's central bank is learning a couple of lessons in monetary economics: A central bank that pegs its exchange rate risks destabilizing its domestic banking system in some circumstances. Call that proposition No. 1.

Then there's proposition No. 2, an even older lesson: A central bank can't simultaneously control the money supply, interest rates and the exchange rate.
...MORE:

[snowflake34] 13/4/2004 21:03

Morgan Stanley Apr 13 2004 essay:


China: Rising Hard-Landing Risk

Andy Xie (Hong Kong)



China’s central bank tightened for the third time, raising the deposit reserve requirement to 7.5% from 7% for all banks and to 8% from 7.5% for banks with inadequate capital. China’s central bank understands that there are substantial excesses in the economy and that slowing the economy is necessary to contain financial losses from the current investment bubble. However, as the main distortion in China’s economy is the mis-pricing of risk, possibly by five percentage points or more, the central bank’s actions have had limited success so far.

Investors started far more projects than expected in the first quarter, most likely with the collusion of local governments, hoping that the banking system would have to feed what had already started regardless of the tightening policy. This moral hazard problem has increased substantially the risk of a hard landing for China’s economy, in my view. It is extremely difficult, if not impossible, to guide fixed investment from 50% annual growth at present to the trend rate of about 10-12%. There are no precedents for achieving a soft landing with so much excess.

The current episode again demonstrates that, without an independent and sound financial system, the management of economic cycles is virtually impossible, as the distortion in credit risk pricing is too great for interest-rate policy to work effectively.

Investment Excess Escalates

China’s investment boom escalated in the first quarter. The nominal growth for gross fixed investment in the first two months was 55% from last year. The industrial production increase at 19.4% from last year pointed to equally strong investment for March. It appears that many investors, mainly in property and commodity industries, brought forward investment projects before the central government’s tightening policy would make such investments impossible. Local governments probably abetted such practices by encouraging local banks to lend. Financial institutions’ loans decelerated in the fourth quarter of 2003 but flared up in the first two months of 2004.

The current investment bubble is becoming bigger than the one between 1992 and 1994. Gross fixed investment adjusted for inflation grew by 35% in 1993 but is running at about 45% now. A vast property bubble centered on Shanghai and Beijing is driving the current investment boom. The rapid growth of investment in commodity industries is due to the high commodity prices driven by the property bubble. The demand for commodities for capacity formation in such industries is driving commodity prices even higher. But the current high prices of property and commodities are artificial. When the bubble bursts, huge financial losses from the current investments can be expected, in my view.

Exhibit 1

China: Economic Indicators (YoY % change)

1980-90 1990-00 2001 2002 2003 1Q04



IP 9.9 12.6 17.0 17.7

GFI 9.3 (a) 13.2 12.7 16.9 25.0 (b) 50.0 (c)

Electricity 7.5 7.9 8.2 13.3 14.2 15.5 (d)



Source: CEIC and Morgan Stanley Research

Note: IP stands for industrial production and GFI for gross fixed investment

a) The deflator for GFI is estimated as the GDP deflator minus 15%, as during 1990s.

b) The deflator was estimated with the data available from a few provinces.

c) Guesstimate on the nominal growth of 55% in the first two months.

d) For the first two months

.

Hard-Landing Risks

An investment bubble experiences a hard landing when there is a shock to either liquidity supply or investor confidence. Below, I identify three shock scenarios that could burst the investment bubble.

1) China runs out of money.

China is experiencing a massive inflow of capital. The current tightening, for example, is equal to only two months of capital inflow. Running out of money seems to be a remote possibility at this time. However, history tells us that capital inflow is fickle and tends to flow to countries that have too much money. As soon as a country actually needs of money, capital flow may stop and usually reverses.

China had a trade surplus last year despite its investment bubble. This is highly unusual. China’s trade data were quite distorted, in my view. I suspect that the exports were exaggerated as exporters tried to cash in on VAT rebates, and that imports were understated as smuggling flared up again. China reported a US$8.4 billion trade deficit for the first quarter. This could get much worse if investment continues to grow at the current pace.

China’s gross fixed investment was US$666 billion last year. After depreciation of about US$150-170 billion, net investment was probably US$500 billion. China’s household savings grew by about US$350 billion, in my estimation. The enterprises probably recycled US$100 billion of profit into funding investment. Central and local government budgetary expenditures probably made up for the rest.

If China’s investment rises at a 50% rate in nominal value, the additional financing compared to 2003 would be about US$300 billion. It appears impossible for household savings and corporate profits to rise by that much. China would have to run a vast trade deficit to import capital similar to what the US has been doing. But without an instrument like US treasury bonds, how would China be able to import so much capital?

In my view, China’s capital inflow is based on the expectation of its currency appreciation. When the market sees that China has a major funding gap, it is likely to abandon appreciation expectations and may take money out of China instead. A sudden liquidity reversal could cause a hard landing in China.

2) China runs out of electricity.

Electricity rationing has become widespread. As more investment projects come up, competing for electricity, the situation may make normal production impossible. At some point, additional investment will not increase output anymore, as that could happen only by suppressing existing economic activity. Worse, productive investment in the export sector could leave China for other countries where there is less competition for electricity. Thus, it is possible that an electricity shortage could cause the economy to stagnate.

3) China runs out of property speculators.

Hong Kong and Taiwan investors initiated China’s property bubble in Shanghai and Beijing, and this has since spread to local investors. The perception of instant riches has triggered massive purchases by local people with very limited income. Chinese banks lend on collateral and rarely check cash flow seriously. It is obvious to me that many property buyers in China do not have the income to pay off their mortgages and need rental income to do so. However, the supply has severely depressed rental yields. In a number of areas rental yields are effectively zero after adjusting for depreciation.

At some point, the declining rental yields and rising number of bankruptcies could scare away new speculators. The vast supply would cause property prices to decline substantially. As was the case in the last bubble, many developers would leave buildings unfinished, bringing about a hard landing.

Who Would Pay for the Losses?

An investment bubble ends with financial losses. Because banks account for most of the funding in China, they would be stuck with bad loans. Local and regional banks were organized as shareholding companies, which the government had hoped would improve their performance. However, it strikes me that such banks would create proportionally more bad debts due to their aggressive lending practices and lack of risk management.

The Chinese government owns directly or indirectly all of the banks with one exception. Because deposits are guaranteed, the Chinese government and, ultimately, taxpayers would pay for the financial losses arising from the investment bubble.

In previous cycles, China always used devaluation to create inflation to tax depositors. China has not used devaluation to cover its financial inefficiency for the past ten years. This time, I hope that China will focus on fixing the financial system instead of devaluing the currency.

In this context, it is bizarre to see that Chinese banks are reporting ever-lower ratios of non-performing assets. I believe that the government should hold those who are perpetrating such acts accountable when the bubble does eventually burst

[snowflake34] 13/4/2004 12:46

April 13 (Bloomberg) -- China's capital spending is spiraling out of control. The harder Beijing tries to dissuade local governments from wasting money on yet another unnecessary highway or town square, the more inclined they seem to do just that.

It's a classic case of ``moral hazard,'' a concept economists use to describe why some people burn their own houses.

Moral hazards are all about distorted incentive systems. A landlord finds it profitable to torch a house he owns when the insured value of his property exceeds its market value. By the same token, China's local governments have a perverse incentive to waste capital: They are judged by the growth they generate, and not by how much capital they use in the process.

The cost of their investment excesses is borne by a malleable banking system. It doesn't matter to provincial governors and city mayors that almost half the loans on the books of the four big state-run Chinese banks have already turned bad. Sure, bad loans are a problem -- Beijing's problem.

``Moral hazard,'' according to Paul Krugman, professor of economics at Princeton University, is ``any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly.

Construction Fallout

``Borrowed money,'' Krugman argues in his 1999 book ``The Return of Depression Economics,'' is ``inherently likely to produce moral hazard.''

In the first two months of 2004, fixed-asset investment by Chinese local authorities shot up 65 percent from a year earlier, more than five times the growth in Beijing's own capital spending.

China's construction spree is creating an unsustainable bubble in global commodity prices. Take copper. Chinese imports of the metal, which is used in plumbing and wiring, more than doubled in February. Copper futures on the London Metal Exchange have risen by three-fourths in the past year.

Lehman Brothers estimates that if overall fixed-asset investment in China grows at last year's 27 percent pace, domestic capital spending will account for half of China's gross domestic product in 2004. That's too high an investment ratio because it's leading to shortages of everything from raw materials to electricity.

Squeeze on Profits

Even worse, Chinese companies aren't able to pass on their rising costs to customers. In February, even as the local price of steel rose 35 percent from a year earlier, China's automobile prices fell 5.1 percent.

Higher raw material costs ``are squeezing the profit margins of China's producers,'' says Rob Subbaraman, Lehman's Tokyo-based economist. ``Rampant investment and production has taken its toll on the economy.''

Until mid-2003, the surge in China's capital spending was touted as an example of that country's insatiable appetite for investments. Increasingly, it looks like a bad case of bulimia. Chinese Premier Wen Jiabao vowed last month to block ``haphazard'' investments.

``Blind investment in some industries and low-efficiency, redundant construction haven't been effectively arrested,'' says Beijing-based State Development and Reform Commission, the top economic planning agency.

Tighter Credit

So far, Beijing has tried to douse the investment fervor by tightening credit. On Sunday, the central bank announced that it was raising the percentage of deposits that banks need to set aside as cash reserves to 7.5 percent from 7 percent starting April 25. The 0.5 percentage point rise in the reserve ratio will remove about 110 billion yuan ($13.3 billion) from the financial system.

The People's Bank of China last raised the reserve ratio to 7 percent from 6 percent in September, removing an estimated 150 billion yuan from circulation.

Still, too much money is sloshing about in the Chinese economy. M2, China's broadest measure of money supply, rose 19.4 percent in February. That's 2.4 percentage points higher than the central bank's target of 17 percent for 2004.

Analysts are veering around to the view that tougher measures may be needed, including higher interest rates.

Higher interest rates may save the day for now, although they won't really address China's moral hazard problem. Telling insurers they ought to provide coverage to fewer homeowners doesn't automatically solve the problem of landlords becoming arsonists.

Cutting Out Politicians

The moral hazard can only be eliminated if Beijing is able to push its banks to bolster their risk management practices, so politicians aren't able to influence lending decisions.

Until that happens -- and it will require substantial improvement in China's outdated banking systems -- party apparatchiks will keep starting financially unsound projects. In January, Credit Suisse First Boston predicted that among the 86 subway lines under construction or being planned in China, ``most of them (if not all) have no prospects of breaking even.''

``Local governments only care about their own interests and keeping the good times going in their own areas,'' Hu Yanni, an analyst at China Securities Research Co. in Beijing, said last month. ``They have power over banks,'' which fund the spending.

When party officials can't produce growth (even with virtually free capital), they invent it. A Bloomberg News report last year showed that, flouting the law of averages, China's 31 provinces and municipalities each reported 2002 growth rates higher than the central government's figure for the whole country.

`Hard Landing Inevitable'

``Local governments are working against the central government by setting up many new projects,'' says Morgan Stanley's Hong Kong-based economist Andy Xie. ``If China doesn't take more effective measures, a hard landing will be inevitable.''

First-quarter gross domestic product figures, which will be released on Thursday, may offer clues to just what kind of a landing it might be for China. If growth fails to cool down from last year's 9.1 percent, it may indeed be a sign that Beijing is losing its battle against moral hazard.

[snowflake34] 12/4/2004 09:13

Mr Beanburger - you are right that Taiwan is a potential trouble spot. Articles starting to pop up worrying about it. See the following op-ed piece from Washington Post:

Heading Off the Next War

By David M. Lampton and Kenneth Lieberthal
Monday, April 12, 2004; Page A19


The recent unsettled election in Taiwan highlights a disturbing fact: The framework that has buttressed peace in the Taiwan Strait for decades is disintegrating. Changes in Taiwan, as well as some of Beijing's counterproductive behavior, are undermining its foundations. Unless an improved framework is adopted soon, war across the strait will become increasingly probable, with the United States likely to be drawn into it. No matter who should "win" such a conflict, the consequences for China, Taiwan, America and Northeast Asia would be dire.

The conundrum is stark. Taiwan sees itself as an "independent, sovereign country." China, with a national fixation over a century long on achieving territorial unity, has staked the legitimacy of its regime on not allowing Taiwan juridical stature as a sovereign country. And the United States has for more than three decades been committed to a "one China" policy, combined with a threat to become militarily involved if Beijing uses force to effect a resolution of cross-strait issues.

There has been rapid expansion in "Taiwan consciousness" on the island in recent years, strongly promoted by the current government in Taipei. And Taiwan President Chen Shui-bian is pledging to hold a referendum in 2006 to authorize a new constitution, and then to adopt the new document in May 2008 -- acts that some in Beijing say could mean war. Moreover, Chen apparently believes that China's threat to use force is a bluff and that the U.S. commitment to back Taiwan militarily is unrestricted -- the logic being that a democratic America and a supportive U.S. Congress would back Taipei no matter what sparked a conflict.

Chen and his predecessor Lee Teng-hui have been so sure of U.S. support that defense spending on the island has continually declined over the past 12 years. But Chen's two assumptions are flawed, and they could well lead him to take actions that precipitate war.

Each side at this point is pursuing efforts to change facts on the ground in its own favor. China is deploying additional missiles that can strike Taiwan and seeking ways to inflict losses on American forces should they intervene on Taiwan's behalf. Taiwan is deepening its effort to instill a distinctive Taiwanese identity, strengthen its bona fides as an independent country and acquire offensive-weapon capabilities. And Washington is both expanding and deepening its military ties with Taiwan, while telling Chen that America does not favor any efforts on his part to challenge the status quo, despite having earlier said that America would "do whatever it takes to help Taiwan defend herself."

Vice President Cheney is to visit Beijing tomorrow, and it appears he will follow the traditional American path of recommending cross-strait dialogue and warning of severe consequences should military conflict flare. He will also assure Beijing that Washington opposes unilateral independence for Taiwan. While voicing these essential elements of a prudent message, the vice president also should signal both Beijing and Taipei that America is prepared for new thinking in the search for peace and growth in the region.

The reality is that there is no final resolution to cross-strait issues that the two sides are likely to be able to reach peacefully for decades. The major effort, therefore, should shift to establishing a stable framework across the strait for a long period -- counted not in years but in decades. For such a framework to be effective, all sides must agree on its fundamentals and its minimum duration, and they must seek the support of the international community in reinforcing it.

Any stable framework will have to effectively address the core fears of each player. We believe that the necessary conditions for the new framework must include the following:

• Taiwan can continue to assert during the decades-long period covered by the agreement that it is an "independent, sovereign country," but it must abjure additional steps to turn this island-wide sensibility into a juridical fact. Beijing can continue to assert that there is only one China and that Taiwan is a part of it, but it must give up its threat to use military force to change Taiwan's status. On this basis, Beijing and Taipei would agree on terms for expanded international space for Taiwan, including the island's involvement in global and regional international organizations.

• Beijing and Taipei must agree to engage in confidence-building measures across the strait to reduce concerns about potential conflict, and the United States and others must commit to play appropriate supporting roles. If tensions across the strait diminish, so should -- under long-standing U.S. policy -- military sales to Taiwan.

• Beijing and Taipei must agree to use the decades of the new framework to progressively expand ties across the strait, including political visits of various sorts, to allow people on both sides to develop a better understanding of each other.

• At the least, the United States, Japan and the European Union must guarantee that they will not recognize an independent Taiwan during the framework period and that all would regard Beijing's unprovoked use of force against Taiwan as a matter of the gravest immediate concern.

Even this modest framework will be very difficult to establish. Each of these principles will have to be fleshed out operationally and the resulting agreement approved in at least China, Taiwan and America. And there is disagreement about cross-strait policy in Beijing, Taipei and Washington.

The proposed new framework therefore requires courageous initiatives from all three political leaderships and considerable diplomatic skill to put into place. But the foreseeable alternatives are too destructive for responsible leaders to avoid taking a serious look -- and soon -- at ways to get things off a very dangerous track.

David M. Lampton is Hyman professor and director of China studies at the Johns Hopkins School of Advanced International Studies and the Nixon Center. Kenneth Lieberthal is a professor of political science at the University of Michigan; he was senior director for Asia on the National Security Council from 1998 to 2000.

[mcbeanburger] 12/4/2004 09:11

China raises bank reserve requirements
By James Kynge in Beijing
Published: April 12 2004 4:23 | Last Updated: April 12 2004 4:23


China's battle against over-investment and inflation intensified as the central bank raised reserve requirements and the cabinet decided to implement further "macro-controls" to prevent redundant investments.


"We must further strengthen macro-controls to take resolute steps to curb rapid investment growth to help prevent inflation and 'ups and downs' in the economy," said the official Financial News, quoting a cabinet meeting chaired by Premier Wen Jiabao.

"The blind investment and duplicate projects in some industries and regions are rather severe," the newspaper said.

It was not clear what form the "macro-controls" would take. Meanwhile, the People's Bank of China (PBoC), the central bank, tightened monetary policy to curb bank lending by increasing reserve requirements from 7 per cent to 7.5 per cent. This will come into effect on April 25 for China's big commercial banks.

The banks covered by this requirement include the "big four" state banks, the shareholding commercial banks, city commercial banks, rural commercial banks, rural co-operative banks, China Agricultural Development Bank, trust companies, leasing companies and financial institutions with links to foreign capital, a PBoC statement said.

For the relatively weaker financial institutions with a capital adequacy ratio below "a certain level", the reserve requirement would be 8 per cent, up from 7.5 per cent, in line with a new PBoC policy of penalising poor quality lenders.

The move to raise reserve requirements represents a continuation of PBoC's approach of tightening monetary policy without raising lending or deposit rates. The main reason that the bank pursues this policy is to try to curb investment without hitting consumer spending, a significant portion of which is driven by loans for cars, education and housing.

Economists said the new reserve requirement policy indicated a rising level of alarm within the government of Wen Jiabao, premier, over inflation. According to the PBoC's estimates, prices of commodities rose 8.3 per cent year-on-year in March while investment goods climbed 8.8 per cent and consumer goods rose 7.4 per cent.

In particular, the price of grain rose by a sharp 28.4 per cent in March compared with the same month a year ago and by 6.3 per cent over February.

The PBoC's price indices attempt to capture inflationary pressures with greater agility than the sluggish Consumer Price Index issued by the National Bureau of Statistics. The CPI showed a 3.2 per cent rise in January, and a mere 2.1 per cent rise in February but the March index, scheduled to be announced this week, is expected to show a significant rise, analysts said.

[energyi] 06/4/2004 05:59

MANDARIN Lesson #1:
Pao Mo = Bubble

Shifting focus for a moment, let's look at what my friend Dr. Steve Sjuggerud has to say about the Chinese stock market.

"Just take a look at what has happened in previous 'China manias.' We don't have a decent history of stocks in China to draw from, but the next best thing is Hong Kong. Over the last 20 years, every time the P/E ratio of the Hang Seng Index (Hong Kong's version of the Dow) reached 20, Hong Kong stocks lost between a third and half of their value.

"It happened in late 1987, and the index fell from around 4,000 to around 2,000 - a 50% fall. It happened in January of 1994, and the index fell from around 12,000 to around 8,000 - a 33% fall. It happened during the dot-com boom in 2000, and the market fell from around 16,000 to around 9,000, nearly a 50% fall.

"Can you believe that it's happened again already? Yes, last month, the P/E of the Hong Kong stock market rose above 20. Time to sell. China in 2004 really is like the Nasdaq in 1999. The waiters and the windsurfers are expecting astronomical returns. But they - and most investors - don't have a clue about what it is they're buying... and they'll likely end up disappointed. You may have lost money in the Nasdaq bust of 2000. Don't get burned a second time."

Up to a point, Steve has a point. But I disagree that China is like NASDAQ in 1999. A P/E of 20 is not a NASDAQ P/E of 100 or more, where it actually was at the top. Using conservative accounting, it may well have been double or triple that.

China may well correct, as do all markets. If the Chinese government does slow the economy down, it should also have a damping effect on their markets, at least for a time.

But China still has a lot of boom left in it. Yes, there will be "bumps" as the Financial Times noted, but there is going to be a lot of opportunity in that country, especially for those that do their homework and find value in the emerging companies. Investors who blindly buy any stock with a Chinese connection are likely to end up sadder but wiser, and Steve is right to urge caution.

This is a country that could double its GDP and double again in the next 20 years. Japan certainly had its run, although there were bumps. My side bet with Steve, if he will take it, is that we have yet to see the top of a Chinese bubble, which will take decades to develop. It may well be the most spectacular of all bubbles, because the confidence that is bred from the powerhouse growth they will experience will feed the emotional references that will make investors think there will e no end to the growth, which is the root of all bubbles. Along the way, there will be recessions and a few odd crises, and some serious corrections. Why should China be any different than any other market?


From John Mauldin

[snowflake34] 05/4/2004 14:29

Here's Stephen Roach's Apr 5 2004 essay:

Global: Pondering Asia

Stephen Roach (New York)


I was unprepared for what I found in Asia over the past two weeks. The role of China appears to be on the cusp of an important transition, as pressure builds on its leadership to confront the mounting imbalances of an overheated economy. With the exclusion of India — where I was stunned by the solid and increasingly powerful dynamic of its IT-enabled services transformation — the rest of the region is far too China-centric for my liking. A likely slowing in the Chinese economy could unmask a new instability in Asia — an outcome that could prove quite vexing for a still-unbalanced global economy.

Asia is a very big deal for those of us in the business of analyzing the global economy. Including Japan, the entire region accounts for fully 33% of the global economy, well in excess of the US portion (21%) and double the share of the Euro area (16%). These calculations are based on the purchasing-power parity (PPP) metric of the IMF, which attempts to strip out the impact of currency valuations in adding up the various pieces of the global economy. By abstracting from transitory trends such as an upside run in the “strong dollar,” an artificially “weak yen,” or the pegged Chinese renminbi, the PPP-based construct does a much better job in isolating the underlying real growth of economies. By contrast, the cross-border aggregation of nominal GDP at market exchange rates can often be dominated by sharp and volatile swings in currency markets.

By looking at Asia through the PPP-based lens, there can be little doubt as to the region’s newfound China dominance. The IMF puts China’s share in the world economy at 12.7%, well in excess of Japan’s 7.1% share and India’s 4.8% portion, the next two largest economies in the region. But there’s more to Asia’s China-centricity than its role as the region’s increasingly dominant producer. China’s voracious appetite for imports — up an astonishing 40% alone in 2003 — underscores the increasingly powerful trade linkages that China exerts on the rest of the world. Its Asian trading partners are the biggest beneficiaries of China’s external impetus. For example, over the 12 months of 2003, surging exports to China accounted for 32% of Japan’s total increase in exports; for Korea, the number was 36%, whereas in Taiwan, fully 68% of the last year’s export growth can be accounted for by surging shipments to China. China’s impact on global commodity markets is equally profound. Whereas this nation had a share of only about 4% of global nominal GDP in 2003, it accounted for 7% of the world’s total consumption of crude oil, 31% of coal, 30% of iron ore, 27% of steel products, 25% of aluminum, and fully 40% of the world’s total cement consumption. There can be no mistaking China’s ascendancy as the new engine of the Asian economy.

Yet China must now slow, and so all of the above are at risk. That message came through loud and clear on my first stop in Asia a couple of weeks ago (see my March 23 dispatch, “China — Determined to Slow”). In my opinion, China’s new leadership is facing a major test as it comes to grips with an overheated economy. The talk in “official Beijing” was very much focused on the mounting excesses and imbalances of a Chinese economy that is still probably growing well in excess of last year’s official 9.1% real GDP growth estimate. From Premier Wen Jiabao on down, China’s leadership was unanimous in sending a clear signal that it is utterly determined to engineer a slowdown. Yet the incoming data flow on the Chinese economy shows what they are up against: Fixed investment surged at 52% y-o-y rate in the first two months of 2004, and bank lending rose 6% over the same period after having decelerated in the final three months of 2003. The overheating of the Chinese economy is very much a by-product of the interplay between excessive bank lending and runaway investment spending. These are the sources of the problem that the Chinese leadership is now prepared to attack head-on.

That attack is now under way. The campaign of policy restraint was initiated last fall, with an increase in reserve requirements on bank deposits from 6% to 7% — announced in late August and made effective in late September. That measure apparently didn’t work in arresting the rapid growth of the real economy. And so Premier Wen was quite direct in warning at the recently concluded China Development Forum that I attended in Beijing that further forceful measures were being prepared (see my March 23 note referenced above). True to his word, the People’s Bank of China unveiled a second tightening in late March (see the March 25 dispatch by our China team, “The Second Tightening Move”). This underscored the increasingly urgent conundrum now evident in China. A failure to arrest the excesses of an increasingly overheated economy is a recipe for the dreaded hard landing. Quite simply, China cannot afford such a dire outcome. It would have serious implications for unemployment and nonperforming bank loans, thereby undermining the very reforms that are at the heart of the China miracle. The verdict, in my view, is clear: The Chinese leadership now senses a new urgency in bringing its economy under control. In my opinion, the late March monetary tightening measures should be viewed as a warning sign of more such initiatives to come.

Asia and the rest of the global economy need to take notice of what is about to happen in China. Yet in my travels in the region over the past couple of weeks, I don’t sense that realization has hit home. Japan is a case in point. As the latest Tankan survey of business confidence revealed, Corporate Japan is now brimming over with newfound optimism (see the April 1 dispatch by Takehiro Sato, “Tankan — An Effective Post-Bubble High”). But the impact of the China factor on Japan cannot be taken lightly. In the second half of 2003, our Japan team estimates that surging exports to China accounted for approximately 30% of the 4.5% annualized increase in Japanese GDP. Moreover, it appears that capital spending — another solid source of increasing growth in the Japanese economy — drew considerable support from capacity expansion by those industries that were befitting the most from expanded trade to China. As China transitions from boom to slowdown, a surprisingly large portion of Japan’s newfound growth dynamic could be at risk. With private consumption growth still hovering at 1%, that could prove to be a serious problem for the Japan recovery story. I would echo those concerns for Korea, where the private consumption dynamic is even weaker and the China factor may even be more important (see my March 26 dispatch, “Asia’s Recovery Void”). Nor would Taiwan, where China trade linkages are greatest, be spared.

India looks increasingly to be Asia’s “special case” — an economy that seems likely to emerge largely unscathed in a China-adjustment scenario. In large part, that’s because the Indian economy has a very different mix than the typical externally-oriented Asian economy. India’s growth dynamic is increasingly tilted toward an IT-enabled emergence of its service sector (see my April 2 dispatch, “India’s Awakening”). While this new portion of the Indian economy is very much externally oriented, it is more beholden to US-based outsourcing imperatives than to the ups and downs of the Chinese economy. Barring a politically-motivated protectionist disruption to such a trend — still a low-probability outcome, in my view — I see very little getting in the way of India’s increasingly powerful growth dynamic.

India’s just-related 4Q03 growth report — a 10.4% y-o-y surge in real GDP — underscores this extraordinary story. While this increase was artificially boosted by an unsustainable, 16.9% drought-related rebound in agricultural output, India’s new underlying growth trajectory now appears to be settling in the 7% zone. Rich in natural resources and with nothing but upside on the infrastructure and domestic energy production fronts, India looks to me to be one of the most compelling macro stories I have seen in a long time. The upcoming national elections are an important test of the new Indian economy, especially insofar as the risk of any potential setbacks on the road to deregulation and reform are concerned. But the inside line in India is that the incumbent BJP ruling coalition will prevail — good news for the continuity of reform.

Five years after the end of the Asian financial crisis, the region is very different. Current-account balances have gone from deficit to surplus, foreign-exchange reserves have been rebuilt, and dependence on short-term capital inflows has been sharply diminished. But the region is still lacking in autonomous support from internal demand. China has emerged as the unquestioned engine of pan-regional growth, but now the Chinese economy is in need of a major adjustment of its own. With the exception of India, most Asian economies are vulnerable to such an about-face. As I ponder the lessons of these past two weeks in Asia, that troubles me the most.

[energyi] 02/4/2004 07:53

-2:

The Chinese government, from the very top, has made it clear they intend to slow down the growth, which if allowed to continue at the current pace would certainly end up in a big bust. If inflation begins to emerge, the Chinese government would be forced to raise rates, which would likely increase the pressure to the upside on the renminbi.

The government has to worry about a slowdown in US demand, which is the main engine for the global economy. A slowdown would certainly hurt domestic growth, as they do not yet have a strong enough internal consumer base.

"Ma Kai, Chairman of the National Development and Reform Commission, worried that China was close to a critical point when bottlenecks in materials consumption could begin to constrain economic growth," reports MorganStanley. "[He] was unequivocal over his concerns about the risks such trends posed to the sustainability of Chinese economic growth. In his words, 'If such an illogical mode of economic growth is maintained, it will be difficult to keep economic growth at 7%.' In China, that's as direct a message as you'll ever see."

China may well correct, as do all markets. If the Chinese government does slow the economy down, it should also have a damping effect on their markets, at least for a time.

But in my view, China still has a lot of boom left in it. Yes, there will be "bumps" as the Financial Times noted, but there is going to be a lot of opportunity in that country, especially for those that do their homework and find value in the emerging companies. But investors who blindly buy any stock with a Chinese connection are likely to end up sadder, but wiser...as my friend Steve Sjuggerud noted in these pages last week.

China is a country that could double its GDP and double again in the next 20 years. Japan certainly had its run, although there were bumps. My bet, however, is that we have yet to see the top of a Chinese bubble, which will take decades to develop.

China's bubble may well be the most spectacular of all bubbles...since the confidence bred from the powerhouse growth China will experience will feed the emotional references that make investors see no end to the growth - the root of all bubbles. Along the way, there will be recessions and a few odd crises, and some serious corrections. Why should China be any different than any other market?

I leave you with a quote from James Kynge in the Financial Times: "Eventually, either an ill wind or a surfeit of domestic success will cause China's stellar phase of growth to abate or crumble - just as it has in every emerging economy in history. When that day comes, the fall-out may be spectacular. But as things stand, the vigour of Asia's emerging powerhouse appears strong enough to carry it forward for some time."

John Mauldin, for The Daily Reckoning

[johnwwwilkinson] 29/3/2004 03:51

Fast growth hurts local pockets
By Xu Dashan (China Daily)
Updated: 2004-03-29 09:14

The low renminbi interest rate with high consumer prices does not change Wang Zhao's habit of deposit money into his bank account every month.

Wang, a researcher with the State Council's Development Research Centre, knew better than anyone that he would lose out by saving money in the bank.

"But, if I do not put money in the bank, I will lose more," he said.

Since last September, China witnessed a rapid rise in its consumer price index (CPI), which covers goods and services from grain to health care.

The CPI rose to 3.2 per cent in December and January, the biggest since April 1997.

However, the benchmark one-year bank deposit rate stands at 1.98 per cent. After deducting a 20 per cent tax, the real interest rate is 1.584 per cent.

In this situation, the rate is actually in the negative, Wang said.

Like Wang, many people choose to save their money in banks.

Figures from People's Bank of China shows the large amount of renminbi savings by Chinese residents stood at 11 trillion yuan (US$1.3 trillion) by the end of February, an increase of 19.2 per cent from the same period of last year.

"People have to save a certain amount of money for large purchases such as houses, cars, education and health care," he said.

Also, people can not find many investment channels that are better, or more convenient, than bank deposits.

"The negative interest rate is beneficial for the recovery of the country's markets of stocks, funds and debts," he said.

Qi Jingmei, a senior researcher with the State Information Centre, said the CPI will continue to be at a high level over the next several months, due to higher grain prices.

"If the grain prices, a major reason for the current high CPI, maintain the same level as the fourth quarter of last year, the CPI will be at more than 2 per cent until the end of this year," she said.

Although this does not mean the country will face inflation, it does means the interest rate will continue to be negative, she said.

"This is unfair for ordinary people because they can't benefit from the country's rapid economic development," she said.

It will also have great impact on people's confidence for the future, she said.

Yuan Gangming, a senior economist with the Chinese Academy of Social Sciences, said the negative interest rate will harm the economy in the long-term.

"The government should take measures to prevent big ups-and-downs in the economy," he said.

The direct impact of the negative interest rate was people's savings, he said.

People's personal wealth will shrink, and along with it, their purchasing power. This will be harmful for consumption, Yuan said.

The lower loan cost stimulates investment for companies, which will increase the possibility of both inflation and deflation, he said.

The government should raise the renminbi interest rate in time, Yuan said.

Song Guoqing, a professor at Peking University, said the government should have already raised the interest rate.

"If people feel the trend is rising prices, they will rush to buy more goods," he said.

The purchasing panic will push the commodity price rise further.

"Then the inflation will occur," he said.

Zhu Jianfang, an economist at China Securities, said the government would not allow residents to suffer the negative interest rate for a long time.

"The government is likely to raise the renminbi interest rate in the third quarter," he said.

A quarterly report by the central bank's monetary policy committee said on Thursday the government would keep the renminbi interest rate stable in the short term.

Earlier this month, the central bank Governor Zhou Xiaochuan said China would not raise the renminbi interest rate in March.

The government would wait for a few months to define the consumer price trend before making any decisions, he said.

Yi Xianrong, an economist with the Chinese Academy of Social Sciences, said China would be unlikely to raise the renminbi interest rate this year.

Although prices have been generally surging rapidly, such growth is expected to slow down this year, he said.

The authorities will also try to create a favourable condition for the State-owned banks' reforms.

"An increase in deposit interest rates would add to the banks' costs," Yi said.

The National Bureau of Statistics said the national economy does not have the elements that constitute an inflationary situation. Also, the CPI should maintain the 3 per cent growth rate in 2004.

According to Yi, the present price rally in China was largely fuelled by surging commodity prices in the international market.

China's imports and exports totalled US$851.2 billion last year, accounting for 60 per cent of the gross domestic product, he said.

However, a weak US dollar against major currencies such as the euro and the yen had propped up prices in the global market, he said.

Higher global energy prices, for example, pushed up the prices of related products in China, he said.

It is estimated that as much as 75 per cent of the price rise in domestic production materials during 2003 was fuelled by the rapid growth in energy prices.

But with the improvement of the international economic environment and an expected stronger US dollar, such price rises in the global market are also expected to slow down this year, he said.

Moreover, although investments in China continued its strong momentum in 2003, it was concentrated only in a few sectors.

China's fixed asset investments grew by 26.7 per cent year-on-year last year, much higher than the 15.1 per cent and 21.5 per cent in 2001 and 2002.

But the investment growth was focused in a few industrial sectors, such as iron and steel, aluminium, concrete, automobiles and real estate. These areas have expanded quickly and pulled up the demand for raw materials, fuel and products used in these sectors, he said.

In the real estate and automobile markets, bubbles have emerged and the possibility of over-supply has also increased.

If such regional over-investment is not controlled, it could trigger other problems such as redundant construction, irrational industrial structure and unbalanced sectional economic development, he said.

It is fortunate, however, that the central bank, aware of the overheating in these sectors, has increased the bank reserve requirements in 2003 and has been controlling credit growth, he said.

As authorities are expected to reduce the lending scale, loosen foreign exchange control and be more lenient with cross-border investment, investment growth is likely to slow down in 2004, Yi said.

This is expected to further suppress the growth of overall product prices, he said. The CPI growth also eased in February, with an annualized growth of only 2.1 per cent.

Under these circumstances, China is unlikely to be hit by high inflation this year. Therefore, it will be unnecessary for the central bank to use an interest rate hike to adjust market supply and demand, Yi said.

On the other hand, the present price rally will ease the pressure on State-owned enterprises and help their reform.

The Big Four State-owned banks, which are at a crucial point in their restructuring, will also benefit.

To create a favourable environment for the bank reform, there is little possibility for the central bank to increase the deposit interest rate, which would increase the banks' expenses, he said.

[energyi] 27/3/2004 09:57

Look at these metals stocks,
Has an important breakdown started?

Inco (Nickel)



Phelps Dodge (Copper)

[energyi] 27/3/2004 09:57

Any critical analysis should not be dismissed as "deramping".

But YES, Greenspan's pumping up of money supply, to raise spending
by US consumers, has had the impact of creating jobs in China, not in the US.
And the US has now become dependent upon seeing its own dollars
recirculated back to the US by China, as it buys Treasury bonds with its
surplus dollars. If China stops, then bond rates will shoot up, and derail
the US economy

[energyi] 26/3/2004 00:11

This bit looks serious:
"Official China is dead serious about coming to grips with the possible overheating of the Chinese economy. In the words of Premier Wen Jiabao, "Overheating is my biggest concern. We are preparing further measures to slow growth and they will be more forceful." To me, that says it all: The Chinese economy has become too hot to handle, and the leadership of this command economy is very focused on slowing the growth rate from the 9.1% pace recorded in 2003."

Meantime,
Inco (N) Nickel & Phelps Dodge (PD) Copper
are showing signs of bREAKDOWN