Forbes – Property Prices Collapse in China. Is This a Crash?

Reads like the inflation problem was worse then most thought, and that a hard landing might still actually be happening. No way to actually tell in real time.

With China a first half/second half story, as previously discussed, January will bring a fresh slug of new govt. lending/spending that should at least moderate any fall that’s in progress.

However, if the anti inflation fiscal policies continue, and spending/lending is materially down from last year, the weakness should persist and potentially get a lot worse.

Property Prices Collapse in China. Is This a Crash?

By Gordon Chang

November 6 (Forbes) — Residential property prices are in freefall in China as developers race to meet revenue targets for the year in a quickly deteriorating market. The country’s largest builders began discounting homes in Shanghai, Beijing, and Shenzhen in recent weeks, and the trend has now spread to second- and third-tier cities such as Hangzhou, Hefei, and Chongqing. In Chongqing, for instance, Hong Kong-based Hutchison Whampoa cut asking prices 32% at its Cape Coral project. “The price war has begun,” said Alan Chiang Sheung-lai of property consultant DTZ to the South China Morning Post.

China’s Squeeze on Property Market Nearing ‘Tipping Point’

If China gets by this we should be ok.
If not, could be a serious setback for a few days,
but ultimately the lower commodity prices are a plus for the US.
And even more of a plus if we knew how to sustain aggregate demand at full employment levels.

China’s Squeeze on Property Market Nearing ‘Tipping Point’
By Bloomberg News

Sept. 23 (Bloomberg) — The squeeze on China’s property market may be reaching a “tipping point” that drives growth lower just when exports are under threat from a global slowdown and investor confidence is plunging, said Zhang Zhiwei, Hong Kong-based chief China economist at Nomura Holdings Inc.
 
Land transactions in 133 cities tracked by Soufun Holdings Ltd., the country’s biggest real-estate website, fell 14 percent by area in August from a month earlier. Prices of new homes declined in 16 of 70 cities last month compared with July, according to government data.
 
Property construction is a mainstay of investment that last year drove more than a half of economic growth while land sales contributed 40 percent of revenues earned by local authorities that have amassed 10.7 trillion yuan ($1.67 trillion) of debt. A funding squeeze on developers risks a “domino effect” as companies needing cash cut prices, forcing others to follow, Credit Suisse Group AG said yesterday.
 
“We’re reaching a tipping point where land sales are dropping much faster than before, developers are losing more access to bank financing, and housing prices are showing weakness,” Nomura’s Zhang said in an interview in Beijing yesterday.
 
The People’s Bank of China has raised interest rates five times over the past year, curbed lending to property developers and raised down payments on home loans as part of Premier Wen Jiabao’s campaign to rein in surging consumer and property prices. The government has also limited purchases of housing in cities where gains have been deemed excessive.
 
Loan Approval Withdrawn
 
Real-estate development accounted for a fifth of China’s urban fixed-asset investment last year, government data show.
 
Shanghai-based Shui On Land Ltd. had a loan approval from a Chinese bank withdrawn after the lender changed its policy, Vincent Lo, the company’s billionaire chairman, said in a Sept. 13 interview. Cancellations by that bank, which he wouldn’t name, are “happening quite frequently” to other developers, he said, adding that the credit squeeze may slow property development.
 
The price of land in Beijing slumped 76 percent in August from a month earlier, while in Guangzhou it plummeted 53 percent, according to Soufun. Land auction failures surged 242 percent in the first seven months of this year because of government curbs on the property market, the Beijing Times reported Aug. 3.
 
Debt Servicing Difficulties
 
The decline may make it more difficult for some of the thousands of companies set up by local governments to service debts taken on to fund infrastructure investment. China Real Estate Information Corp., a Shanghai-based property information and consulting firm, estimates 40 percent of overall local government revenue came from land sales last year.
 
In a sign financing vehicles in some provinces are struggling, the auditor of northeast Liaoning province estimated in July that about 85 percent of such companies in the region had insufficient income last year to cover all their debt servicing payments.
 
Some developers have turned to trust firms for financing, usually in the form of loans that are repackaged into investment products and sold to retail investors. The debt is typically funded by banks or investors themselves, according to Samsung Securities Asia Ltd.
 
Many real-estate companies have received about half of their new financing from trust firms over the past year, according to Jinsong Du, an analyst with Credit Suisse in Hong Kong. New bank lending to property developers in the second quarter of this year sank to 42 billion yuan from 169 billion yuan in the first quarter, he said, citing central bank data.
 
Stocks Drop
 
Shares in China property companies slumped yesterday on concern tightened access to loans will force them to cut prices. Greentown China Holdings Ltd. plunged 16 percent in Hong Kong, the most in almost three years, and was 6.5 percent lower at HK$4.20 at 3:34 p.m. today.
 
Greentown, the largest builder in the eastern province of Zhejiang, yesterday denied media reports the banking regulator ordered trust companies to provide details of their business dealings with the company and its units.
 
The China Banking Regulatory Commission is looking into financing of developers through trust companies as part of a broader evaluation of real-estate lending, a person familiar with the matter said today. The inquiries are part of regular monitoring and aren’t targeting any particular company, said the person, who declined to be identified because the regulator’s queries were meant to be private.
 
The “possibility of developers defaulting on debt has definitely increased and towards the end of the year that’s pretty likely,” Du said in a telephone interview yesterday.
 
‘Tip of the Iceberg’
 
Developer Dalian Rightway Real Estate entered preliminary restructuring talks with lenders after missing a loan repayment, the Hong Kong-based South China Morning Post newspaper reported Sept. 9, citing three unidentified people involved in the situation.
 
Funding problems are just “the tip of the iceberg” and “sharp declines in property sales and prices are likely in the next two to three months,” said Shen Jianguang, an economist at Mizuho Securities Asia Ltd. in Hong Kong.
 
Premier Wen reiterated this month that stabilizing consumer prices remains the government’s top priority and that the direction of government policies won’t change. The slowdown in economic growth is “within expectations,” he said.
 
Too Complacent
 
Consumer-price increases in August slowed to 6.2 percent from a year earlier, down from a three-year high of 6.5 percent the previous month. Economists at Citigroup, Mizuho Securities Asia Ltd. and Macquarie Securities Ltd. say inflation probably peaked in July.
 
Policy makers may be too complacent about the economy’s performance, Mizuho’s Shen said, pointing to the deteriorating outlook for exports as Europe’s debt crisis deepens and the U.S. risks slipping back into recession.
 
The International Monetary Fund this week cut its forecasts for global expansion this year and next and said downside risks to growth are rising.
 
In signs China’s economy is cooling, a preliminary index of purchasing managers released yesterday by HSBC Holdings Plc and Markit Economics showed manufacturing may shrink for a third month in September, the longest contraction since 2009, as measures of export orders and output decline.
 
“The risk of China replaying the hard landing of 2008 is increasing as the property sector cools and exports weaken,” Shen said. “ I fear that once the real economy deteriorates and officials do loosen policies, it will already be too late.”

CH News – 09.13.11

Ok news so far for August, some slowing but no sign of a hard landing yet!

On Tue, Sep 13, 2011 at 8:03 AM, Evelyn Richards wrote:
 

HIGHLIGHTS
-China’s retail sales up 17% in Aug
-China’s fixed asset investment up 25% in Jan-Aug
-Yuan Forwards Decline Most in a Month on Greece Debt Concern
-China Aims to Play Role in Stabilizing Europe, Researcher Says
-China August Fiscal Revenue Rises 34.3% on Year, Ministry Says
-China Called on as Emergency Lender as Italy Faces Crisis
-China unlikely to loosen monetary policy
 

China’s retail sales up 17% in Aug
Sep. 13, 2011 (China Knowledge) – China’s retail sales reached RMB 1.47 trillion
in August this year, up 17% year-on-year, said the National Bureau of
Statistics.

Total retail sales in urban areas rose 17.1% year-on-year to RMB 1.28 trillion
last month, while retail sales in rural areas rose 16.4% to RMB 192.2 billion in
the same period.

Retail sales in the catering industry also grew and increased to 16.7%
year-on-year to RMB 171.7 billion in August, while retail sales of consumer
goods rose 17% to RMB 1.3 trillion.

Last month, the retails sales of automobiles continued to top the country’s
retails sales list, reaching RMB 174.6 billion, up 12.4% year-on-year, while
retail sales of oil and related products came in second, hitting RMB 126.7
billion, with a growth of 38.4%.

In the first eight months of this year, the country’s retail sales totaled RMB
11.49 trillion, 16.9% more than in the corresponding period of last year.
Retails sales of automobiles grew 14.9% to RMB 1.29 trillion during the period,
and retail sales of oil and related products amounted to RMB 928.2 billion,
39.5%.
 

China’s fixed asset investment up 25% in Jan-Aug
Sep. 13, 2011 (China Knowledge) – China’s total fixed asset investment surged
25% year on year to RMB 18.06 trillion in the first eight months of this year,
according to statistics released by the National Bureau of Statistics.

The growth rate was 0.4 percentage points lower than that in the first seven
months.

Last month, the country’s fixed asset investment climbed 1.16% from July.

Fixed asset investment in primary industry saw a 23% increase, hitting RMB 417.6
billion, while investment in secondary and investment in tertiary industry grew
27% and 23.6% year on year to RMB 7.92 trillion and RMB 9.73 trillion,
respectively, according to the latest statistics.

The country’s investment in the industrial sector jumped 26.6% year-on-year to
RMB 7.71 trillion, including RMB 638.9 billion in the mining sector and RMB 6.24
trillion in the manufacturing, up 15.9% and 32.2% year on year, respectively.
The power, gas and water producing and supplying industry saw its fixed-asset
investment climb 1.9% year on year to RMB 833.5 billion in the first eight
months.

In the first eight months, investment in real estate development surged up 33.2%
year on year to RMB 3.78 trillion.

Meanwhile, fixed asset investment in China’s eastern, central and western areas
booked notable year-on year increases of 22.6%, 30.1% and 29.4%, respectively.
 

Yuan Forwards Decline Most in a Month on Greece Debt Concern
Sept. 13 (Bloomberg) — China’s yuan forwards dropped the
most in a month amid speculation Greece is nearing default,
which may prompt policy makers to slow the currency’s
appreciation.
The People’s Bank of China set the daily reference rate
0.09 percent lower today, the most in almost four weeks, as
Asian currencies weakened. The chance of a default by Greece in
the next five years has soared to 98 percent as Prime Minister
George Papandreou fails to reassure investors that his country
can survive the euro-region crisis, credit-default swaps showed.
“What you may see actually is a weaker pace of
appreciation,” said Leong Sook Mei, regional head of global
currency research at Bank of Tokyo Mitsubishi UFJ Ltd. in
Singapore. “There was lots of risk aversion with regards to the
Greece issue. The overall trend of appreciation won’t stop as
yet until we see decisive signs of Chinese growth coming off and
inflation easing.”
Twelve-month non-deliverable forwards slid 0.33 percent to
6.3305 per dollar as of 4:58 p.m. in Hong Kong, according to
data compiled by Bloomberg. The premium to the onshore spot rate
was 1.1 percent, compared with 1.2 percent yesterday.
The yuan dropped 0.17 percent to 6.3991 per dollar in
Shanghai, according to the China Foreign Exchange Trade System.
In Hong Kong’s offshore market, the yuan declined 0.02 percent
to 6.3855.
A central bank statement yesterday that inflation is still
too high is “hawkish,” Tim Condon, head of Asia research at
ING Groep NV, said in an e-mailed note today.
Policy makers will want to see a second consecutive month
of lower headline inflation before declaring “victory,” Condon
wrote. He reiterated the bank’s call for one more 25-basis point
increase in benchmark interest rates by the end of the year.
China’s inflation eased in August, rising 6.2 percent from
a year earlier, compared with 6.5 percent in July, which was the
fastest since June 2008.
 

China Aims to Play Role in Stabilizing Europe, Researcher Says
Sept. 13 (Bloomberg) — China is playing its role as a
responsible major world economy and is trying to help stabilize
global confidence by supporting European governments, Zhang
Yansheng, a researcher affiliated with the nation’s top economic
planning agency, said today.
Chinese policy makers are thinking in a “global context”
and about the need to prevent a “domino effect” in the debt
crisis, Zhang said in Beijing today when asked to comment on
reports that China is in talks to make investments in Italy that
may include government bonds. If Italy “falls” it may drag
down Europe, the world and China’s economy, he said.
There is a limit to what China can do to help, Zhang said.
Zhang, who is a researcher at the Institute of Foreign
Economic Research affiliated to the National Development and
Reform Commission, said he was giving his own views on the
matter.
 

China August Fiscal Revenue Rises 34.3% on Year, Ministry Says
Sept. 13 (Bloomberg) — China’s August fiscal revenue rose
34.3 percent from a year earlier to 754.6 billion yuan and
fiscal expenditure rose 25.9 percent to 807.7 billion yuan,
according to a statement on the Ministry of Finance’s website
today.
Fiscal revenue for the first eight months this year rose
30.9 percent to 7.4 trillion yuan, the statement said.
 

China Called on as Emergency Lender as Italy Faces Crisis
Sept. 13 (Bloomberg Businessweek) — China’s status as the fastest- growing major economy and holder of the largest foreign-exchange reserves lured another bailout candidate as Italy struggles to avoid a collapse in investor confidence.

Italian officials held talks in the past few weeks with Chinese counterparts about potential investments in the country, an Italian government official said yesterday, adding that bonds weren’t the focus. Finance Minister Giulio Tremonti met with Chinese officials in Rome earlier this month, his spokesman Filippo Pepe said by phone today, declining to say exactly when the talks took place or what was discussed.

Foreign Ministry spokeswoman Jiang Yu, asked about buying Italian assets, said Europe is one of China’s main investment destinations, without specifically mentioning Italy.

Italy joins Spain, Greece, Portugal and investment bank Morgan Stanley among distressed borrowers that turned to China since the 2007 collapse in U.S. mortgage securities set off a crisis that widened to engulf euro-region sovereign debtors. Stocks rose on the potential Chinese investment in Italy even as previous commitments failed to have a lasting impact.

“It’s a clear pattern of China’s intention to help stabilize the euro area,” said Nicholas Zhu, head of macro- commodity research for Asia at Australia & New Zealand Banking Group in Shanghai and a former World Bank economist. “The benefit to China is that it will help in the perception of host countries if China is viewed as a responsible stakeholder in the global community.”

Bond Auction
Italy today is auctioning as much as 7 billion euros ($10 billion) of bonds to help pay for 14.5 billion euros of bonds maturing on Sept. 15. The euro region’s third-largest economy sold 11.5 billion euros of bills yesterday and priced its one- year notes to yield 4.153 percent, up from 2.959 percent at the previous auction last month.

The yield on Italy’s 10-year bond rose to 5.69 percent as of 10:01 a.m. in Rome, pushing the spread with the equivalent German securities up 13 basis points to 396 basis points. The MSCI Asia Pacific index of stocks advanced 0.3 percent as of 4:50 p.m. in Tokyo after the Standard & Poor’s 500 index gained 0.7 percent overnight.

Chinese Image
For China, any purchases of European debt may allow the world’s largest exporter to be seen as helpful as it rebuffs calls to allow its exchange rate to appreciate at a faster pace. The world’s second largest economy has amassed record currency reserves of $3.2 trillion by selling yuan to limit gains.

Chinese policy makers are thinking in a “global context” and about the need to prevent a “domino effect” in the European debt crisis, Zhang Yansheng, a researcher affiliated with the nation’s top economic planning agency, said today.

China’s central bank referred questions to the State Administration of Foreign Exchange, which didn’t respond to a request for comment. China Investment Corp., the nation’s sovereign-wealth fund, also didn’t respond.

Italy’s bond-yields rose to a euro-era record last month as the region’s sovereign debt crisis spread from Greece, the first to receive a European Union-led bailout. Prime Minister Silvio Berlusconi’s government rushed a 54 billion-euro austerity package to convince the European Central Bank to buy its debt.

Redemptions
Even so, the size of Italy’s debt — at 1.9 trillion euros more than Spain, Greece, Ireland and Portugal combined — leaves it vulnerable to any rise in borrowing costs as it refinances maturing securities. The country still needs to sell about 70 billion euros of debt this year to cover its deficit and finance redemptions.

“We have heard this story before with regard to the likes of Spanish and Portuguese bonds, and in the end it was ECB buying and EU bailouts that seemed to have taken place rather than anything with a Chinese influence,” Gary Jenkins, a strategist at Evolution Securities in London, wrote in a research note.

Any Chinese purchases of euro-region debt to date haven’t produced a lasting cut in yield premiums for Greece, Portugal or Spain.

The extra yield investors demand to buy Greek 10-year debt over German bunds is about 23 percentage points, up from 14 percentage points three months ago. The equivalent spread for Portugal over Germany is 9.5 percentage points, up from 7.7 points over that period. Spain’s gap rose to 3.6 points from 2.5 points.

Too Big
“The issue with Europe is bigger than China alone can help with,” said Ju Wang, a fixed-income strategist at Barclays Capital in Singapore, adding that Italy’s debt load alone is a sum exceeding half the Chinese foreign-exchange reserves. “China probably will continue to help to shore up the euro, but its involvement in direct purchases of troubled Europe debt is unlikely to be too aggressive.”

If Italy “falls” it may drag down Europe, the world and China’s economy, said Zhang, a researcher at the Institute of Foreign Economic Research affiliated to the National Development and Reform Commission.

Japanese Finance Minister Jun Azumi said today that European policy makers should decide themselves whether they need fiscal assistance from Japan. U.S. Treasury Secretary Timothy F. Geithner will travel to Poland on Sept. 16 to participate in a meeting of European government finance officials trying to contain the region’s debt crisis.

‘Helping Hand’
Premier Wen Jiabao said in June that China can offer “a helping hand” to Europe by buying a limited volume of sovereign bonds. The Asian nation pledged that month to buy Hungarian government bonds and agreed to extend a 1 billion euro loan for the financing of development projects in the European country that needed an International Monetary Fund-led bailout in 2008.

Spain’s prime minister secured a Chinese pledge to invest in his nation’s faltering savings banks and in government debt on an April visit to Beijing.

In October, Wen said China will buy Greek bonds to support Greece’s shipping industry, while Chinese state-run banks agreed to $267.8 million in loans to three Greek shippers. President Hu Jintao visited Portugal in November and said China is “available to support, through concrete measures, Portuguese efforts to face the impacts caused by the international financial crisis.”

Diversification
Any Chinese purchases of euro-denominated debt may help it diversify its reserves away from dollars. The biggest foreign owner of U.S. government debt has doubled its holdings of Treasuries in the three years through June to about $1.17 trillion.

China is playing a “white knight” role in assisting Europe and buying itself goodwill that will enable it to purchase more sensitive European assets such as technology companies, according to Stamford, Connecticut-based Faros Trading in a June report. The European Union still has an arms embargo on China, imposed after the Tiananmen Square massacre in 1989.

Some of China’s investments have returned losses. China Investment Corp. paid $3 billion for a 9.4 percent stake in private equity firm Blackstone in 2007 at a 4.5 percent discount to its initial public offering price of $31. The stock traded at $12.31 yesterday, which translates to a loss of more than $1.7 billion loss for China, according to data compiled by Bloomberg.

CIC, as the wealth fund is known, widened its investment horizon to 10 years from five years, the company said in July.

“They are trying to be helpful by diversifying a little within the euro zone community,” Michael Spence, a Nobel laureate in economics, said while attending a conference in Beijing today. “With relatively high yields, if there is a credible plan in Italy — Italy has very low private debt, its public debt is relatively stable if they adopt sensible policies — so could be quite a good investment as well.”
 

China unlikely to loosen monetary policy
Sept 13 (The Australian) – CHINA’s central bank says stabilising prices remains its priority, reinforcing signs that Beijing is unlikely to loosen the reins on the world’s No. 2 economy any time soon despite mounting global uncertainties.

In a statement last night, the People’s Bank of China also gave fresh acknowledgment that its traditional measuring tools have failed to keep up with recent changes in the Chinese financial system. The bank said it is considering issuing an adjusted version of its benchmark measure of the supply of money in the economy to help plug the resulting gaps.

The PBOC’s statement came after economic data over the previous three days showing growth and inflation both easing somewhat, but remaining strong.

The data reinforced a growing consensus among economists that Beijing has likely pressed pause on any big monetary policy moves — after a series of rate increases over the last year — as it balances concerns about the weakness in advanced economies like Europe and the US against ongoing wariness over consumer prices at home.

“There is some control over the causes of rising prices, but they haven’t been eliminated,” the PBOC said last night. “Inflation remains high and stabilising prices remains the top macro-control policy.” The bank said China needs to continue its “prudent” monetary policy and maintain steady and appropriate credit growth.

Data issued by the PBOC on Sunday showed that money-supply growth slowed further last month, which the central bank said was in line with its “prudent” monetary policy. China’s broadest measure of money supply, M2, was up 13.5 per cent at the end of August from a year earlier, slower than the 14.7 per cent rise at the end of July, and below economists’ expectations of 14.5 per cent.

But the PBOC’s statement last night also said it is researching the addition of an “M2-Plus” measure of money supply, because the current M2 measure — which gauges bank deposits and cash in circulation — doesn’t capture funds in wealth management products, which have expanded dramatically this year. That means the M2 readings have understated the total growth in money, which is a factor in inflation.

“The official M2 growth number has become a little less reliable than it once was,” said Standard Chartered economists Li Wei and Stephen Green in a research note last week.

The PBOC noted that growth in lending hasn’t been slow so far this year, pointing out that bank lending in August was up about 10 billion yuan ($1.5bn) from the same month last year, when monetary policy was still loose.

“Overall liquidity conditions are appropriate and banks’ provision levels are normal,” the PBOC said. China’s financial institutions issued 548.5bn yuan of new yuan loans in August, up from 493bn yuan in July and above economists’ expectations of 500bn yuan.

China’s consumer price index rose 6.2 per cent in August from a year earlier, slowing from July’s 6.5 per cent increase, which was the fastest rise in more than three years.

Soft spot softening?

And if the US debt ceiling is not extended the drop in aggregate demand (spending) will take down most of the world economy:

Headlines:
Swiss Investor Sentiment Falls to Lowest in More Than 2 Years
Euro-Area Services, Manufacturing Gauge at Lowest Since 2009
Juncker Says Selective Default for Greece Is a Possibility
German output growth slowed sharply to its weakest in two years

and this:

China’s Manufacturing May Contract for First Time in a Year

July 21 (Bloomberg) — China’s manufacturing may contract for the first time in a year as output and new orders drop, preliminary data for a purchasing managers’ index indicated.

The gauge fell to 48.9 for July from a final reading of 50.1 for June, HSBC Holdings Plc and Markit Economics said in a statement today. The final July reading is due Aug. 1.

Today’s data adds to evidence that growth in the world’s second-largest economy is slowing on Premier Wen Jiabao’s campaign to tame consumer and property prices. The International Monetary Fund said in a report released late yesterday in Washington that risks for the economy include the threat of faster-than-expected inflation, a real-estate bubble, and bad loans from stimulus spending.

“The data are another sign that the monetary tightening measures that commenced last October are biting,” said Tim Condon, the Singapore-based head of Asia research at ING Groep NV. “If there is a concern that growth is slowing too much, past practice is that there will be a pause in the tightening.”

Stocks in China fell for a fourth day. The benchmark Shanghai Composite Index closed 1 percent lower at 2,765.89, the biggest decline since July 12.

The yuan rose to a 17-year high after the central bank set the strongest reference rate since a dollar peg was scrapped exactly six years ago. It was 0.12 percent stronger at 6.4516 per dollar at 3:28 p.m. in Shanghai, the biggest advance in a week, according to the China Foreign Exchange Trade System.

Cost Pressure

Lu Ting, a Hong Kong-based economist at Bank of America Merrill Lynch, said the HSBC survey may be “more downward- biased” than an official PMI because the average size of the businesses covered is smaller. Such companies “are under increasing pressure” from labor costs and to secure capital, Lu said. He advised investors to “not overly respond” to the data.

The government has raised interest rates five times since mid-October, boosted lenders’ reserve requirements to a record level and imposed curbs on property investment and home purchases.

Inflation, which has breached the government’s 2011 target of 4 percent every month this year, accelerated to 6.4 percent in June from a year earlier, the highest level in three years.

The IMF said in the report that China’s economy “remains on a solid footing, propelled by vigorous domestic and external demand.” The Washington-based lender’s 24 directors also “generally agreed” that a stronger yuan would help rebalance the China’s economy toward domestic demand.

Slowing Demand

HSBC’s preliminary index, known as the Flash PMI, is based on 85 percent to 90 percent of responses to a survey of executives in more than 400 companies. Output in July contracted at a faster rate, export orders shrank at a slower pace and the gauge of new orders dropped below 50, the dividing line between expansion and contraction, today’s data showed.

Manufacturing in some industries is being hit by slowing demand. Li Ning Co., China’s largest sportswear maker and retailer, said July 7 its first-half sales dropped by about 5 percent. The China Association of Automobile Manufacturers said July 8 that vehicle sales may increase about 5 percent this year, compared with an earlier estimate for 10 percent to 15 percent growth, due to lower demand for commercial autos.

The preliminary number has matched the final reading twice since HSBC began publishing the series in February. If it’s confirmed on Aug. 1, the index will have dropped to its lowest level since March 2009. It last fell below 50 in July 2010.

PBOC Cuts Yuan Intervention as Slower Economy Curbs Inflows

FDI (foreign direct investment) has been the force causing the yuan to appreciate as it’s been an avenue for speculative flows as well as real investment.

The real investment flows may have slowed a while back, with speculative flows responsible for the most recent rise in the currency.

As these flows slow, China intervenes less as that force driving the currency appreciation slows.

That leaves them with forces that work to weaken a currency- inflation and its associated rising costs of production.

In the case of China, this has the potential of turning the currency from strong to weak, as discussed here over the last two years.

The declining FDI and reduced intervention indicate progress in that direction.

PBOC Cuts Yuan Intervention as Slower Economy Curbs Inflows: China Credit

July 12 (Bloomberg) — China’s central bank bought the fewest dollars in four months to stem gains in the yuan in June as slowing growth in Asia’s biggest economy damped capital inflows and reduced pressure for the currency to appreciate.

The People’s Bank of China’s purchases of foreign exchange from the nation’s lenders totaled 277.3 billion yuan ($42.8 billion), 26 percent less than in May, according to data released yesterday. Foreign reserves rose $152.8 billion in the second quarter, the least in a year, and government data today showed gross domestic product increased at the slowest pace since 2009.

Expansion is cooling after policy makers raised interest rates three times this year and lenders’ reserve-requirement ratios on six occasions, seeking to tame the fastest inflation since 2008. Forward contracts show investors are the least bullish on yuan gains since a dollar peg ended in June 2010, even after the currency trailed advances in both Brazil’s real and the Russian ruble this year. The average yield on yuan bonds in Hong Kong jumped 62 basis points, or 0.62 percentage point, since May, based on an HSBC Holdings Plc index.

“Rising hard-landing risks are dimming the allure of yuan- denominated assets, resulting in fewer hot money inflows,” said Liu Dongliang, a senior analyst in Shenzhen at China Merchants Bank Co., the nation’s sixth-largest lender. “Inflows may decline further in the second half, lessening the need for the central bank to raise reserve ratios. The PBOC is likely to raise ratios no more than once before the end of 2011.”

CH News

China is traditionally a first half/second half story, with h2 notably slower than h1 as fiscal and lending initiatives have generally been front loaded.

So watch for a very weak h2:

China Stocks Drop for 6th Day on Slowing Growth, Tighter Credit

May 26 (Bloomberg) — China’s stocks slid for a sixth day, driving the benchmark index to the longest stretch of losses in 11 months, on concern tightening measures are slowing the economy and making it harder for small companies to borrow money.

Huaxin Cement Co., an affiliate of Holcim Ltd., dropped 2.9 percent after Shanghai Securities News reported China’s industrial output may slow. A gauge of small-capitalization stocks fell to the lowest close in four months as Citigroup Inc. said smaller companies are being squeezed by tighter credit. Kangmei Pharmaceutical Co. led declines for drugmakers on speculation the government will further lower drug prices.

“Sentiment is weak and we haven’t seen anything positive that can support stocks,” said Dai Ming, fund manager at Shanghai Kingsun Investment Management & Consulting Co. “Slowing growth, high inflation and tight lending will continue to weigh on the market in the near future.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, fell 5.23 points, or 0.2 percent, to 2,736.53 at the 3 p.m. close, erasing a gain in the last half hour of trading. The six-day decline is the longest since July 1. The CSI 300 Index lost 0.4 percent to 2,978.38, while the CSI Smallcap 500 Index retreated 1 percent.

The Shanghai gauge has slumped 2.5 percent this year as the central bank raised the reserve-requirement ratio for banks 11 times and boosted interest rates four times since the start of 2010 to cool inflation, which exceeded the government target each month this year. China’s preliminary manufacturing index
fell to its lowest level in 10 months, according to a report from HSBC Holdings Plc and Markit Economics this week.

Huaxin Cement slid 2.9 percent to 22.19 yuan. Offshore Oil Engineering Co. lost 4.9 percent to 6.42 yuan, the lowest close since Aug. 27. SAIC Motor Corp., China’s largest carmaker, fell 1.4 percent to 15.96 yuan.

Slowing Industrial Output

China’s industrial output growth is expected to slow in coming months as companies continue to destock and power shortages restrain production, Xu Ce, a researcher with the State Information Center, wrote in a commentary published in Shanghai Securities News. Government efforts to cut capacity in some industries will also restrain output growth, Xu wrote.

Sanan Optoelectronics Co., China’s biggest producer of light-emitting diode chips, led declines for smaller companies, slumping 3.7 percent to 16.71 yuan. Haining China Leather Market Co. plunged 5.6 percent to 21.53 yuan.

China’s small- and medium-sized companies are being squeezed by credit rationing and rising costs, Minggao Shen, an analyst at Citigroup, said in a report after meeting clients.

Bank Funding

The seven-day repurchase rate, which measures funding availability between banks, has averaged 3.48 percent so far this month, compared with 2.83 percent in April and 2.39 percent in March. The seven-day repo rate was at 5.08 percent as of 11:31 a.m. in Shanghai, according to a weighted average compiled by the National Interbank Funding Center. It touched 5.50 percent yesterday, the highest level since Feb. 23.

Kangmei fell 8.5 percent to 11.90 yuan, the biggest decline in almost 21 months. Nanjing Pharmaceutical Co. slid 6.9 percent to 12.44 yuan. Northeast Pharmaceutical Group Co. lost 6.3 percent to 16.37 yuan.

“Institutions are selling drugmaker shares because there’s still a lot of uncertainty about the next round of drug price cuts by the government,” said Li Ying, analyst at Capital Securities Corp.

Chinese stocks are “getting close to the market bottom” after recent declines and may gain as much as 20 percent this year, according to Steven Sun, Hong Kong-based head of China equity strategy at HSBC Holdings Plc.

The nation’s equities may rally in the second half of 2011, as easing inflation from June onward allows the central bank to hold off on its policy tightening campaign, Sun said in an interview with Bloomberg Television yesterday.

“We are getting close to the market bottom,” he said. “We are talking about a 15 to 20 percent upside by the end of this year.”

China Steel Reduces Prices as Industrial Output Slows

May 25 (Bloomberg) — China Steel Corp., Taiwan’s largest producer, will cut prices for domestic customers after the island’s industrial output slowed.

Prices will fall by an average 4.2 percent for July and August contracts, the Kaohsiung-based company said in an e-mailed statement today. Hot-rolled coil, a benchmark product, will fall by an average NT$1,754 ($61) a metric ton, while cold- rolled steel will be cut by an average NT$1,419 a ton.

Steel demand may decline after industrial production increased at the slowest pace in 19 months in April. Vehicle and auto part output fell 0.35 percent last month from a year earlier, the Ministry of Economic Affairs said May 23.

China Steel dropped 0.4 percent to close at NT$34.25 in Taipei before the announcement. The stock has climbed 2.2 percent this year, compared with the 2 percent decline in the benchmark Taiex index.

Electro-galvanized sheet prices will be cut by NT$1,500 a ton, electrical sheets by NT$2,600, and hot-dipped zinc-galvanized sheets by NT$1,613, China Steel said. Prices of plates, bars and wire rods will be left unchanged, the steelmaker said, without giving specific percentage changes for the products.

Yuan Gains by Most in Three Weeks as Zhou Says Inflation High

This is an unsustainable paradigm but interesting while it lasts.
Actual inflation works to weaken a currency (it buys less in general, by definition). Under those circumstances, acting to keep your currency strong first causes the trade flows reverse, and then to continue to keep it strong market forces tend to eat up your fx reserves. All of them. And then some. To the point where the local currency can no longer be supported short of additional fiscal tightening sufficient to reduce ‘real’ wages vs your trading partners.

Yuan Gains by Most in Three Weeks as Zhou Says Inflation High

By Brian Parkin

May 20 (Bloomberg) &#8212 China’s yuan rose by the most in three weeks after People’s Bank of China Governor Zhou Xiaochuan said inflation remains “high,” fueling speculation further gains will be tolerated.

China needs to strike a balance between economic growth and consumer prices, Zhou said at the Lujiazui Forum in Shanghai today. Asia’s largest economy is “cautiously” promoting cross- border use of the yuan in financial transactions in addition to trade and investment, he said, adding that the onvertibility of the yuan should be a gradual, orderly, mid-to-long-term process.

“The official commentary has been leaning towards expounding the benefits of yuan flexibility,” said Emmanuel Ng, a currency strategist at Oversea-Chinese Banking Corp. in Singapore. “It has been mentioned as a bit of an inflation tool.”

The yuan rose 0.17 percent to 6.4926 per dollar as of 4:30 p.m. in Shanghai, resulting in a weekly gain of 0.08 percent, according to the China Foreign Exchange Trade System. The currency isn’t allowed to move more than 0.5 percent either side of the central bank’s daily fixing, which was raised 0.10 percent today to 6.4983. In Hong Kong’s offshore market, the yuan strengthened 0.08 percent to 6.4915.

Twelve-month non-deliverable forwards gained 0.05 percent to 6.3645 per dollar from yesterday, a 2 percent premium to the onshore spot rate, according to data compiled by Bloomberg. The contracts were little changed from last week.

A stronger currency helps tame inflation by reducing the cost of imports. Consumer prices rose 5.3 percent in April from a year earlier following a 5.4 percent increase in March that was the biggest since July 2008. The government aims to limit inflation to 4 percent this year.

China- Growth of FDI slowing

With its capital constraints FDI has been channel for speculative inflows to facilitate bets on yuan appreciation.

While month to month numbers are volatile, they’re worth keeping an eye on.

In the long run inflation weakens a currency.

Also, JPM yesterday suggested increased risk of what they called a hard landing

Growth of foreign direct investment in China slowing

May 18 (Global Times) – Foreign direct investment (FDI) in China rose to $8.46 billion in April, driven largely by investment in the property sector. The figure is 15.21 percent higher than the previous year but represents a slower rate of growth than seen in March, according to official data released Tuesday.

The slowdown of FDI growth as well as other economic indices this month showed that the economy is cooling down, economists warned Tuesday.
April’s figure was lower than the $12.52 billion invested in March and represented less than half of March’s year on year growth rate of 32.9 percent. The ministry did not elaborate on the reasons for the fall.

The property sector attracted about 24 percent of April’s investment flows, Ministry of Commerce spokesman Yao Jian said at a press briefing.
During the first four months of the year, FDI rose 26.03 percent over levels of the previous year to $38.80 billion, the data showed.

During this period, 10 Asian economies including Japan, Singapore and Hong Kong set up 6,487 new businesses, up 9.87 percent from the previous year, and invested $32.9 billion, up 31.23 percent from the previous year.

EU countries set up 562 new businesses in China, up 16.36 percent from the previous year, while investment from the EU rose 23.42 percent to reach $2.6 billion.
“Despite the financial crisis, European companies are still expanding and investing abroad, including in China. We encourage further market access in China to attract even more EU companies to invest there and indeed we also encourage Chinese companies to invest in Europe,” William Fingleton, a spokesman for the Delegation of the EU to China, told the Global Times in an email.

However, investment from the US dropped 28 percent during the first four months of this year to $1.03 billion in April.

FDI in China plunged after the financial crisis in 2008 but rebounded strongly last year to reach $105.7 billion.

“If the figures released in the first three months are regarded as volatile, April’s FDI figure as well as the month’s imports, manufacturing and other economic indices reported earlier showed a cooldown has firmly set into the economy,” Tian Yun, director of the research center of China Society of Macroeconomics, told the Global Times.

“The economy risks a further slowdown if the government’s monetary tightening policy continues and the country’s employment situation, which should always come before inflation issues, will remain worrisome,” Tian warned.

Inflation Outlook

Governor Zhou Xiaochuan said China’s central bank was focused on controlling prices, without mentioning threats to growth, an indication that he has been more concerned about inflation than any risk of a growth slowdown.

The central bank will “control the monetary conditions behind excessively rapid gains in prices,” Zhou said in comments dated April 18 and released yesterday in the central bank’s annual report. The comments tally with a monetary policy report released May 3 and were before data showing industrial output growth weakened last month.

Home prices rose in China’s 67 of 70 cities monitored by the government in April from last year, led by smaller cities that are defying efforts to control property prices nationwide. Housing prices increased at a faster pace in smaller cities and slowed in major ones, data posted on the statistics bureau’s website today showed.

Rising Coal Demand

Shenhua, the nation’s largest coal producer, rose 0.9 percent to 28.53 yuan. Yanzhou Coal Mining Co., the fourth biggest, advanced 0.9 percent to 32.99 yuan.

Demand for thermal and coking coal may increase between 8 percent and 10 percent this year as less rainfall curbs supplies of hydropower and boosts demand for coal-fired electricity, Luo Zeting, an analyst at Citic Securities, wrote in a report today.

China’s dollar reserves being used to fight inflation?

This may be some of the most recent data:

The SAFE Releases Data on Chinas External Debt at the End of September 2010

Excerpt: “At the end of September 2010, China’s outstanding external debt (excluding that of Hong Kong SAR, Macao SAR, and Taiwan Province) reached USD546.449 billion. Specifically, the outstanding registered external debt reached USD326.549 billion and the balance of trade credit totaled USD219.9 billion. ”

Then Mktwatch reported this end Dec 2010:

China’s external debt nears $550 billion: Safe

Escerpt: “HONG KONG (MarketWatch) — China’s external debt was $548.938 billion at the end of 2010, compared to $546 billion owed at the end of the third quarter, according to newswire reports Thursday that cited figures released by the State Administration of Foreign Exchange. Of that total, China’s short-term debt was $375.7 billion, or equivalent to 13.2% of China’s foreign exchange reserves, the agency said”

CAUTION,THIS IS ALL VERY PRELIMINARY AND COULD PROVE TO BE ENTIRELY WRONG

I got this response, and I’m looking further into it.

I don’t think this includes dollar debt of state banks and state owned enterprises.

What it means is that China’s net reserves aren’t as high as generally believed, and that they are being ‘spent/lent’ by borrowing dollars and then spending, leaving the gross, headline reserve number intact, rather than spending the reserves directly.

They could even be buying their own currency to drive it higher to fight inflation.

This would be an interesting, quasi desperation move, as it would mean they are willing to risk export markets to try to keep prices in check.

It would also help explain the downward drift in the dollar over the last 6 months or so.

And currency support under these circumstances is also, in general, unsustainable. If the trade flows have turned against them due to inflation, they will burn through all their reserves trying to support their currency without a lot more fiscal tightening at all levels, and a very hard landing as well. And even that might not be enough, depending on how institutionalized the inflation is.

All speculation on my part at this point.

China Daily | Zhou Pledges More Tightening as China Raises Reserve Ratios

As previously discussed, changing reserve ratios and the like does nothing more than raise the cost of funds to the banks, much like a ‘normal’ rate hike.

And, also as previously discussed, higher rates more often than not add to inflationary pressures, rather than subtract from them.

Ultimately, it is the fiscal adjustments that bite, including reduced deficit spending (both proactive and, more common, via automatic stabilizers, particularly increased tax receipts due to nominal growth) and reduced state lending, all of which is in progress. Reductions in state lending are also, functionally, best considered ‘fiscal’ measures.

This all typically results in a very hard landing.

China Raises Reserve Ratio to Curb Inflation as Zhou Pledges More to Come

April 17 (Bloomberg) — China increased banks’ reserve requirements to lock up cash and cool inflation, and central bank Governor Zhou Xiaochuan said monetary tightening will continue for “some time.”

Reserve ratios will rise a half point from April 21, the People’s Bank of China said on its website yesterday, pushing the requirement to a record 20.5 percent for the biggest lenders. The move came less than two weeks after an interest-rate increase. Zhou sees no “absolute” limit on how high reserve requirements can go, he said April 16.

The nation’s fifth interest-rate increase since the financial crisis may come as soon as next month after inflation accelerated in March to the fastest pace since 2008, Societe Generale SA said. Chinese policy makers may also consider allowing faster appreciation in the yuan, described by the U.S. as “substantially” undervalued, to reduce the cost of imported commodities such as oil.

Higher reserve requirements “will help tighten monetary conditions and prevent banks from lending aggressively in the coming month,” said Liu Li-Gang, an Australia & New Zealand Banking Group economist in Hong Kong who formerly worked for the World Bank. Policy makers may also increasingly rely on the yuan to contain “imported inflation,” Liu added.

Geithner’s Case

The Shanghai Composite Index rose 0.4 percent as of 11:09 a.m. local time. Non-deliverable yuan forwards were little changed, indicating expectations for the currency to rise about 2.3 percent in the next 12 months from 6.5293 per dollar.

U.S. Treasury Secretary Timothy F. Geithner says a stronger Chinese currency would both counter inflation within the Asian nation and aid efforts to reduce economic imbalances that contributed to the global financial crisis.

The yuan has gained about 4.5 percent against the dollar since June last year, when China scrapped a crisis policy of keeping the currency unchanged against the greenback. Analysts’ median forecast is for the currency to climb to 6.3 per dollar by year end.

Speaking in Washington yesterday, PBOC Deputy Governor Yi Gang said the yuan is close to being freely usable, which would allow it to be included in the International Monetary Fund’s Special Drawing Rights basket. He said April 15 that a gradual appreciation of the currency would help his country overcome inflation.