Category Archives: Hong Kong

BoJ Gov Shirakawa – Japan’s Fiscal Situation “Very Severe”

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Because they think they could be the next Greece they *are* Japan.

BOJ’s Shirakawa Says Japan’s Fiscal Situation Is ’Very Severe’

By Mayumi Otsuma

March 23 (Bloomberg) — Bank of Japan Governor Masaaki Shirakawa said that while Japan’s fiscal situation is “very severe,” investors’ trust in the country’s policy makers is keeping bond yields low. He spoke in parliament today in Tokyo.

Japan Mulls Postwar-Style Reconstruction Agency, Adds Cash

By Takashi Hirokawa and Keiko Ujikane

March 23 (Bloomberg) — Japan may set up a reconstruction agency to oversee earthquake repairs, while data showed the central bank pumped record liquidity into lenders, as the nation grappled with its worst disaster since World War II.

Underwriting Bonds

“If a central bank starts to underwrite government bonds, there may be no problems at first, but it would lead to a limitless expansion of currency issuance, spur sharp inflation and yield a big blow to people’s lives and economic activities,” as has happened in the past, Shirakawa said.

By law, the central bank can directly buy JGBs only in extraordinary circumstances with the permission of the Diet. Vice Finance Minister Fumihiko Igarashi said in parliament that the government needed to be “cautious” in considering whether to have the BOJ make direct purchases.

Bond sales, cuts to other spending and tax measures could pay for reconstruction, Economic and Fiscal Policy Minister Kaoru Yosano said yesterday. Morgan Stanley MUFG Securities Co. analysts led by Robert Feldman in Tokyo wrote in a note this week that policy makers will likely implement “several” spending packages of 10 trillion yen or more.

Loan Programs

Fiscal spending won’t be the only channel for stimulus, according to Chotaro Morita, chief strategist at Barclays Capital Japan Ltd. in Tokyo.

“We expect the utilization of government lending” vehicles such as the Government Housing Loan Corporation and Finance Corporation for Municipal Governments, as was done in the wake of the 1995 Kobe earthquake, Morita wrote in a report to clients yesterday. This would help reduce the increase in government-bond issuance, he said.

In the wake of the devastation of World War II, Japan’s government set up the Economic Stabilization Board in August 1946. Among its duties was to ration commodities and oversee the revival of the nation’s industries.

To maintain short-term financial stability, BOJ policy makers have added emergency cash every business day since the quake. Lenders’ current-account balances at the central bank yesterday exceeded the 36.4 trillion yen record set in March 2004, when officials were implementing so-called quantitative easing measures to counter deflation. Deposits have climbed from about 17.6 trillion yen on March 10.

Japan Forecasts Earthquake Damage May Swell to $309 Billion

By Keiko Ujikane

March 23 (Bloomberg) — Japan’s government estimated the damage from this month’s record earthquake and tsunami at as much as 25 trillion yen ($309 billion), an amount almost four times the hit imposed by Hurricane Katrina on the U.S.

The destruction will push down gross domestic product by as much as 2.75 trillion yen for the year starting April 1, today’s report showed. The figure, about 0.5 percent of the 530 trillion yen economy, reflects a decline in production from supply disruptions and damage to corporate facilities without taking into account the effects of possible power outages.

The figures are the first gauge of the scale of rebuilding Prime Minister Naoto Kan’s government will face after the quake killed more than 9,000 people. Japan may set up a reconstruction agency to oversee the rebuilding effort and the central bank has injected record cash to stabilize financial markets.

Damages will probably amount to between 16 trillion yen and 25 trillion yen, today’s report said. It covers destruction to infrastructure in seven prefectures affected by the disaster, including damages to nuclear power facilities north of Tokyo.

Wider implications on the economy, including how radiation will affect food and water supply, are not included in the estimate.

Bank of Japan board member Ryuzo Miyao said today that it may take more time to overcome the damage of the quake than it did after the 1995 disaster in Kobe, western Japan.

Power Shortage

Tokyo’s power supply may fall 20,500 megawatts short of summer demand, or 34 percent less than the peak consumption last year, according to figures from Tokyo Electric Power Co. The utility is capable of supplying 37,500-megawatts and plans to add about 2,000 megawatts of thermal generation by the end of this month, company spokesman Naoyuki Matsumoto said by telephone today.

The government had previously projected growth of 1.5 percent for the year starting April 1 after growing an estimated 3.1 percent this year.

Bank of America Merrill Lynch cut its GDP projection for fiscal 2011 to 1 percent from 1.7 percent. RBS Securities and Nomura Securities Co. have also cut their forecasts while noting that the economy will still expand because the rebuilding will spur demand and help offset damage on growth in the period.

Rebuilding efforts in fiscal 2011 could push up GDP by 5 trillion yen to 7.75 trillion yen, the government said today.

Japan’s growth will return to normal “very soon” as reconstruction work starts, Justin Lin, the World Bank’s chief economist, said in Hong Kong today. At the same time, some are worried the boost won’t come soon enough.

Biggest Concern

“My biggest concern is that a positive impact from reconstruction may take a while to materialize,” said Akiyoshi Takumori, chief economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “This earthquake and tsunami destroyed infrastructure and that will delay a recovery in production, a major driving force for the economy.”

The government maintained its assessment of the economy for March as the economic indicators released before the earthquake showed exports and production rebounding, while also voicing “concern” about the impact of the temblor on the economy.

“Although the Japanese economy is turning to pick up, its ability to self-sustain itself is weak,” the Cabinet Office said in a monthly report.

The U.S. National Hurricane Center in August 2006 calculated the damage of Hurricane Katrina, which slammed into New Orleans the year before, at $81 billion.

Future assessments will need to address damage to much of the northeast’s economy, and the disruptions to electricity and distribution systems that’s spread south to Tokyo and beyond.

Toyota Motor Corp. said yesterday it will halt car assembly in Japan through March 26. Sony Corp. said it shut five more plants.

Export Decline

Koji Miyahara, president of the Japanese Shipowners’ Association, said today exports may decline for six to 12 months after the earthquake, adding that the disaster won’t affect the industry in the longer term as reconstruction efforts take hold.

Kan is now faced with the challenge of finding ways to pay for the damage to the economy. BOJ Governor Masaaki Shirakawa has reiterated a reluctance to underwrite debt from the government and said today that nation’s fiscal situation is “very severe.”

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Inflation Slowing China’s Export Engine

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This is the force that ‘naturally’ brings the currency into line, and then can make it a lot weaker.

And the only way China knows to ‘fight it’ is probably with moves that will will result in a recession.

Inflation Slowing China’s Export Engine
Published: Sunday, 30 Jan 2011 | 10:46 PM ET

Inflation is starting to slow China’s mighty export machine, as buyers from Western multinational companies balk at higher prices and have cut back their planned spring shipments across the Pacific.

Markups of 20 to 50 percent on products like leather shoes and polo shirts have sent Western buyers scrambling for alternate suppliers. But from Vietnam to India, few low-wage developing countries can match China’s manufacturing might — and no country offers refuge from high global commodity prices.

Already, the slowdown in American orders has forced some container shipping lines to cancel up to a quarter of their trips to the United States this spring from Hong Kong and other Chinese ports.

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Beijing City to Raise Minimum Wage 21%

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It’s a game of political survival.

The people want no inflation and they also want more income to keep up with rising prices.

Not totally impossible to achieve both, but requires a lot more than the traditional macro tools taught in the western universities.

Beijing city to raise minimum wage 21%
By Jamil Anderlini in Beijing and Rahul Jacob in Hong Kong
Published: December 28 2010 12:47 | Last updated: December 28 2010 12:47
 

Every province and municipality in China has announced a rise in its minimum wage this year, with increases ranging from 12 per cent to Beijing’s rise.
 

The official measure of annual consumer price inflation in China hit 5.1 per cent in November, up from 4.4 per cent in October, with food prices rising 11.7 per cent in November from a year earlier.
 

Beijing city is to raise its minimum wage 21 per cent next year, the second such rise in barely six months, amid rising inflationary pressure and growing concern over China’s widening wealth gap.
 

The increase, which will come into effect on New Year’s day, raises the statutory minimum monthly wage in the Chinese capital to Rmb1,160 ($175) and the hourly rate to Rmb6.7. It follows a 20 per cent rise in June.
 

Every province and municipality in China has announced a rise in its minimum wage this year, with increases ranging from 12 per cent to Beijing’s rise.
 

The official measure of annual consumer price inflation in China hit 5.1 per cent in November, up from 4.4 per cent in October, with food prices rising 11.7 per cent in November from a year earlier.
 

The government is worried about the disproportionate burden of rising food costs on low-income households, which spend a larger share of their income on basic necessities. It also fears that persistent price rises could stoke social unrest, as they often have in the past.
 

“While China’s living standards have dramatically risen over the past 30 years, the gap between rich and poor has sharply widened,” Yu Yongding, an influential former adviser to China’s central bank, wrote in a newspaper article last week. “With the contrast between the opulent lifestyles of the rich and the slow improvement of basic living conditions for the poor fomenting social tension, a serious backlash is brewing.”
 

Nationwide increases in minimum wages are part of the government’s plan to reduce income disparity and the Chinese economy’s heavy reliance on investment and promote greater consumption by middle- and low-income households.
 

But with many businesses already being squeezed by rising input costs, wage increases come at a difficult time and are likely to lead to higher overall inflation.
 

“In just the last three months we’ve already had to raise entry-level starting wages 60 per cent just to get people to come to a job interview,” said Jade Gray, chief executive of Gung Ho Pizza, a Beijing-based gourmet pizza delivery service. “With rising rents, the much higher cost of ingredients and now wage inflation, many businesses in the services industries are going to find it impossible not to pass on much higher costs to consumers.”
 

With its latest wage increase Beijing now has the highest minimum wage in the country, ahead of Shanghai on Rmb1,120 per month but other cities and provinces, including the manufacturing hub of Guangdong, are already eyeing further increases early in the new year.
 

The government estimates that Beijing’s minimum wage rise will benefit nearly 3m people.
 

In the separately-ruled Chinese territory of Hong Kong, legislators in November set the city’s first-ever minimum wage at HK$28 an hour. The new wage, which takes effect in May 2011, followed months of public consultation and debate amid growing concern in the city about widening income disparities.

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QE still driving portfolio shifting

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I’ve been watching for a ‘buy the rumor sell the news’ ‘risk off’ reversal, but it happened at best only momentarily after the Fed announcement, when the 10 year tsy note dipped to maybe 2.62 very briefly, stocks dipped, the dollar sort of held, gold was off a touch, etc. But now it looks like it’s ‘risk back on’ with a vengeance as both believers in QE and those who believe others believe in QE are piling on.

The fact remains that QE does nothing apart from alter the term structure of rates.

There are no ‘quantity’ effects, though from the following article and market reactions much of the world still believes there are substantial quantity effects.

And what we are seeing are the effects of ongoing portfolio shifting and trading based on the false notions about QE.

To review,

QE is not ‘money printing’ of any consequence. It just alters the duration of outstanding govt liabilities which alters the term structure of risk free rates.

QE removes some interest income from the economy which the Fed turns over to the Tsy. This works against ‘earnings’ in general.

QE alters the discount rates that price assets, helping valuations.

Japan has done enough QE to keep 10 year jgb’s below 1%, without triggering inflation or supporting aggregate demand in any meaningful way. Japan’s economy remains relatively flat, even with substantial net exports, which help domestic demand, a policy to which we are now aspiring.

QE does not increase commodity consumption or oil consumption.

QE does not provide liquidity for the rest of the world.

QE does cause a lot of portfolio shifting which one way or another is functionally ‘getting short the dollar’

This is much like what happened when panicked money paid up to move out of the euro, driving it briefly down to 118, if I recall correctly.

No telling how long this QE ride will last.

What’s reasonably certain is the Fed will do what it can to keep rates low until it looks like it’s meeting at least one of its dual mandates.

Asians Gird for Bubble Threat, Criticize Fed Move

By Michael Heath

November 4 Bloomberg) — Asia-Pacific officials are preparing
for stronger currencies and asset-price inflation as they blamed
the U.S. Federal Reserve’s expanded monetary stimulus for
threatening to escalate an inflow of capital into the region.

Chinese central bank adviser Xia Bin said Fed quantitative
easing is “uncontrolled” money printing, and Japan’s Prime
Minister Naoto Kan cited the U.S. pursuing a “weak-dollar
policy.” The Hong Kong Monetary Authority warned the city’s
property prices could surge and Malaysia’s central bank chief
said nations are prepared to act jointly on capital flows.

“Extra liquidity due to quantitative easing will spill
into Asian markets,” said Patrick Bennett, a Hong Kong-based
strategist at Standard Bank Group Ltd. “It will put increased
pressure on all currencies to appreciate, the yuan in particular
has been appreciating at a slower rate than others.”

The International Monetary Fund last month urged Asia-
Pacific nations to withdraw policy stimulus to head off asset-
price pressures, as their world-leading economies draw capital
because of low interest rates in the U.S. and other advanced
countries. Today’s reactions of regional policy makers reflect
the international ramifications of the Fed’s decision yesterday
to inject $600 billion into the U.S. economy.

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China Raises Lending, Deposit Rates as Inflation Accelerates

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A lot more evidence of an inflation problem here.

Market forces may be at work forcing ‘currency adjustment’ from that angle as China undergoes the transformation from employment growth via export led growth to employment growth via domestic demand as world demand for their exports remains soft.

As previously discussed, their currency has probably been fundamentally weakening for a while, supported by capital flows rather than trade flows.

This is a bubble like process that can ‘burst’ when the capital flows decelerate with a bout of currency weakness, double digit inflation, and political unrest.

And their next gen western educated economists seem to be doing the traditional interest rate hiking response to inflation they learned in school, which only makes it worse through the ‘fiscal channel’ of higher interest payments by the govt. on the demand side, and rising costs of real investment on the supply side.
A lot more evidence of an inflation problem here.

Market forces may be at work forcing ‘currency adjustment’ from that angle as China
undergoes the transformation from employment growth from export led growth to employment growth through domestic demand as world demand for their exports remains soft.

As previously discussed, their currency has probably been fundamentally weakening for a while, supported by capital flows rather than trade flows.

This is a bubble like process that can ‘burst’ when the capital flows decelerate with a bout of currency weakness, double digit inflation, and political unrest.

And their next gen western educated economists seem to be doing the traditional interest rate hiking response to inflation they learned in school, which only makes it worse through the ‘fiscal channel’ of higher interest payments by the govt on the demand side, and rising costs of real investment on the supply side.

Headlines:

China Raises Lending, Deposit Rates as Inflation Accelerates
Investors Should Cut China Property Stake, Gave Says
PBOC’s ‘Vicious Cycle’ Worsened by Fed, Yu Says: China Credit
China to Do More to Manage Inflation Expectations, Zhang Writes
World Bank Cuts East Asia Outlook, Warns on ‘Bubbles’
South Korean central bank looks to gold

China Raises Lending, Deposit Rates as Inflation Accelerates

October 19 (Bloomberg) — China raised its benchmark
lending and deposit rates for the first time since 2007 after
inflation accelerated to the fastest pace in 22 months.

The one-year deposit rate will increase to 2.5 percent
from 2.25 percent, effective tomorrow, the People’s Bank of
China said on its website today. The lending rate will
increase to 5.56 percent from 5.31 percent, it said.

China’s inflation quickened to 3.5 percent in August,
highlighting overheating risks that have prompted the
government to curb credit and clamp down on the real-estate
market this year. Higher interest rates may encourage inflows
of speculative capital from abroad, complicating management
of the fastest-growing major economy.

“Policy makers need to better anchor inflation
expectations by boosting real interest rates,” Liu Li-Gang,
a Hong Kong-based economist at Australia and New Zealand
Banking Group Ltd., said before today’s release.

China last raised benchmark rates in December 2007, with
central bank Deputy Governor Zhu Min saying on March 25 that
rates are a “heavy-duty weapon” and alternative measures
were working well.

Today’s move came after two surveys showed manufacturing
accelerated in September and input prices jumped, signaling
stabilizing growth and inflation pressures.

Global Recovery

“China would be wise to raise rates,” Dariusz
Kowalczyk, a Hong Kong-based senior economist at Credit
Agricole, said ahead of today’s announcement. “It has led
the global recovery and yet is one of only a few emerging
Asian nations that have not begun to reverse the steep rate
cuts orchestrated during the crisis.”

Chinese officials are grappling with the risk created by
last year’s record 9.59 trillion yuan ($1.4 trillion) credit
boom that fueled the nation’s comeback from the global
recession. China’s property prices in 70 cities rose 9.1
percent in September from a year earlier, according to the
statistics bureau.

China will speed up the introduction of a trial property
tax in some cities and then expand the levy to the whole
country, the government said Sept. 29, without giving a
timetable. The state also told commercial banks to stop
offering loans to buyers of third homes and extended a 30
percent down payment requirement to all first-home buyers.

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China reduces long term treasuries by record amount

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Notice US Tsy yields fell to their lows even with China reducing holdings.
The fear mongerers will just tell us to thank goodness someone else came in to replace them, and that without the Fed buying it’s all over for the US, etc.
To which I say, it’s just a reserve drain, get over it!
And if you don’t understand that, try educating yourself before you sound off.

Interesting they are letting overseas banks invest in their bond markets.
Maybe a move to help strengthen their currency?
They can see the $ reserves aren’t coming in as before?
Or overseas banks bought their way in, looking to profit?
Or the next generation western educated Chinese thinks an expanded financial sector is a prerequisite to growth?
In any case, looks like another western disease has spread to China.

China Headlines,
China Threatened By Export Risk After Eclipsing Japan

China Reduces Long-Term Treasuries by Record Amount

China Economic Index Rises, Conference Board Says

China to Let Overseas Banks Invest in Bond Market

China Lags Behind on Key Measures After Surpassing Japan: Govt

Foreign Investment in China Climbs for 12th Month

Yuan Gains Most Since June as China Favors Greater Volatility

China Copper Consumption Growth to Slow, Antaike Says

Hong Kong Jobless Rate Slides to Lowest in 19 Months

Singapore Exports Cool as Government Predicts Slowing Demand

China Reduces Long-Term Treasuries by Record Amount

By Wes Goodman and Daniel Kruger

August 17(Bloomberg) — China cut its holdings of Treasury notes and bonds by the most ever, raising speculation a plunge in U.S. yields has made government securities unattractive.

The nation’s holdings of long-term Treasuries fell in June for the first time in 15 months, dropping by $21.2 billion to $839.7 billion, a U.S. government report showed yesterday. Two- year yields headed for a fifth monthly decline in August, falling today to a record 0.48 percent.

Two-year rates will rise to 0.85 percent by year-end as the U.S. economy rebounds in 2010 from a contraction in 2009, according to Bloomberg surveys of financial companies. Reports today will show improvement in housing and manufacturing, signs of stability even as growth is less than expected, analysts said.

“Buying now is a big risk,” said Hiroki Shimazu, an economist in Tokyo at Nikko Cordial Securities Inc., a unit of Japan’s third-largest publicly traded bank. “I don’t recommend it. The economy is stable.”

Investors who purchased two-year notes today would lose 0.4 percent if the yield projection is correct, according to data compiled by Bloomberg.

The economy will expand at a 2.55 percent rate in the last six months of 2010, according to the median of 67 estimates in a Bloomberg survey taken July 31 to Aug. 9, down from the 2.8 percent pace projected last month.

Housing, Production

China’s overall Treasury position fell for a second month in June to $843.7 billion.

“This may have been opportunistic,” said James Caron, head of U.S. interest-rate strategy at Morgan Stanley in New York, one of 18 primary dealers that trade with the Federal Reserve. “Look at the level of yields. If you’ve held a lot of Treasuries, you’ve done well.”

The People’s Bank of China on June 19 ended a two-year peg to the dollar, saying it would allow greater “flexibility” in the exchange rate. The currency has since strengthened 0.5 percent.

The central bank limits appreciation by selling yuan and buying dollars, a policy that has contributed to its accumulation of the world’s largest foreign-exchange reserves and led to the build-up of its Treasury holdings.

Domestic Investors

Treasury yields fell as U.S. investors increased their holdings to 50.5 percent, the biggest share of the debt since August 2007 at the start of the financial crisis, amid signs that a recovery from the longest contraction since the Great Depression has lost momentum.

U.S. reports last week showed retail sales increased in July less than economists forecast and inflation held at a 44- year low.

The two-year note yielded 0.50 percent as of 12:19 p.m. in Tokyo. The 0.625 percent security due in July 2012 traded at a price of 100 7/32, according to data compiled by Bloomberg.

China, with $2.45 trillion in foreign-exchange reserves, turned bullish on Europe and Japan at the expense of the U.S.

The nation has been buying “quite a lot” of European bonds, said Yu Yongding, a former adviser to the People’s Bank of China who was part of a foreign-policy advisory committee that visited France, Spain and Germany from June 20 to July 2. Japan’s Ministry of Finance said Aug. 9 that China bought 1.73 trillion yen ($20.3 billion) more Japanese debt than it sold in the first half of 2010, the fastest pace of purchases in at least five years.

Diversification Strategy

“Diversification should be a basic principle,” Yu, president of the China Society of World Economy, said in an interview last week, adding a “top-level Chinese central banker” told him to convey to European policy makers China’s confidence in the region’s economy and currency. “We didn’t sell any European bonds or assets. Instead we bought quite a lot.”

China held 10 percent of the $8.18 trillion of outstanding Treasury debt as of July. Investors in Japan hold the second- largest position in Treasuries with $803.6 billion of the securities, or 9.8 percent. Total foreign holdings rose 1.2 percent to a record $4.01 trillion, the Treasury said. China’s holdings peaked in July 2009 at $939.9 billion.

China needs a strong U.S. dollar, said Kenneth Lieberthal, a senior fellow specializing in China at the Brookings Institution, a research group on Washington.

“I don’t think we’re going to see any massive flight from China’s holdings of U.S. debt,” Lieberthal said on Bloomberg Television. “That would be self defeating and they well recognize that.”

China to Let Overseas Banks Invest in Bond Market

August 17 (Bloomberg) — China will let overseas financial institutions invest yuan holdings in the nation’s interbank bond market in a pilot program to spur currency flows from abroad.

The People’s Bank of China will start with foreign central banks, clearing banks for cross-border yuan settlement in Hong Kong and Macau, and other international lenders involved in trade settlement, according to a statement on its website today.

“It’s a big boost for the offshore renminbi market,” said Steve Wang, a credit strategist for Bank of China International Securities Ltd. in Hong Kong. It “would allow offshore holders of yuan to invest the money directly in China rather than going through middlemen. It’s a step in the right direction that really opens the domestic securities market.”

The move comes as China seeks to broaden the use of its currency. The nation approved use of the yuan to settle cross- border trade with Hong Kong in June 2009, part of a drive to reduce reliance on the U.S. dollar. The popularity of that program was limited by the investments available in the currency.

Each overseas bank needs a special account at a local lender for debt transaction clearing, according to the regulations, which come into effect from today. Overseas banks must first apply for investment quotas on the interbank market, the central bank said. Foreign central banks should disclose funding sources and investing plans in their applications, according to the central bank.

There were a total 14.3 trillion yuan ($2.1 trillion) of bonds on the interbank market as of June, including debt issued by the central government, banks and companies, the central bank said July 30. That amount accounted for 97 percent of total debt outstanding.

Yuan Deposit Growth

Yuan deposits in Hong Kong climbed 4.8 percent in June to a record as China ended a two-year peg against the dollar. Currently, trade is the main way for offshore holders of yuan to return money to China, Wang said.

The program is a step forward to internationalization of the renminbi, said Dariusz Kowalczyk, a currency strategist at Credit Agricole CIB in Hong Kong. The Chinese currency, the yuan, is also known as the renminbi.

“By opening the new avenue to invest Chinese yuan funds, the currency will become more attractive and may come under further upward pressure in the offshore market in Hong Kong,” Kowalczyk said. “Foreign central banks may decide to begin the process of diversifying their reserves into Chinese yuan.”

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China buying euros

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China shifting towards euro buying might indicate they want to beef up exports to the eurozone.

And China probably knows with the credit issues in Europe the last thing the euro zone can do is discourage them from buying euro national govt debt.

Wouldn’t even surprise me if China cut a deal with the ECB to backstop any credit issues before buying as well.

If so, it’s a nominal wealth shift from the euro zone to China as the euro zone national govts pay them a risk premium and then the ECB guarantees the debt.

China is even buying yen, highlighted below, indicating they may be trying to slow imports from Japan and maybe even increase exports to Japan as well.

And Japan my already be quietly buying $US financial assets as indicated by their rising holdings of US Treasury securities.

Looks like a floating exchange rate version of the gold standard ‘beggar they neighbor’ trade wars may be brewing.

This would be an enormous benefit for the US if we knew how to use fiscal policy to sustain domestic demand at full employment levels.

China Favors Euro to Dollar as Bernanke Shifts Course

By Candice Zachariahs and Ron Harui

August 16 (Bloomberg) — China, whose $2.45 trillion in foreign-exchange reserves are the world’s largest, is turning bullish on Europe and Japan at the expense of the U.S.

The nation has been buying “quite a lot” of European bonds, said Yu Yongding, a former adviser to the People’s Bank of China who was part of a foreign-policy advisory committee that visited France, Spain and Germany from June 20 to July 2. Japan’s Ministry of Finance said Aug. 9 that China bought 1.73 trillion yen ($20.1 billion) more Japanese debt than it sold in the first half of 2010, the fastest pace of purchases in at least five years.

“Diversification should be a basic principle,” Yu said in an interview, adding a “top-level Chinese central banker” told him to convey to European policy makers China’s confidence in the region’s economy and currency. “We didn’t sell any European bonds or assets, instead we bought quite a lot.”

China’s position may make it harder for the greenback to rebound after falling as much as 10 percent from this year’s peak in June as measured by the trade-weighted Dollar Index. The nation cut its holdings of U.S. government debt by $72.2 billion, or 7.7 percent, through May from last year’s record of $939.9 billion in July 2009, according to the Treasury Department, which releases new data today.

U.S. Concerns

Concern the U.S. economy is faltering was underscored by the Federal Reserve on Aug. 10. Chairman Ben S. Bernanke said the central bank will reinvest principal payments on its mortgage holdings into Treasury notes to prevent money from being drained out of the financial system, its first expansion of measures to spur growth in more than a year.

“The pace of economic recovery is likely to be more modest in the near term than had been anticipated,” the Federal Open Market Committee said in a statement after meeting in Washington. “The Committee will keep constant the Federal Reserve’s holdings of securities at their current level.”

Asian central banks holding some 60 percent of the world’s foreign-exchange reserves are turning away from the dollar. Concerned about weakening U.S. growth and the Treasury’s record borrowing, they are switching toward euro assets to safeguard reserves, driving gains in the 16-nation currency. South Korea, Malaysia and India reduced their holdings of Treasuries, U.S. government data show.

Cutting Treasuries

The allocations to dollars in official foreign-exchange reserves declined in the first three months of the year, to 61.5 percent from 62.2 percent in the final quarter of 2009, the International Monetary Fund said June 30.

The yen’s share was 3.1 percent, up from 3 percent, The euro’s was 27.2 percent, little changed from 27.3 percent, even after the currency tumbled 5.7 percent versus the dollar during the first quarter on speculation that nations including Greece will struggle to rein in their budget deficits.

“Short of concerns of a default, the investor community in terms of big reserve managers will probably be forced to invest in the euro zone,” said Dwyfor Evans, a strategist in Hong Kong at State Street Global Markets LLC, part of State Street Corp. which has $19 trillion under custody and $1.8 trillion under management. “They can’t be putting all of their eggs in one basket, which is U.S. Treasuries.”

Dollar Index

The Dollar Index’s 5.2 percent drop in July, the biggest decline in 14 months, failed to dissuade most foreign-exchange forecasters from predicting the greenback will strengthen against the euro and yen by December.

The dollar traded at $1.2817 per euro as of 7:13 a.m. in New York from $1.2754 last week, when it rose 4.1 percent. The greenback was at 85.60 yen after falling to 84.73 yen on Aug. 11, the weakest since July 1995.

The U.S. currency will climb to $1.23 per euro by Dec. 31 and to 92 yen, based on median estimates of strategists and economists in Bloomberg surveys. Economists forecast U.S. growth will be 3 percent this year, compared with 1.2 percent for the region sharing the euro and 3.4 percent for Japan.

“There’s no sign of panic or urgency from the Fed and that supports our view that this is a temporary soft patch and the U.S. economy will fight its way through,” said Gareth Berry, a Singapore-based currency strategist at UBS AG, the world’s second-largest foreign-exchange trader. UBS forecasts the dollar will rise to $1.15 per euro and 95 yen in three months.

Slower Growth

Japan’s economy expanded at the slowest pace in three quarters, missing the estimates of all economists polled, the Cabinet Office said today in Tokyo. Gross domestic product rose an annualized 0.4 percent in the three months ended June 30, compared with the median estimate in a Bloomberg survey for annual growth of 2.3 percent.

Slowing purchases of Treasuries by Asian nations haven’t hindered President Barack Obama’s ability to finance a projected record budget deficit of $1.6 trillion in the year ending Sept. 30. Investor demand for the safest investments compressed yields on benchmark 10-year Treasury notes to a 16-month low of 2.65 percent today, even after the U.S.’s publicly traded debt swelled to $8.18 trillion in July.

U.S. mutual funds, households and banks in May boosted their share of America’s debt to 50.2 percent, the first time domestic investors owned more Treasuries than foreign holders since the start of the financial crisis in August 2007.

‘Concrete Steps’

Chinese Premier Wen Jiabao urged the U.S. in March to take “concrete steps” to reassure investors about the safety of dollar assets. The nation, which is the largest overseas holder of Treasuries, trimmed its stockpile of U.S. debt to $867.7 billion in May, from $900.2 billion in April and a record $939.9 billion in July 2009.

Increases to its holdings made between June 2008 and June 2009 amid the global financial crisis were mostly in short-term securities, signaling a “lack of confidence” in the U.S. ability to reduce its debt, UBS said in a research note Aug. 9.

“China has confidence in Europe’s economy, in the euro, and the euro area,” Yu said. A member of the state-backed Chinese Academy of Social Sciences, Yu was selected by the official China Daily to question Treasury secretary Timothy F. Geithner during his June 2009 visit to Beijing about risks the U.S.’s budget deficit will undermine the value of its debt.

Chinese Purchases

Chinese purchases of Europe’s bonds come in the wake of measures taken by European policy makers to allay concern the sovereign-debt crisis will threaten the single-currency union. In May, they announced a loan package worth as much as 750 billion euros ($956 billion) to backstop euro-area governments.

That month, foreign investors were net buyers of euro-zone debt as the 16-nation currency plummeted by the most since January 2009. Foreigners purchased 37.4 billion euros of bonds and notes after buying 49.7 billion euros in April, the latest data from the European Central Bank show.

China’s concern is mirrored by neighboring central banks that are building up foreign-exchange reserves as they sell local currencies to maintain the competiveness of exporters, according to Faros Trading LLC, which conducts currency transactions on behalf of hedge funds and institutional clients.

Indonesia’s central bank and Thailand’s prime minister said in the past month they are watching the performance of their nation’s currencies amid speculation gains will curb exports. Taiwan’s dollar has depreciated in the final minutes of trading on most days in the past four months as policy makers bought dollars, according to traders familiar with the central bank’s operations who declined to be identified. Exports account for about two-thirds of Taiwan’s gross domestic product.

‘Rapidly Diversifying’

“Asian central banks, other than China, don’t want to be caught holding all of the dollars when China is rapidly diversifying,” said Brad Bechtel, a Connecticut-based managing director with Faros Trading. “When sentiment shifts and people start getting very bearish on the euro again, beware central banks might be aggressively buying euros on the other side.”

The yen has climbed 8.4 percent against the dollar this year. China bought a net 456.4 billion yen of Japanese debt in June, after purchasing 735.2 billion yen in May, which was the largest in records dating from 2005, according to Japan’s Ministry of Finance data.

“China’s policy of steady and relatively rapid accumulation of foreign-exchange reserves means they have to be invested somewhere,” said Greg Gibbs, a currency strategist at Royal Bank of Scotland Group Plc in Sydney. “It is easy to imagine that given the low yields in the U.S. and the debt crisis in Europe, China is now willing to invest more of these reserves in the yen.”

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China Seen Robbing Consumers With Low Interest Rates

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Looks like someone’s catching on to the interest rate channel. And Bloomberg is reporting it.

(Bloomberg never reported it when I communicated with them.)

China Seen Robbing Consumers With Low Interest Rates

Aug 6 (Bloomberg) — Peking University professor Michael
Pettis was discussing declining bank-deposit returns when a
student interrupted with a story about her aunt that may stymie
China’s plan to boost consumer spending.

“To send her son to university in six years it means she
must replace each yuan in lost income with one from her wages,”
the student said, according to Pettis.

The government’s policy of keeping interest rates low to
reduce the burden of soaring municipal debt is costing savers as
much as 1.6 trillion yuan ($236 billion) a year in lost income
on bank deposits, according to Pettis, former head of emerging
markets at Bear Stearns Cos. To make up the shortfall, savers
have to set aside a larger proportion of wages, undermining
China’s efforts to counter slower export growth with consumer
spending at home.

“Consumption is already at a dangerously low level,” said
Pettis, author of the “The Volatility Machine,” a 2001 book
that examines financial crises in emerging markets. “If it
doesn’t begin to rise very quickly, China has a problem because
household consumption will continue to drop as a share of GDP.”

Emphasis on exports and investments have caused domestic
consumption to fall to 35 percent of gross domestic product, the
lowest of any major economy, from 45 percent a decade ago,
Societe Generale AG says.

Pettis isn’t alone in being skeptical about a consumer boom
in China. Yale University finance professor Chen Zhiwu and Huang
Yasheng at the Massachusetts Institute of Technology also
predict constrained consumer spending.

State Controlled

Chen estimates the state controls 70 percent of the
nation’s assets and says most of its profits don’t flow to
consumers. On an inflation-adjusted basis government income
surged more than tenfold in the past 15 years while disposable
urban income increased less than three times, he said.

Pettis said the drag on consumer spending from depressed
deposit rates may help slash China’s annual economic expansion
to between 5 and 7 percent a year through 2020, from an average
of about 10 percent in the past decade.

The Group of 20 nations has urged China to boost domestic
consumer spending to help offset reduced consumption from debt-
strapped consumers in the U.S. and Europe. If Chinese shoppers
fail to take over that mantle as the government’s 4 trillion
yuan in stimulus wanes, then the nation may have to fall back on
exports for growth. That would revive trade disputes with the
U.S., which is battling 9.5 percent unemployment, said Huang.

Trade Tensions

“I do not see how trade tensions can be avoided,” said
Huang, a professor at MIT’s Sloan School of Management in
Cambridge, Massachusetts, and author of “Capitalism with
Chinese Characteristics: Entrepreneurship and the State.”
“Even in the best-case scenario I do not see household
consumption replacing investment as a driver of growth in the
foreseeable future.”

China’s leaders have vowed to boost consumption’s share of
GDP since at least 2006 — so far to no avail. The ratio of
consumption in China’s economy is about half that of the U.S.,
and about 60 percent of both Europe and Japan, according to
Credit Agricole CIB.

China’s past development has created an “irrational
economic structure” and “uncoordinated and unsustainable
development is increasingly apparent,” said Vice Premier Li
Keqiang in a June article in the government-owned Qiu Shi
magazine. Long-term dependence on investment and exports for
growth “will grow the instability of the economy,” he said.

Low Rates

Pettis computes the 1.6 trillion yuan in lost returns to
savers by comparing the difference between China’s nominal
deposit and growth rates to those in other emerging markets.
That calculation indicates China’s deposit rates should be at
least 4 percentage points higher, he said.

“The government maintains a cap on deposit rates, which
helps prop up bank profits, but only by spreading the cost to
households in the form of artificially low interest returns,”
said Mark Williams, an economist at Capital Economics Ltd. in
London who worked at the U.K. Treasury as an adviser on China
from 2005 to 2007.

China has left interest rates unchanged since December 2008,
even as countries from Malaysia to Taiwan, South Korea and India
raised them. The central bank sees little need for an imminent
increase, the International Monetary Fund said in a staff report
on July 29 after consultation with the Chinese government.

China’s inflation, near a two-year high of 2.9 percent in
June, is also eroding household savings. That may cause people
to spend less and save more to cover rising costs of healthcare,
pensions and children’s education, said Pettis. The one-year
deposit rate is 2.25 percent.

Lost Returns

In June 2009 savers earned a real return on one-year
deposits of 3.95 percent. That slumped to a negative 0.65
percent in June this year, indicating lost returns to savers of
1.8 trillion yuan annually compared with a year earlier. Pettis
estimates China’s household deposits account for 60 percent of
total deposits, or about 40 trillion yuan.

Chinese investors have few appealing options. Capital
controls inhibit citizens from investing overseas. A crackdown
on property speculation may cause property prices to fall as
much as 30 percent in the next 12 months, according to Barclays
Capital. The Shanghai Composite Index, up 0.1 percent as of the
11:30 a.m. local time break in trading, has slumped about 20
percent this year.

Pettis said the 3.06 percentage-point spread between
deposit and lending rates that is set by the central bank will
help banks pay for potential bad loans after an 18-month lending
boom that was almost as big as the U.K.’s gross domestic product.

Bad Loans

“Evidence is mounting that the lending spree not only has
created bad loans but is now constraining monetary policy,”
said Huang.

Concern about potential losses in the financial system may
deepen after China’s banking regulator decided to conduct stress
tests of the nation’s lenders. The tests include a worst-case
scenario of property prices falling as much as 60 percent in
cities where they have risen significantly, a person with
knowledge of the matter said.

Banks could be saddled with bad loans of more than $400
billion, said Jim Walker, chief economist at Hong Kong-based
Asianomics Ltd.

Some economists argue that surging retail-sales figures and
rising wages show China’s shift to greater consumer spending is
on track. Dariusz Kowalczyk at Credit Agricole CIB in Hong Kong
estimates consumption will account for 47 percent of GDP within
10 years.

Retail sales rose 18 percent in the first half of 2010 to
7.3 trillion yuan. Citigroup Inc. says wages in the unskilled
labor market may double over the next five years.

Middle Class

“Disposable income levels are growing, the middle class is
growing and urbanization is alive and strong,” said Andy Mantel,
Hong Kong-based managing director of Pacific Sun Investment
Management Ltd.’s consumer-focused Mantou Fund, which invests
mainly in Greater China equities. “That would be positive for
the next five to 10 years.”

Mantou’s holdings include companies like Fujian-based fruit
and vegetable producer China Green (Holdings) Ltd. whose new
drinks line is “higher quality than has been available on the
market,” said Mantel. “People these days are willing to pay a
bit extra for better products.”

Hong Kong-based Nomura Holdings Inc. analyst Emma Liu
expects China Green’s stock to rise more than 20 percent over
the next year to HK$10.8 ($1.4).

Investor’s Picks

Rising rural incomes prompted Shanghai-based River Fund
Management to buy shares this year in Qingdao-based Qingdao
Haier Co. Ltd. and Zhuhai-based Gree Electric Appliances Inc.,
two of China’s biggest makers of air conditioners.

“People nowadays are not only replacing their old air-
conditioners, but upgrading from low-end to high-end ones,”
said fund manager Zhang Ling. “This will continue over the next
10 years.”

Driven by government subsidies for consumer products
including cars and refrigerators, retail sales rose 16 percent
in 2009 after adjusting for consumer price changes, the most
since 1986.

China supplanted the U.S. as the world’s largest auto
market last year as vehicle sales jumped 46 percent. Households
borrowed 2.5 trillion yuan, almost four times more than a year
earlier.

Even as sales rise, the hope that China was at “a turning
point” for the role of consumer spending in the economy may
have been premature, said Nicholas Lardy, a senior fellow at the
Peterson Institute for International Economics in Washington.

‘More Unbalanced’

The economy is “still becoming slightly more unbalanced”
toward investment, said Glenn Maguire, chief Asia Pacific
economist at Societe Generale in Hong Kong. “Until consumption
grows faster than fixed-asset investment for a sustained period,
the economy will remain unbalanced.”

Urban fixed-asset investment surged 25.5 percent in the
first half to 9.8 trillion yuan. Another 29.6 trillion yuan is
needed to finish outstanding fixed-asset projects, said Sun
Mingchun, an economist with Nomura Holdings Inc. in Hong Kong.

To achieve sustained rebalancing, China should allow a
stronger currency that boosts household purchasing power,
improve pension and healthcare coverage and gradually allow
markets to determine interest rates, the IMF report said.

“I never believed the hype that China was turning the
corner on rebalancing growth toward consumption,” said Huang.
“The main political agenda is not to let GDP growth slip and
that means continued investment growth.”

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Bloomberg- Millionaires’ Ranks Grow 14%

Posted on by

govt deficits = ‘non govt’ savings:

The recovery in wealth last year was a result of resurgent financial markets and increased savings, the report said. The Standard & Poor’s 500 Index rose 20 percent in 2009 and the U.S. savings rate averaged 4.2 percent compared with 2.6 percent a year earlier.

>   
>   (email exchange)
>   
>   On Fri, Jun 11, 2010 at 3:57 AM, wrote:
>   
>   What’s interesting about this to me is Slovakia. The Capital, Bratislava,
>   is 45 minutes from Vienna by car, and they’re third on the list! Ever
>   hear bad things about Slovakia? FLAT TAX of 19 percent for several years
>   now and more and more industry growing there. Great restaurants, clubs,
>   and more so quality of life has greatly increased. Magna has several
>   facilities there as do VW etc etc.
>   

Yes, it’s a ‘race to the bottom’ with whoever has the lowest taxes winning business from other EU nations, eventually forcing them to do same.

This is what’s happened to US States, with the States with the lowest tax rates and benefits getting businesses from other States. The problem is that means that States have to spend the least on education and public services to win business, in a race to the bottom.

It’s a fallacy of composition in action. If you stand up at a football game you see better, but soon everyone is standing up so nothing’s gained and no one can sit down (in the case of the football game at least until the front row sits down).

One of the public purposes of the federal govt is to set min standards that prevent races to the bottom

World’s Millionaires Increase by 14%, Boston Consulting Reports

By Alexis Leondis

June 10 (Bloomberg) —The global millionaires’ club expanded by about 14 percent in 2009 with Singapore leading the way, The Boston Consulting Group said.

The number of millionaire households increased to 11.2 million, according to the study released yesterday by the Boston-based firm. Singapore posted a 35 percent gain, followed by Malaysia, Slovakia and China. In 2008, the number of millionaire households fell about 14 percent to 9.8 million.

“Given the severity and magnitude of the crisis, I’m surprised at how fast global wealth has come back,” Bruce Holley, a senior partner in the firm’s New York office and topic expert for wealth management and private banking for the U.S., said in a telephone interview before the report was released.

Global wealth rose by 11.5 percent after falling 10 percent in 2008, as assets under management increased to $111.5 trillion, close to the annual study’s record $111.6 trillion in 2007. North America, defined as the U.S. and Canada, had the greatest gain in assets at $4.6 trillion to $35.1 trillion. The U.S. also had the most millionaire households at 4.72 million, the survey said, while Europe remained the wealthiest region, with $37.1 trillion.

Current numbers may differ from those in last year’s report because of currency fluctuations and newer available data, said Peter Damisch, a BCG partner and a co-author of the report. The study looked at 62 countries representing more than 98 percent of global gross domestic product.

Wealth Recovery

The recovery in wealth last year was a result of resurgent financial markets and increased savings, the report said. The Standard & Poor’s 500 Index rose 20 percent in 2009 and the U.S. savings rate averaged 4.2 percent compared with 2.6 percent a year earlier.

Global wealth dropped in 2008 for the first time since the survey’s 2001 inception as the credit crisis sent stock indexes tumbling and slashed the value of real-estate holdings, hedge- fund and private-equity investments.

Less than 1 percent of households globally were considered millionaires, which is defined as investable assets of more than $1 million, exclusive of real estate and property such as art. Wealth became more concentrated with millionaire households controlling 38 percent of the world’s assets compared with 36 percent a year earlier, the study said.

Singapore also had the highest proportion of millionaire households at 11.4 percent, followed by Hong Kong and Switzerland. The fourth, fifth and sixth spots were in the Middle East — Kuwait, Qatar and the United Arab Emirates. The U.S. was seventh-highest at 4.1 percent.

Growth Rate

The amount of offshore wealth, defined as assets housed in a country other than the investor’s legal residence, increased to $7.4 trillion after declining to $6.8 trillion in 2008 as global regulators pressured countries such as Switzerland to cut down on bank secrecy. Switzerland remained the largest offshore center, with about 27 percent, or $2 trillion, of assets, the report said.

Global wealth will increase at an average annual rate of almost 6 percent from yearend 2009 through 2014, which is higher than the 4.8 percent annual growth rate from yearend 2004 through 2009, the study said. Wealth in the Asia-Pacific region, excluding Japan, is expected to rise almost double the global rate. Last year’s survey said total wealth wouldn’t return to pre-recession levels until 2013.

‘Still Feel Burned’

The report’s authors also looked at the performance of 114 wealth management firms worldwide and found revenue declined by an average of 7.3 percent as assets under management increased an average of 14.3 percent. Reasons for decreased revenue include fewer transactions, tougher price negotiations and a shift to lower-risk asset classes and investments that are liquid and simple, the study said.

Investors feel frustrated and distrustful following the market events beginning in 2008, despite the increase in wealth, Holley said.

“People still feel burned,” said Holley. “I think the numbers in the report suggest a much rosier experience than how people actually feel.”

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China Inflation Seen at 15% With Wen Jiabao Losing Boom Control

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More info dripping out regarding an inflation problem which ultimately weakens a currency.

Earlier reports showing US Treasury holdings falling and State dollar debt growing point to the same thing, as does
the reports of govt. efforts to ‘tighten’ policy via reductions in the growth of lending etc.

China Inflation Seen at 15% With Wen Jiabao Losing Boom Control

By Bloomberg News
April 8 (Bloomberg) — “Look at the scale of this,” said
Li Chongyi, an engineer, as he watched a 4-kilometer line of
trucks and earth movers busy quadrupling the size of Chongqing’s
Jiangbei International Airport. “This will take years.”
Jiangbei, which begins work on a third terminal when the
second is done next year, is one of 15 trillion yuan ($2.2
trillion) in projects begun in 2009, almost twice the economy of
India. Most were started by local governments as China’s
stimulus package sparked a record 9.6 trillion yuan of loans.
The projects and their loans are stymieing efforts by
Premier Wen Jiabao to curtail investment as inflation rose to
2.7 percent in February, a 16-month high. Failure to rein in
local government spending could push inflation to 15 percent by
2012, said Victor Shih, a political economist at Northwestern
University who spent months tallying government borrowing.
“Increasingly the choice facing the government is between
inflation or bad loans,” said Shih, author of the book
“Finance and Factions in China,” who teaches political science
at the university in Evanston, Illinois. “The only mechanism
for controlling inflation in China is credit restriction, but if
they use that, this show is over — a gigantic wave of bad loans
will appear on banks’ balance sheets.”
Attempts to curb borrowing by raising interest rates would
boost debt-servicing costs for local governments. At the same
time, tightening credit may stall projects, triggering “a
build-up of bad loans,” the Basel, Switzerland-based Bank for
International Settlements said in a quarterly report in December.

Debt Rising

Nomura Holdings Inc., Japan’s biggest brokerage, estimates
local government projects started last year totaled up to 10
trillion yuan — 2.5 times the official 4 trillion yuan stimulus
plan. The Chongqing Economic Times reported April 6 that the
city plans to spend 1 trillion yuan on another 323 projects.
Construction companies working on projects begun by
provincial governments may be shielded from a wider slowdown in
China’s property market, said Ephraim Fields, a fund manager
with Echo Lake Capital in New York.
“These vital, long-term projects should get the necessary
funding even if the overall economy slows down a bit,” said
Fields, who holds shares of China Advanced Construction
Materials Group Inc., a Nasdaq-listed concrete maker that gets
more than 75 percent of its sales from government infrastructure
projects.

Cement Stocks

Roth Capital Partners also favors Beijing-based CADC. The
company’s stock may rise 52 percent to $8 within a year, the
Newport Beach, California-based fund manager forecast. BOC
International analyst Patrick Li recommends buying Xinjiang
Tianshan Cement Co., which he forecasts may gain more than 15
percent, and Tangshan Jidong Cement Co., which may rise almost
23 percent. The projects begun in 2009 will help China’s cement
output rise 11 percent, or 186 million tons, this year, Li
predicts.
Chongqing, China’s wartime capital on the Yangtze River, is
a prime example of how provincial governments multiplied the
effect of the central government’s stimulus plan. The city had
900 billion yuan in loans and credit lines outstanding at the
end of 2009, said Northwestern’s Shih. Chongqing’s economy
expanded 14.9 percent last year, with investment in factories
and property expanding the most in 13 years.
“Chongqing really stood out,” said Hong Kong-born Shih,
35, who joined Northwestern in 2003 after completing a PhD in
government at Harvard University.

Roads and Rail

Chongqing’s projects include a light rail system that will
receive more than 10 billion yuan in investment this year.
The city will spend at least 8 billion yuan on rail
construction and another 15.5 billion yuan on 288 kilometers
(179 miles) of new expressways. Jiangbei airport said it plans
to raise passenger capacity to an annual 30 million when Phase
II is completed next year, from 14 million in 2009. Phase III,
would raise throughput to 55 million passengers.
The municipality’s construction boom has boosted business
confidence and the property market, said Bruce Yang, managing
director of Australia Eastern Elevators Group (China).
Sales at Eastern Elevators surged 51 percent in 2009, aided
by projects such as a local-government office block in Nan’an
district that needed 20 elevators, Yang said at the company’s
headquarters in Nan’an. He has an order this year to install 23
lifts in a government-sponsored hospital near Chengdu in Sichuan
province.

Macau Bridge

Chongqing isn’t alone. Sun Mingchun, an economist with
Nomura in Hong Kong, estimates local governments have proposed
projects with a value of more than 20 trillion yuan since the
stimulus package was announced in November 2008. They include
high-speed rail links between Wuhan in central China and
Guangzhou in the south, the Hong Kong-Macao-Zhuhai Bridge, and
the construction or upgrading of 35 airports. The economic
planning agency says 5,557 kilometers of railways and 98,000
kilometers of highways opened last year.
The building boom boosted construction and materials stocks,
raising concerns of a bubble. Baoshan Iron & Steel Co. rose
almost 74 percent since the stimulus was announced while Anhui
Conch Cement Co. gained 135 percent. The Shanghai Composite
Index rose 80 percent in the period.
Construction of high-speed rail lines linking Xi’an with
Ankang and Datong in Shaanxi province have pushed CADC’s output
to capacity, President Jeremy Goodwin said in a phone interview.
“The demand is so great we are struggling to keep up,”
said Goodwin.

Burst Bubble

Should the boom end in a property-market collapse, even
those stocks tied to the local government projects will be
affected along with most other industries, said Shanghai-based
independent economist Andy Xie, formerly Morgan Stanley’s chief
Asia economist.
“Corporate profits are very much driven by the property
sector,” said Xie. “The largest sectors will be hit hard,
especially banks and insurance companies.”
A gauge of property stocks has fallen more than 6 percent
this year after more than doubling in 2009 as the government
takes steps to cool rising prices, including raising the deposit
requirement to 20 percent of the minimum price of auctioned land.
Property sales were equivalent to 13 percent of gross domestic
product last year.
“Policy makers may need to start thinking about how to
handle the aftermath of the bust,” said Nomura’s Sun.

Lending Target

Policy makers have also moved to tighten credit. The
central bank is seeking to slow lending growth by 22 percent to
7.5 trillion this year.
China’s local governments set up investment vehicles to
circumvent regulations that prevent them borrowing directly.
These vehicles borrow money against the land injected into them
and guarantees by local governments, said Shih.
Chinese officials have pledged to limit the risks posed by
these vehicles. China plans to nullify guarantees provided by
local governments for some loans, said Yan Qingmin, head of the
banking regulator’s Shanghai branch, March 5.
The World Bank said on March 17 that China, the world’s
third-biggest economy, needs to raise interest rates to help
contain the risk of a property bubble and allow a stronger yuan
to damp inflation.
“Massive monetary stimulus” risks triggering large asset-
price increases, a housing bubble, and bad debts, from financing
local-government projects, the Washington-based World Bank said
in its quarterly report on China. The World Bank raised its
economic growth forecast for China this year to 9.5 percent from
9 percent in January.
The financial burden of those measures on local governments
means that “loose liquidity conditions” will persist for
longer than they should, said Shen Minggao, a Citigroup Inc.
economist in Hong Kong.
Any effort to quickly exit stimulus policies would lead to
“an immediate increase in non-performing loans in the banking
sector,” he said. “To avoid a credit crisis, Chinese
authorities may have to delay a policy exit in the hope that
time remedies the pain.”

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