We're celebrating the holiday week at Demand Side by borrowing, plagarizing and paraphrasing from the work of others. Tuesday it was Hyman Minsky in Plain English. Today it is Michael "Mish" Shedlock on China, largely borrowed from Mish's Global Economic Trend Analysis blog.
We should note that we do not agree with Mish on about half of things, particularly his sensitivity to the federal deficit and numbness to the private debt. But here he does us all a favor by mining data and news for indications of what might actually be happening in China. Demand Side has long distrusted the China miracle. At a minimum, China's success comes with a deep failure of its environment. Here is
China Faces Crash Scenario
Problems in China continue to mount. Money supply is growing rampantly out of control, property prices are in a bubble, exports are weak, commodity speculation is pervasive, and GDP growth is more of a mirage than real.
Money Supply is growing at a record nearly 30 percent.
As we've been discussing on Demand Side recently, money is created by the boom, not by the authorities. But Mish and the Chinese are not aware.
China’s banking regulator plans to slow new lending to between 7 trillion yuan and 8 trillion yuan next year, a person familiar with the matter said this week. China is trying to ensure that there is enough credit to support an economic recovery without increased risks of bad loans and asset bubbles.
“We believe slower credit growth in 2010 will be key to avoid a boom-bust scenario in the economy,” Wang Tao, a Beijing-based economist for UBS AG, said in a report.
The government “plans to control property prices by accelerating property investment and increasing supply,” economists Lu Ting and T.J. Bond said in an e-mailed note today. That contrasts with efforts in 2006 to cool prices by controlling investment, the economists said.
Sounds like controlling a runaway train by building tracks over a cliff. Mish agrees.
China Is Overbuilding Already
Note the insanity. China want to control prices by building more. It already has completely empty shopping centers, condos, and even a completely empty city.
China Has Trouble Maintaining Demand Growth
In spite of obvious speculation and overheating in the housing sector, China Faces Difficulties in Maintaining Demand Growth.
China, the world’s third-largest economy, faces “increased difficulties” in maintaining growth in domestic consumption, the nation’s top economic planning agency said.
A recovery in external demand is “difficult,” the National Development and Reform Commission said on its Web site today, citing Vice Chairman Du Ying. The nation’s economic recovery “is not yet solid,” the agency known as NDRC said.
China will maintain a “moderately” loose monetary-policy stance and “proactive” fiscal policies in 2010 as its economic recovery isn’t solid yet, the official Xinhua News Agency said Dec. 7, citing a statement by the annual central economic work conference.
The country still faces a “very challenging” international environment and “the domestic problems it is confronted with are also complicated,” Du said in the statement today. “The potential risks in the fiscal and financial sectors can’t be underestimated,” Du said.
Economic growth in China, which is spending $586 billion on a stimulus package, accelerated to 8.9 percent in the third quarter after slipping to 6.1 percent in the first. The government is targeting 8 percent growth for the full year.
And here they fall back to the illusion that monetary policy is controlling the money supply.
Moderately Loose Monetary Policy?!
What would a "loose" policy look like? Regardless, when Vice Chairman Du Ying says the "recovery is not solid" and the environment is "very challenging" you can take his word for it. Actually you can look at money supply growth and empty cities and conclude the same thing.
Bear in mind that China calculates GDP a peculiar way, as soon as the money is allocated. Much of that GDP growth is a mirage. Moreover, much if not most of what isn't a mirage, is nothing more than property malinvestment and other speculation.
Premier Wen Jiabao said Nov. 28 that property speculation must be suppressed, and the government on Dec. 9 reinstated a sales tax on homes sold within five years of purchase after reducing the period to two years in January. That change is superficial and will have minimal impact, said Lu Qiling, an analyst at Shanghai Uwin Real Estate Information Services Co.
“It’s only a token measure,” Lu said. “It won’t change the upward trend in housing prices.”
“The government is clearly in a dilemma,” Luk said. “It wants to address the surging property prices and concerns on bubble-bursting, yet it dares not take drastic measures for fear of hitting the market too hard.”
The nation’s real estate and stock markets are a “bubble” that will burst when inflation accelerates in 2011, former Morgan Stanley chief Asian economist Andy Xie said in an interview in Hong Kong today.
“China’s asset markets are a Ponzi scheme,” said Xie, now a Shanghai-based independent economist. “Property is heading for one huge bust that will take a year and a half to unfold.”
The Shanghai Property Index, which tracks 33 developers listed in the city, has more than doubled this year, compared with a 75 percent gain for China’s benchmark Shanghai Composite Index.
Copper Stockpiles Soar
Copper stockpiles held in duty-free warehouses in China, the top user, may be re-exported after surging to as much as 350,000 tons from almost none at the start of the year.
Pig farmers and other speculators may have amassed more than 50,000 metric tons, Jeremy Goldwyn, who oversees business development in Asia for London-based Sucden, wrote in an e- mailed report after a visit to China. That’s about half the level of inventories tallied by the Shanghai Futures Exchange, which stood last week at a two-year high of 97,396 tons.
Sucden’s estimate underscores the difficulty analysts face in gauging metals demand in China amid increased speculation by retail investors, whose holdings remain outside the reporting framework undertaken by exchanges. Private investors in China also had as much as 20,000 tons of nickel, Goldwyn wrote.
According to one observer who was just in China, “It’s pervasive; people are piling this stuff up in their backyards.”
Chinese Banks Hide Transactions Off Balance Sheet.
Dec. 18 (Bloomberg) Chinese banks’ capital strength is probably more “strained” than it appears as lenders use more off-balance sheet transactions to make room for loan growth, Fitch Ratings said.
The increasing amount of unreported transactions, including repackaging loans into wealth management products to sell to investors, and the outright sale of loans to other financial institutions, represent a “growing pool of hidden credit risk,” Fitch said in an annual review of Chinese banks.
Hiding assets off the balance sheet is one of the things that wrecked Citigroup. The Citi kept accumulating assets thinking there was plenty of time left at the ball.
Former Citigroup CEO Chuck Prince: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing".
Well, the music stopped abruptly about one month later and Citigroup was stuck with $1 trillion in off balance sheet garbage. Chuck Prince turned into a pumpkin and was tossed out the door.
Exactly how much of that garbage is left and what it is worth is hard to tell, other than by judging the action in Citigroup share price (which is not pretty to say the least).
Don't confuse unsound lending and pervasive speculation in China with inflation in the US. Remember that commodity prices are set at the margin, and in this case the margin include pig farmers.
If you are looking for inflation, the place to find it is in China, not the US.
Scylla or Charybdis?
China is in a Scylla or Charybdis scenario. If China continues to inflate it will overheat. If it doesn't, unemployment and unrest will soar, and the economy will implode. Either way, there is no winning solution.
Peak oil and environmental pollution compound China's problem immensely. China is simply on an unsustainable path for many reasons.