| Username |
Post |
| David Poon |
Posted
on 10-May-04 10:42 AM
China
When China's economy sneezes ...
By Macabe Keliher
HONG KONG - Not since the great tea surpluses of the late 19th century has China been able to command so much attention from the global economy for its faults. Just as too many leaves in Fujian in the 1880s sent world prices into a spiral, Chinese Premier Wen Jiabao shook the region's - and possibly the world's - financial markets to the core last week when he emphasized the government's determination to curb lending and said China would "take effective and very forceful measures" to reign in a booming and overheating economy.
Fearing a slowdown in a country that could arguably be driving much of the regional economy, investors sent Asia's financial markets and currencies into a tailspin. Taiwan - one of the most heavily China-leveraged markets - shed almost 8 percent after Wen's announcement last week, and Singapore was close behind, losing 5.75 percent. Currencies came crashing down too: the Korean won dropped 1.5 percent against the US dollar, and the New Taiwan dollar was down by almost a percentage point.
Even the US markets suffered heavy losses. The Dow fell 2.4 percent in the second half of last week, and the Standard and Poor's index fell 2.7 percent. Although US macroeconomic indicators were not glowing - lower-than-expected GDP (gross domestic product) growth, anticipated inflation, and expected interest-rate hikes - pundits have fingered China as a plausible cause.
Excess capacity flooding the world market could have disastrous effects on international trade prices. Further, in the past year China has taken in some 40-50 percent of Asia's exports, accounting for all of Taiwan's and the Philippine's export growth last year and more than 50 percent each of Japan's, Malaysia's, South Korea's and Australia's. Such intake has driven more than 7 percent of GDP growth in Taiwan, Malaysia and Singapore, 5.8 percent in South Korea and 4 percent in Thailand, according to Union Bank of Switzerland (UBS) figures (see Replacing US in Asian export market, February 11).
Should China sneeze, investors worry, the region might get very sick. "China has become very visible," says Chi Lo, a China strategist and consultant based in Hong Kong. "It has created a fear among investors; an expectation even if the actual material impact is not that great."
Applying the brakes
The Chinese government has moved cool down its red-hot economy. A 43 percent increase in investment in the first quarter this year, which helped fuel a near 10 percent GDP growth, led the People's Bank of China to raise the capital-adequacy ratio for banks a half a percentage point in April to 7.5 percent - the third time in six months.
Also, the China Banking Regulatory Commission announced this past weekend that commercial lenders have stopped the approval of new middle- and long-term loans. Last Friday the commission ordered the commercial banks to pull back loans extended to rush investment and copycat construction.
Furthermore, in March the government made a list of construction and building industries for which lending for new projects would be prohibited. Beijing also increased down payments for investments in steel manufacturing from 25 percent to 40 percent, and from 20 percent to 35 percent for cement, aluminum and real-estate investments.
Overheated
China's economy officially grew nearly 10 percent last year, although many foreign investment banks estimate the actual growth rate at 2 or 3 percentage points higher. Although the government took some measures late last year and early this year to cool the economy down, for all intents and purposes they failed. In the first quarter of 2004, China's economy officially grew 9.7 percent, and the Ministry of Commerce said first-half growth would certainly exceed 9 percent.
Investment growth this year has also skyrocketed: 43 percent year-on-year, its highest growth levels in recent times, and almost three times the 25-year average of 15 percent. In January and February, growth in 16 of 30 industrial sectors exceeded 100 percent. Investment growth in iron and steel, construction materials, and cement was as high as 170 percent.
But most troubling is the amount of "hot money" flowing into the country. On speculation that certain sectors such as real estate will boom, and that the yuan will revalue, foreign investors have pumped cash into China. In the first quarter of this year, the country got US$30.9 billion in outside foreign exchange, for an increase of 25.6 percent over last year. "If the surging inflows of international hot money continue, China's money supply and outstanding credit will keep expanding, resulting in the excess growth in a handful of industries, causing further economic bubbles and increasing financial risks," says Tung Chen-yuan, a political economist at the Institute for International Relations, Taipei.
The steel industry, for example, will have the capacity to produce at least 330 million tons of steel by next year, an amount the country will not consume until 2010.
Good timing?
Economists expect further curbs on lending for the overheated sectors, and possibly an interest-rate hike of a half a percentage point in the second half. Unlike the early 1990s when the government halted all new loans and recalled outstanding ones, authorities have chosen to be selective here and go after the culprit industries, the aim of which authorities hope will achieve a different result than the deflation that occurred then.
The problem this time, however, is China's prowess on the world market. For example, steel analysts estimate that if China's internal steel demand falls to that of four years ago, there will be enough excess capacity on the market to account for all of current international steel trade. This could cause a glut so rich that prices would plummet below costs and destroy manufacturers overseas.
But more so, if China stops importing at the same rate that it has been, will the region stumble and fall? Probably not. Analysts estimate that it will probably shave less than a half a percentage point off regional GDP growth. But tell that to regional investors.
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| DWI |
Posted
on 10-May-04 11:17 AM
Good article David.
I'd been waiting to see some discussion on this. May be my old friend Isolated_Freak will also get involved in it.
Business Week, issue from the last week of April( I think), had an article on this. With one of the biggest(2nd) purchasing power Chinese economy is now on Radar gun of every country striving to strengthen their trade. However, with GDP and growth
rate so big, comes the concern what if the bubble bursts?
The magazine lists several circumstances that could downgrade the China's growing economic trend. THe aftermath would be very tragic to the neighbouring economy and will have major impact on Euro and American economy.
I will bring more to the plate later.
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| isolated freak |
Posted
on 11-May-04 09:53 AM
Here's my quick uninformed and naive comments:
Yo DWI,
Lao Peng i(old friend), I’ve also read some news regarding this “over-heating” of Chinese economy, the most recent one being Thomas Friedman’s column in the NY Times. Before I carry on, let me make one thing clear: I am not an econ person, so do not know a whole lot about all this . Let me just write what I have been seeing and reading here:
Anyone who comes to China notices that there’s a lot of construction going on everywhere. C for China, C for Construction and C for Change ! (this is what I told SC dai when he was in China last year). China and change being something else, let’s just focus on construction.
China is preparing itself for the 2008 Beijing Olympics and the Shanghai World Expo 2010, so naturally in big cities like Beijing and Shanghai, you see cranes everywhere. Anyways, when you see all these construction going on, naturally, you ask, where’s all this money coming from. The money is coming from the private sector, and the private sector is getting loans from the banks. So, the question is: What happens when and if the Private sector fails to repay the bank loans? This is a debate going on here in China and very recently (probably 72-96 hrs ago), HE Wen Jiabao, the PM of China, made it clear that he will soon introduce policies/laws so that the banks can take stern measures against those who do not repay or repay on time. Now, if the govt. and the banks work together, the banks will have their loans or at least the interests coming in soon, and this should take care of any banking crisis that might arise due to the clients’ failure to repay the debts, like in the case of Korea, Japan and Indonesia (I understand that there are other factors that led to the Asian Economic Crisis of December 1997, but, I think that failure to repay the bank debts was one of the major reasons besides the IMF asking the Korean Government to change its credit system. Again, as I made myself clear at the beginning of the post, I am not an econ guy and am quite dumb when it comes to discussing economic affairs.) Since the IMF is in no hurry to request the Chinese government to change its credit handling/dealing (?) system, and the money is pouring in from everywhere, the Chinese economy should be fine, if the govt. and everyone dealing with the finances keep on coming with the right policies when necessary. And I don’t doubt their ability to do this: Starting 1978, China has been closely following the world economic and political trends and formulating its domestic economic polices. The Russian disaster and the Asian catastrophe have definitely highlighted the need for a better economic planning to everyone, including the Chinese and I am sure that the Chinese have all the back up plans (or fall back options) ready, or are in the process of getting ready and approved by the concerned financial authorities/experts in China and abroad.
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| isolated freak |
Posted
on 11-May-04 09:56 AM
J payo tyahi bold bhayecha, hopefully, this one would show the correct highlights. Sorry for this.
Here's my quick uninformed and naive comments:
Yo DWI,
Lao Peng (old friend), I’ve also read some news regarding this “over-heating” of Chinese economy, the most recent one being Thomas Friedman’s column in the NY Times. Before I carry on, let me make one thing clear: I am not an econ person, so do not know a whole lot about all this . Let me just write what I have been seeing and reading here:
Anyone who comes to China notices that there’s a lot of construction going on everywhere. C for China, C for Construction and C for Change ! (this is what I told SC dai when he was in China last year). China and change being something else, let’s just focus on construction.
China is preparing itself for the 2008 Beijing Olympics and the Shanghai World Expo 2010, so naturally in big cities like Beijing and Shanghai, you see cranes everywhere. Anyways, when you see all these construction going on, naturally, you ask, where’s all this money coming from. The money is coming from the private sector, and the private sector is getting loans from the banks. So, the question is: What happens when and if the Private sector fails to repay the bank loans? This is a debate going on here in China and very recently (probably 72-96 hrs ago), HE Wen Jiabao, the PM of China, made it clear that he will soon introduce policies/laws so that the banks can take stern measures against those who do not repay or repay on time. Now, if the govt. and the banks work together, the banks will have their loans or at least the interests coming in soon, and this should take care of any banking crisis that might arise due to the clients’ failure to repay the debts, like in the case of Korea, Japan and Indonesia (I understand that there are other factors that led to the Asian Economic Crisis of December 1997, but, I think that failure to repay the bank debts was one of the major reasons besides the IMF asking the Korean Government to change its credit system. Again, as I made myself clear at the beginning of the post, I am not an econ guy and am quite dumb when it comes to discussing economic affairs. ) Since the IMF is in no hurry to request the Chinese government to change its credit handling/dealing (?) system, and the money is pouring in from everywhere, the Chinese economy should be fine, if the govt. and everyone dealing with the finances keep on coming with the right policies when necessary. And I don’t doubt their ability to do this: Starting 1978, China has been closely following the world economic and political trends and formulating its domestic economic polices. The Russian disaster and the Asian catastrophe have definitely highlighted the need for a better economic planning to everyone, including the Chinese and I am sure that the Chinese have all the back up plans (or fall back options) ready, or are in the process of getting ready and approved by the concerned financial authorities/experts in China and abroad.
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| isolated freak |
Posted
on 11-May-04 09:58 AM
like in the case of Korea, Japan and Indonesia= unlike in the cases of Korea, Japan and Indonesia where the clients did not have the money to repay the debts or simply did not repay.
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| JagaltayBhoot |
Posted
on 11-May-04 10:24 AM
May I make a humble attempt to make some comments here.
When considering a booming economy like China, East Asian of 1997-98 crisis naturally comes to my mind and I wish to make some comparisons here.
In Thailand and like countries, firms had to shift towards non-manufacturing sector (construction) as they lost competitiveness in the foreign market as their currencies were more or less pegged to the dollar and Yen had depreciated against the dollar. (of course, this may be one of many reasons) This is to say, investments were being made to non-productive sector while exports were forced to decline. In the case of China, its exports have increased in the past years and with signs of improvement (???) in American economy, may continue doing so.
The east asian currencies were perceived (and in fact) to be overvalued (they were pegged) and induced speculators (like George Soros) to capitalize on the opportunity, thus leading to banking and currency crisis whereas Chinese Yuan is perceived to be UNDERVALUED. If Chinese Yuan was to be allowd to float now, then pundits believe that it would appreciate against the dollar (and seriously harm chinese exports and overall economy at this moment). Of course, china has indicated that it is not going to allow its currency to float freely any time soon. But where does that lead us to? I do not know how much of the Chinese activities are funded by foreign capital, but their inability to repay to the foreign debtors, if any, will have more to do with illiquidity than insolvency.
A real nice topic by the way and so much of my views for now.
However, this will keep me more occupied after my exams are over and hope to do some research on it.
cheers
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| DWI |
Posted
on 15-May-04 09:21 PM
Iso,
As you pointed out, I too think the main concern there is the financing and loans that the Chinese enterprises and Govt is taking for the massive build ups and developments.
JagaltayBhut brings a very good point about chinese currency being undervalued. I too, am not an Economics major and will be opinioning from layman point of view. However illiquidity is the major reason behind insolvency, is it not?
Olympic 2008 is surely fueling the Chinese economy. I think strengthening of European Union (with expansion to include Poland etc) will have a positive effect. The Iron lady of China, Wu Yi (sorry if I recall it wrong, I am referring to the Chinese Vice. Premiere) seems to have a good grasp of the strengths and also seems to be cautious of the traps that caused the 1997 collapse. Bank reserve requirement has been raised, so has the lending trend. This should be contained. However, they should also be cautious of not repeating the 1992-94 methodology of "containment" where very high rates were used and other forceful administrative method were utilized.
Atleast for now, China is looked as a friendly market for the US not as an opponent.
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| JagaltayBhoot |
Posted
on 16-May-04 03:12 AM
May I add a few more commets
Unlike in Asian crisis, when the east asian economies were in fact being praised by international community till the eve of the crisis, completely oblivious of the impending debacle, it is nice to know that at least concerns are being raised in the case of china.
Further, East asian crisis was a twin crisis in the sense that there was a banking criss (non-payment) plus a currency crisis (dramatic devaluation of currency) simultaneously. However, the impending crisis in China (if that was indeed to occur) would only be a banking crisis. But still, it should be a relief for the international community to know that the Chinese government is at least aware of waht could happen (unlike the east asian economies) and are taking corrective measures like increasing reserve requirements and restricting lending in some sectors, as pointed out by DWI above and as seen in some online articles.
From a nepali’s perspective, the direct impact on Nepal from the Chinese ‘sneeze’ would obviously depend on how much of a bilateral trade we conduct with China (how much do we export to china?) rather than geographical proximity. As I saw in at least one article, the countries to be worrying about this are Rusia , Australia (and of course, China itself), who export considerably to china to fuel its export (and consumption).
So much of my raw comments for now ………more later
cheers
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