Chinese Economics Thread

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China does not need massive fiscal stimulus to stabilize growth and calm investors fretting that the global economy may slip back into a similar crisis as 2008-2009, top policy advisers said on Wednesday.

Even though China's economic growth is expected to ease this year to its weakest pace in 13 years, aggressive spending now could do longer-term harm, they said.

"I don't think we're back in that kind of acute crisis phase," Richard Boucher, deputy secretary general of the Paris-based Organisation for Economic Co-operation and Development (OECD), told Reuters.

Boucher's is the latest voice to play down the need for a massive stimulus program of the sort unleashed by Beijing at the height of the global economic crisis.

Investors have speculated wildly this week about potential stimulus from China, looking to the biggest driver of global growth as Europe's deepening debt crisis erodes market confidence in the health of the world economy.

Many traders now see parallels to the 2008-09 crisis - when the world's banks lost trust in each other, the international financial system nearly came undone and global trade ground to a halt - especially as more evidence emerges of the slowdown in China's economy.

The crisis saw Beijing unveil a 4 trillion yuan ($635 billion) stimulus program to fight a downturn that cost 20 million Chinese jobs in a matter of months. The stimulus helped underpin investor faith in the international policy response to solve the crisis.

Expectations of fresh Chinese stimulus have been fuelled by government steps in the past two weeks to fast track some infrastructure and industrial projects, which economists estimate to be worth around 1 trillion yuan.

Premier Wen Jiabao was quoted on a government website on May 23 saying that "downward economic pressure is increasing."

Boucher - deputy head of the organisation that bills itself as the global policy think-tank to the world's most important economies and in Beijing for a conference on international trade - said China had ample policy tools at its disposal without resorting to fiscal stimulus.

"It is not just a question of money," Boucher said. "The Chinese authorities have a whole variety of tools to use to stabilize the right level of growth... I think signs that Chinese growth is stabilizing at a steadier level, a more sustainable level, would be good for everybody."

SLOWER GROWTH, MORE REFORM

Vice Premier Li Keqiang said on Wednesday that China should rely on domestic demand and structural reforms to support the economy, which faces growing downward pressures.

"We must stick to the long-term strategy of stimulating domestic demand in order to maintain stable and relatively fast economic growth. It is also an important step to reform our economic structure," state radio cited Li, widely seen as China's premier-in-waiting, as saying.

China's leaders have repeatedly said they would use a period of anticipated slower growth in 2012 to carry out structural shifts, including efforts to wean the economy off dependence on external demand and investment spending.

Beijing in March lowered the country's official growth target to 7.5 percent for this year from 8 percent previously. It has a target of 7 percent on average over the five years to 2015. The most recent Reuters poll produced a consensus forecast for 2012 growth of 8.2 percent.

Such growth is way above an ill-defined "hard landing" scenario that investors had largely dismissed by the end of March, but which has begun to creep back into the consciousness of markets after weaker-than-expected April data.

China's annual economic growth is expected by analysts to fall to 7.9 percent in the second quarter, the first dip below 8 percent since 2009.

But slowing growth alone does not imply a hard landing, said Xia Bin, head of the financial research institute at the cabinet's think-tank, the Development Research Centre.

Xia, who was a member of the central bank's monetary policy committee until March, said a hard landing would bring a sharp rise in both banking sector risks and unemployment, posing a threat to social stability.

In contrast to the global financial crisis, China's labor today is tight as firms struggle to fill vacancies. Non-performing bank loans are around 1.1 percent - far below international averages.

Meanwhile there is room for the central bank to cut lending rates to help deal with the risks to growth and corporate profits but excessive policy action should be avoided, Xia said.

"Americans and Europeans like it. Investors like it because they want to speculate on stocks. The whole world is hoping China will relax policy," Xia told Reuters. "We will fall into a trap if we do. We will not be that stupid," Xia said, adding that the government should only stimulate economic growth in a "balanced and modest" way, while forging ahead with structural reforms to sustain growth over the longer term.

With that in mind, China's cabinet on Wednesday approved a blueprint to promote seven strategic industries by 2015, including next-generation information technology, biotech, industrial materials and advanced equipment manufacturing.

STIMULUS SPECULATION

China's 2009-10 stimulus program sparked a wave of speculative real estate development, lifting home prices way out of reach of many middle class Chinese. It drove inflation to a three-year high and saw local governments build a 10.7 trillion yuan mountain of debt.

Beijing has only just brought inflation under control, helping explain why growth is being sacrificed short term. Analysts cite a two-year long program of property curbs as the main reason why China's economic growth in 2012 will be the slowest since 1999.

Boucher and Xia echoed a chorus of commentary from top Chinese academics in leading state-backed newspapers on Wednesday that Beijing should spur growth, but shun stimulus.

Earlier this week, an official at China's top economic planning agency, the National Development and Reform Commission (NDRC), said large-scale economic stimulus was unlikely.

An article published on the website of the official Xinhua news agency said China had no plan to repeat the powerful stimulus measures used during the global crisis in 2008.

"The Chinese government's intention is very obvious: It will not unveil another massive stimulus plan to stimulate economic growth," the Xinhua article said, without citing sources. "Current policies to stabilize growth will not repeat the old way of stimulating growth three years ago."

It was not clear if the article, which also cited analysts, represents official thinking - Beijing usually publishes straight-forward commentaries, not analyses, when it wants to explain its stance.

But the story was in line with the mainstream view among Chinese policy advisers that Beijing should avoid massive stimulus that would reduce the efficiency of economic growth and exacerbate overcapacity in some industries.

Chen Bingcai, a professor at the National Academy of Governance, said China must not overly expand investment and sacrifice quality growth for high growth. Chen's school teaches and trains many senior leaders of the central government.

"If Beijing returns to an investment boom again, the previous call of adjusting the economic structure would turn out to be nothing but empty talk," the official China Securities Journal cited Chen as saying.

 

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Something funky is going on with the renminbi.
Swift, the global payments network – essentially an all-seeing eye over the global banking system – has released some intriguing new data about the international use of the Chinese currency.

While the renminbi accounts for just 0.34 per cent of all international payments, this year it has accounted for 4 per cent of global issuance of letters of credit (LCs), instruments used to finance trade.Or to put it another way, the renminbi is one of the least-used currencies in the world when it comes to all payments, in sixteenth position, but it is now the third-biggest currency for LCs, after the dollar and the euro (see chart.) This is all the more remarkable because international transactions in renminbi only became possible three years ago.

What’s going on? In its press release on the data, Swift didn’t suggest why such a large proportion of renminbi trade involved letters of credit.But beyondbrics can take a stab at an explanation. Our best guess is that Chinese companies are using renminbi-denominated LCs as a clever way to arbitrage the onshore and offshore financial markets.

Remember, Beijing retains extensive controls on the movement of capital between the Chinese mainland and the rest of the world. Trade is one of the few permitted routes for the renminbi in and out of the country. Letters of credit, therefore, open up all sorts of possibilities for savvy companies. Traditionally, companies use LCs to provide iron-clad guarantees to their international trading partners that they will be paid on time. Issued by banks, LCs ensure that payment will be made for goods once they are delivered at a specified date in the future.

But as the FT reported in November, Chinese companies can also use LCs to pierce the country’s capital controls and borrow more cheaply offshore. One of the main types of arbitrage works as follows. A Chinese company places renminbi on deposit with a mainland bank, earning an interest rate of about 3.5 per cent. The company then obtains a long-dated, renminbi-denominated letter of credit from the bank, ostensibly to pay for a shipment of goods from its own subsidiary in Hong Kong.

In turn, the Hong Kong subsidiary takes the letter of credit to a local bank and uses it as collateral to obtain a US dollar loan at a lower interest rate than those available on the mainland. In many cases, the company would also use a currency derivative to eliminate the foreign exchange risk. The end result: the company has captured the difference between onshore and offshore interest rates, less banker’s fees.

From the looks of the Swift data, this kind of activity is occurring on a big scale. As shown in the chart below, most of the LCs are between mainland China and Hong Kong. Note also that almost all the LCs are going in one direction: out of China.

For more evidence of the remarkable boom in renminbi letters of credit, we must turn to the Hong Kong Monetary Authority. HKMA data show that Hong Kong banks’ claims on banks in mainland China – a statistic that includes letters of credit – reached HK$1.53tn ($196bn) as of August, having jumped sixfold from just HK$252bn when the renminbi trade settlement scheme started in June 2009 (see chart.) These data are important, as they suggest that Hong Kong banks have indeed been lending against letters of credit from the mainland.

Why should we care about all this? For a start, it suggests that Hong Kong banks have a large exposure to mainland banks sitting on their balance sheets and that discounting LCs has been a big driver of revenues in recent years.
But there is a broader point too. If international trade in the renminbi is largely driven by financial arbitrage, as the extraordinary use of letters of credit implies, then Beijing’s plan to internationalise the renminbi is not exactly going according to plan.

 

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China's Purchasing Managers Index (PMI), a readout of the country's manufacturing activity, ended five months of consecutive growth in May and retreated to 50.4 percent, indicating a slowing economy.

The PMI in May was down 2.9 percentage points from that in April, the China Federation of Logistics and Purchasing (CFLP) said Friday.

The figure in May showed China's economy has decelerated but the growing trend remained unchanged, as the reading still stood above 50 percent, the CFLP said in a statement.

A PMI reading of 50 percent demarcates expansion from contraction.

"The short-term moderation of economic growth at present does not mean the Chinese economy is entering a new recession stage," the statement said.

 

[Equation]

This is the American politics-I am speechless!

[video=youtube;Lvl5Gan69Wo]http://www.youtube.com/watch?v=Lvl5Gan69Wo[/video]

Ahhh...must be an election year coming. The audience will get the best of the worse mud slinging commercials during this time of year as finger pointing and yelling at the opposition candidates party become a decor. Any subjects that can trigger emotional response by 30 - 50% of the national audience gets the biggest spot light: jobs, China, sluggish economy, and the war in Afghanistan.

 

[AssassinsMace]

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Analysis: G7 must look beyond China for euro zone rescuer
By Nick Edwards | Reuters – Tue, Jun 5, 2012

BEIJING (Reuters) - Finance chiefs of the Group of Seven industrialized powers hoping China can step in to rescue the euro zone must look elsewhere for a white knight as Beijing increasingly focuses on domestic issues this year.

The G7 policymakers and some members of the wider G20 will hold an emergency teleconference on the euro zone debt crisis on Tuesday in a sign of heightened global alarm about the threat posed by strains inside the 17-nation monetary union. The call comes two weeks before a G20 summit this month in Mexico.

"The question is can the G20 do anything to accelerate and bring forward the date at which China feels it should do something? I'm skeptical," Tim Condon, chief economist and head of Asian economic research at ING in Singapore, said.

China has no intention of over-extending itself near term in pursuit of long-term goals rebuffed back in October 2011 when euro zone and International Monetary Fund officials last asked Beijing for bailout cash, but were unwilling to offer the market access, guarantees, and technology sales demanded in return.

An increasingly inward focus in the final months before a once-in-a-decade leadership transition means only a Lehman-like collapse in confidence that halts global trade and costs millions of Chinese jobs is likely to change Beijing's mind.

"China is totally consumed by juggling what is turning out to be a complicated year domestically. If something coincides with what's good for Europe, happy days, but for them to do something above and beyond... I'm not a big buyer of the view that we're going to have some big kumbaya moment at the G20," Condon said.

The last such moment of unity was in late 2008 when shattered confidence in the world financial system forced central banks to begin printing money to reflate it and led G20 nations to pledge stimulus packages worth some $5 trillion by early 2009 to underpin global growth.

China's 4 trillion yuan ($635 billion) contribution to that effort, unveiled at the end of 2008 and launched in 2009, was vital. The world's biggest single contributor of economic growth essentially underwrote business activity into 2010, but it did so at substantial domestic political cost.

SPECULATION, CORRUPTION, INFLATION

"China's 2008 stimulus led to widespread speculation, corruption and inflation. It won't want to do that again," said independent economist Andy Xie.

China's stimulus was supported by extremely loose monetary policy, fuelling rampant property speculation that saw prices double in key cities in little more than 12 months, let local governments rack up 10.7 trillion yuan of debt and pushed consumer inflation to a 3-year high.

A two-year tightening campaign since has barely brought inflation back under control, a worry for Beijing as it starts to ease economic policy again to cushion falling growth.

It has eased banks' required reserves in three steps since the autumn of 2011, cutting 150 basis points in total to 20 percent and freeing up an estimated 1.2 trillion yuan for fresh lending.

It has also cut taxes and slashed red tape, fast-tracked infrastructure investment, provided consumption subsidies in some household sectors and pushed ahead with financial reforms to help safeguard growth.

But Beijing is wary about loosening too much too quickly again and setting off a fresh round of price hikes that put social stability at risk.

High inflation has preceded political tension in China in the past - something the ruling Communist Party is desperate to avoid ahead of a leadership change and already complicated by the purge of populist politician Bo Xilai and the murder scandal surrounding his fall.

CAPABILITIES CURTAILED

The sudden collapse in exports during the 2008-09 crisis threw some 20 million migrant workers out of work, an incentive behind the massive stimulus package. The economy may be slowing right now, but labor markets are tighter, wages are rising and employers are struggling for staff.

The combination makes it particularly difficult for Beijing to make big statements of international importance to global markets, just as hopes ride high that it will.

Brazil wants coordinated action to end the European crisis to be the defining action point of the next G20 summit meeting, due to be held in Mexico on June 18-19.

Separately a G20 official in Asia said the group could look to put pressure on Germany to switch to stimulus mode as part of a wider call for strong, developed economies to step up spending.

Faltering domestic and external demand have set China's economy on track for its slowest full year of growth since 1999, curtailing Beijing's ability to offer others aid as well as lowering growth prospects for neighboring Asian economies.

India recorded its weakest quarterly growth between January-March in almost a decade and Brazil barely expanded during the final three months of 2011, casting doubt on how much support emerging markets can offer the soggy world economy.

While a forecast in the latest Reuters poll that China's economy will growth this year by 8.2 percent might look brisk to recessionary Europe, it comes very close to the level many economists believe is the bare minimum China must achieve to create enough jobs for its 1.3 billion strong population.

So while things haven't got any better for the euro zone since October 2011 when Klaus Regling, who runs Europe's bailout fund, and the IMF were last in Beijing asking for help, China's economy has taken a clear turn for the worse.

And that's bad news for global policymakers, business leaders and investors who had been banking up to now on China to provide the lion's share of economic growth this year, Kenneth Courtis, co-founder of Asia-focused private equity fund, Themes Investment Management, said.

Beijing's reluctance to engage in a new round of 2009-like mega-stimulus, has dramatically raised concerns from a policy perspective, said Courtis, in Stockholm for meetings of this week's IMF-convened International Monetary Conference.

"What they more and more desperately want is a clear sign from Beijing that it will be taking forceful measures to put a floor under its economy... with the object of assuring that China deliver 8-9 percent growth this year and next," Courtis told Reuters.

"That is also I understand what the group which originated today's G-7/G-20 conference call also hope and expect will be the message China will deliver during the call."

(Editing by Neil Fullick)

I love the misleading title. Look beyond China to manipulate China. The West has spent so much time spelling out doom for China but they still want China to bail out Europe. The problem is the West acts like they deserve it without any concessions yet when anyone wants something from them, countries have to do backflips and a whole slews of superficial gestures first and then maybe they'll consider it. They can't even give what China superficially wants like look at the existence of the G7. They never wanted China to have that honor so they put more emphasis on the G20 yet the G7 still exists. Look how they want to manipulate China by the threat of loss of jobs. China can use the same logic because helping the West maintain what they have only continues to deny what China wants from them. Look beyond China suggests they want lesser developed countries to give them money but they know that would look bad which is why like I said before it's getting these countries to manipulate China into giving money. Depending on their whims of the moment they contradict themselves in making China full of poor at one instance so they can feel superior and declare China imcompetent and then another time rich so they can like at this instance demand money. They can't ask non-G7 countries to cough up cash for the rich because it looks as horrible at it is.

 

[Preux]

The West is not a monolithic bloc with one hive-mind any more than China is.

We are not locked in a Manichean struggle to the death and the sooner we recognized that the better.

You can criticize the article without generalizing about The West.

 

[AssassinsMace]

I did. Just like that child that was ran over by a car in China reported as if the Western media were the ones to bring this attention or else it would've been ignored. Oh what generalizing of the Chinese people as one. Or just like at Copenhagen every country but those of the West was demanded to restrict themselves.

 

[Preux]

.... are you seriously saying that in a post where you mentioned 'The West' as if it were a single entity no less than 3 times that you were not, in fact, generalizing?

Anyway, your remark on the Copenhagen Summit was a bold-faced lie. You can argue all you want about the morality of the restrictions due to the developed countries' earlier industrialization (and I think they have a point), but to claim that 'the West' did not demand restrictions of themselves is just factually incorrect. Australia, New Zealand, the EU and even America all made emission cut commitments. Hell, do you remember the ETS? That's a European initiative.

 

[AssassinsMace]

Again take you're own advice and read carefully. I did say, "I did." Did I deny it? No. I do what they do.

And yes the Western countries demanded everyone else restrict more than for themselves. And I wouldn't call the US and EU trying to punish China making alterntive energy technology cheaper as a sign they want to save the environment.

 

[Preux]

Again take you're own advice and read carefully. I did say, "I did." Did I deny it? No. I do what they do.

And yes the Western countries demanded everyone else restrict more than for themselves. And I wouldn't call the US and EU trying to punish China making alterntive energy technology cheaper as a sign they want to save the environment.

That's not what you said.

You said "Or just like at Copenhagen every country but those of the West was demanded to restrict themselves."

Which is flat out wrong. You are backpedaling here.

Post included for your reference.

I did. Just like that child that was ran over by a car in China reported as if the Western media were the ones to bring this attention or else it would've been ignored. Oh what generalizing of the Chinese people as one. Or just like at Copenhagen every country but those of the West was demanded to restrict themselves.

---------- Post added at 03:05 AM ---------- Previous post was at 02:59 AM ----------

I am pretty sure going on about the sort of US and THEM confrontation counts as 'country bashing' so let's restrict our criticism to the article itself without dragging the entirety of Western Civilization into it.