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Craig Stephen's This Week in China
July 11, 2010, 7:44 p.m. EDT · Recommend (7) · Post:
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China's puzzling economic indicators
First Take "º
NTP faces uphill battle against rich foes
By Craig Stephen
HONG KONG (MarketWatch) -- China's widening trade surplus in June will inevitably re-focus attention on the question of the overvalued yuan. The renewed surplus looks particularly ill-timed, coming days after the U.S. Treasury agreed not to name China as a currency manipulator. But is Beijing really back to its old tricks of conjuring up $20 billion monthly trade surpluses?
That might be a convenient explanation, but it hardly looks to be fair. In fact, these figures highlight potentially bigger problems for Beijing.
To understand these numbers, you need to look less at the exports, and instead consider the import picture in the context of China's recent massive stimulus program.
Storms batter southern China for the second time in weeks killing dozens and causing over a billion dollars damage. Video Courtesy of Reuters.
After all, it was only just over 18 months ago that Beijing was being lauded for its oversized efforts to stimulate growth as the world economy struggled to deal with the post-Lehman credit debacle.
China's stimulus was big, and it was fast. Much of the bank lending ended up going into infrastructure and real-estate investment, as well as various places that might not have been intended. But there were few voices of dissent as China almost single-handedly kick-started commodity prices, regional exports and a wider recovery. Once again, the world marveled as Beijing reeled off another set of double-digit gross domestic product growth numbers.
Like many countries this year, Beijing has had to retreat from stimulus, and it seems inevitable that the same things that went up will go down.
Imports are generally taken as a proxy for domestic consumption, but for China a better measure is fixed-asset investment, given its dominance -- accounting for approximately two-thirds of GDP. May data showed the rate of increase in fixed-asset investment has been slowing, and in China that means so too will imports -- hence, a widening trade surplus.
Imports slipped from a yearly growth rate of 48.3% in May to 34.1% in June, allowing the trade surplus to swell. On a year-on-year basis, export growth was 43.9%, down from 48.5% in May, although edging up only modestly from $136 billion to $137.3 billion, month-on-month. See full story on China's June trade data.
Most likely, this slowdown reflects government administrative measures to curb lending to property and infrastructure investment. Iron-ore and copper imports, for instance, just fell for the third straight month.
There is a view that for balanced trade China must boost domestic demand rather than re-peg its currency higher. Still, this will take time and need major structural reforms to lessen the dominance of the state in the economy and boost consumption. Recent increases in the minimum wage of factory workers are a start perhaps.
To continue covering the country in concrete buildings and new highways does not seem to be the answer. The mainland Chinese habit of holding multiple properties empty as investment looks a particularly inefficient way to run an economy.
In general, little attention was given to the efficiency of the banks' stimulus lending, which was after all, state-decreed. Add in that it was majority state-owned but publicly listed banks that were doing the lending to municipal government investment vehicles, and everything gets a little bit incestuous. Another complicating factor is the stimulus spending took place in a growing property bubble.
Now, analysts have begun drilling down on these loans and, perhaps unsurprisingly, some of the predictions are quite alarming.
Capital Economics, a London-based consultancy, predicts that the mainland's local government investment vehicles -- which borrowed the majority of the banks 9.6 trillion yuan ($1.4 trillion) stimulus last year -- face bankruptcy. These "window companies" amassed 7.34 trillion yuan of loans by the end of 2009, according to government data.
A recent move by the banking regulator to ordered lenders to refuse further credit to the 8,000-plus window companies set up by municipal governments to fund infrastructure projects means many will face bankruptcy, says Capital Economics. In June, the China Banking Regulatory Commission called for credit to be withdrawn because of heightened risks in the property sector.
If the order is carried out, they predict the investment vehicles will either go bust saddling the banks with bad debt, or they will need to be bailed out by the central government. Either way, the mess will end up on Beijing's lap.
All said, Beijing has potentially enough problems of its own just now to be cut a bit of slack on its trade surplus.
NTP Inc., a patent holding company without a website, a product, or a listed phone number, is clearly hoping that history repeats itself as it takes on some of the biggest names in the technology universe, writes Therese Poletti.
1:31 p.m. July 9, 2010 | Comments: 3
- AmericanPatriot | 5:57 p.m. July 11, 2010
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