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Friday, 13 April 2012

China's adventures

Intrigues and dramas
This week saw news from China dominating broadcasts as political and economic affairs escalated.  The cracks in Party unity were exposed following the arrest of Gu Kailai for the murder of Neil Heywood, a British businessman who had assisted her and her husband, Bo Xilai, the former mayor of Chongqing and popular politician who was dismissed from the Central Committee and the Politburo of the Chinese Communist Party (following his dismissal from the position of mayor of Chongqing).

News services struggled to delve into the political circumstances underlying Bo's dismissal, subsequent reports have looked at allegations of corruption involving Bo and his associates, long term rivalries with other factions in the ruling elite and the significant business dealings of his wife as well as the circumstances of Mr Heywood's death.  Needless to say there was as much intrigue and mystery as a feudal saga.

One way to navigate the landscape in China (c) Chooseco LLC

An interesting economic statistic
Meanwhile there was much talk about the lower than expected first quarter GDP figure of 8.1% released on Friday for which there wasn't a consensus.  The range of views on the GDP figure included:

i) the Chinese economy is re-accelerating: DBS Bank of Singapore seem to be the strongest proponent of this view, mostly relying on GDP and inflation growth.  Definitely too bullish - Zerohedge, the economics website, tweeted that DBS overestimated the GDP number at 9% in an advance research note (and labelled DBS a "3rd tier research firm").  DBS may have a point regarding inflation (see below).

ii) the Chinese economy is growing, but at a slower pace:  Richard Jerrum, economist at the Bank of Singapore painted a favourable picture of the Chinese economy based on low inflation, sufficient capital investment and decent property growth (with means to stimulate) in an interview with Reuters.  The World Bank echoed this in its favourable report on Thursday which cut its growth forecast to 8.2 per cent for 2012 emphasising the success so far in cooling the property sector and remaining available tools for the central bank to inject liquidity.  This would be the case for a "soft landing" which the World Bank predicted as highly likely.  And Standard Chartered's Stephen Green also favoured a soft landing, expecting continued capacity for growth across the economy, a strong labour market and broad scope of tools available to the central bank.

The problem with the soft landing view its critics say, is that the underlying assumptions are simply not true, i.e. inflation is high, the property market is in a slump and the central bank does not have as many tools at its disposal (or as much scope to use them).

iii) the Chinese economy is contracting or not growing:  One key point for the hard-landing proponents is that there is simply too big a credibility gap to take statistics of the Chinese economy at face value.  The FT Alphaville blog published a short but interesting article (inspired by the above book on China) detailing a number of recent statistics which showed significant variation depending on their source or were significantly inconsistent with related statistics. The notable example was the Purchasing Manager's Index (a measure of manufacturing activity) - the official Chinese figure showed expansion while HSBC's figure showed contraction.

There was equal scepticism from some towards the inflation figures (via the Consumer Price Index which was recorded at 3.6% for March (announced at the start of the week). Not only was this number higher than expected, but Patrick Chovanec commented in an interview with Bloomberg prior to the release that a figure of such magnitude seemed vastly understated and as evidence he noted the 33% increase in the cost of his milk supply (although on Twitter he added that he thought it was due to increased delivery charges rather than the milk itself!).  More seriously he noted that in all his recent discussions with business people across China he did not come across an outlook of low inflation and higher growth consistent with a soft landing.

Meanwhile although Stephen Green's team have done some updating research which showed a recent pick up in construction activity and improvements in sentiments of developers this was tempered by research suggesting that activity is being driven in a large part through financing from less regulated shadow banking, including loans from investment trusts, which may not be a sustainable source of finance. And as mentioned in the FT Alphaville note, this week saw what could be the first bankruptcy of a property developer in China.

And a couple of articles in Reuters pointed out that tools of the central bank to stimulate demand had already been brought into use since 2011 (through cuts to the amounts of capital the banks hold, the required reserve ratio, in 2011) with resulting significant amounts of new lending likely to complicate the central bank's monetary operations in the future.  Jeremy Stevens, an economist for Standard Bank in Beijing summed up the mood:
Overall conditions seem to have stabilized, but it wouldn't take much to push sentiment in the wrong direction...
In any case due to factors like the excessive extent of local government debts and the shadow banking sector it was argued by James Kynge in the Financial Times last year that the powers of the central monetary authorities to control the supply  and price of credit are "tenuous".  A couple of others were more upfront - Satyajit Das wrote a follow-up piece to his last effort in the Australian media where he referred to recent Chinese growth as an "illusion", while economist Jim Walker in an interview with Reuters stated "economies don't have soft landings".

iv) the Chinese economy has reached the bottom and is rising again (though not necessarily fast): This view was put forward by a number of people who considered the possibility of a hard landing but had felt optimistic with recent figures. Some examples included Karine Hern of East Capital (from the property perspective) and Zhiwei Zhang of Nomura who revised his bearish estimate on GDP growth this week on a view of increased economic output and lending.  As the Beyond Brics post noted (and was noted elsewhere) the significant growth element of consumption included government spending which may have distorted the measure showing stimulus rather than genuine growth.

The verdict from the markets was negative - stockmarkets worldwide slumped on the expectation of lower growth going forwards, especially as the GDP figure was the lowest comparatively in a number of years.  Noel Roubini's report picked up on this and in a tweet he commented that the GDP figure may in fact have been 6.9%.

Unlike in the adventure books where the reader can flick through to see what outcome will occur following his choice, we will have to wait and see.

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