China's Paper Tigers: Inside LICs and associated dirty secrets

All this goo ga about the PRC being a world economic power is beginning to wear me down. Simple folks...China is not going to meaingfully replace the US anytime in the near future. All those reports about China flexing its military muscles and keeping the US off the China Sea is just drivel...


Why? let me assure you that I am no knee-jerk PRC basher...but there are too many dirty things swept under the carpet in the PRC that paint a less glowing picture...despite Arthur Kroeber's rather facetious article..Victor Shih bears repeating here...


I don't think the problem is trivial, especially in light that local governments seem determined to take on trillions in additional debt in the coming two years to finance ambitious investment plans. My main worry is that unless Beijing decisively restricts local investment projects, local investment companies will continue to borrow in large quantities in the coming two years.


Even relatively bullish investment bank report suggests that new non-performing loans in the banks can increase by 2-3 trillion RMB in the next couple of years. To be sure, this is well within the government's ability to handle and likely will not lead to any kind of financial crisis. However, this remains a daunting problem for the government and for current shareholders of China's banking stocks. This will require the China Investment Corporation to inject tens of billions of dollars into banks through Huijin. Additional asset management companies will have to be formed to take over the NPLs. This is a lengthy and difficult process involving numerous ministries and interests, which is expected to generate a great deal of uncertainty. If the expectation indeed is a couple of trillions in NPLs, it deserves careful watching rather than dismissal.


Finally, some investment bank reports suggest that the enormous sum of state assets must be considered along side of the debt. If debt ever becomes a problem, the Chinese government can always sell state assets to repay the debt. Here, I am in complete agreement with my colleagues. It will be a great day when the Chinese government decides to privatize trillions in state assets to raise money to repay local debt. The record of the Chinese government in privatization, however, is spotty at best. Even in the late 1990s, when the fiscal shape of the central government was at its weakest, only small SOEs were privatized, often through murky processes to insiders. 


Since then, both the central and local governments have done their utmost to maintain the dominance of large state-owned corporations through protectionism and subsidies from both the budget and the financial system. Instead of privatizing these firms and allowing them to compete on equal footings with private and foreign firms, they are given every advantage so that they can dominate the domestic and even the global markets. The financial system in particular channels the bulk of its resources to the state sector. Unfortunately, it does not seem privatization is anywhere near on the horizon. Instead, we can expect trillions more being poured into state entities, including local investment companies, in the foreseeable future.

Victor Shih is acknowledged here

China: Still hot despite Credit and Property Bubble worry

Am I being too bullish on China or am I reading all the data wrong? But guess what ,China's growth needs re-orienting viewed in terms of its current dependence on investment, currency controls, loose money etc...Though capacity utilization is at 100%..it makes me worried as in conjunction with what is happening in EU and the current mayhem in markets in the US,

It is best China taps some of its domestic constituency and unleash it...It has so many strengths in terms of consumption spending power and domestic demand in general...

A sizzling 11.3% growth in Q1 and a consistent 8% plus avg. growth that has been envious...While the Chinese will do anything to keep unemployment down....

Recipe for Inflation: China mostly is in the grip of a bubble as its property markets are indicating and are so are credit markets. People's Bank of China recently revealed that in March the output gap reached more than 3%, the highest level since 1998 and the seventh straight month of increase. Positive output gap indicates that factories are running out to comply with high demand which in turn is likely to push prices even higher. This looks very inflationary for China in conjunction with the very level of money supply.

People's Bank allowed lending to surge starting in late 2008 to fight the global financial crisis. New loans rose to a record 9.59 trillion yuan in 2009 and banks advanced another 3.38 trillion yuan in the first four months this year. The Shanghai Composite index of stocks has fallen off more than 2o% this year, the worst-performing index in Asia, as investors sold Chinese assets on concern a withdrawal of stimulus spending and a slowdown in construction could choke off growth after an 11.9% expansion in the first quarter. (Thanks CNBC)

In Shanghai fears abound that property speculators chasing quick profits are inflating a real estate bubble. Apparently, the Chinese Government is also worried about this and is now capping prices and making some building loans harder to get.

Re-orientation critical as current strategy has outlived utility

Besides PBoC's March 2010 data, that China is facing serious overcapacity problems goes beyond real estate. According to Prof. Michael Pettis lectures of Peking University, China's understandable efforts to try and shield itself from the world economic crisis with a massive stimulus package may end up making its situation worse. I am also getting a feeling that China has reached a point where it is producing stuff or investing in infrastructure that is not economically viable; that in the future China is still not going to be able to use this stuff and Chinese people are still going to have to pay for it despite the negative NPV of so many road projects.

Pettis conclusion is stark "when that happens that will exchange future growth in exchange for the growth that we got today." "What we've seen in the last year has been a very robust reaction to the contraction in the export sector and to the threat of rising unemployment." Professor Pettis says China entered the global financial crisis with an investment rate that was probably much too high.

Look at the Chart below and it is easy to understand why China needs to stimulate consumption. The economy is way too heavily dependent on investment. Since investment rates is so high there's a very, very strong reason to believe that a lot of this investment is being wasted. Considering the monetary policy in place to allow for easy access to capital, repayment nightmares could become a big potential issue that makes any growth very inefficient....

China is not imploding any time soon as doom mongers seem to suggest.....nothing the Chinese cannot handle...