Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Gold Price Closely Tracks Debt-to-GDP Ratio - 9th Apr 20
Gold, Silver and Rigged Market Socialism - 9th Apr 20
Going to School in Lockdown Britain, Dobcroft Sheffield - 9th Apr 20
Amazon Face Masks to Protect Against Covid-19 Viral Particles N95, FPP2, PM2.5, for Kids and Adults - 9th Apr 20
Is Natural Gas Price Ready For An April Rally? - 8th Apr 20
Market Predictions And The Business Implications - 8th Apr 20
When Will UK Coronavirus Crisis Imrpove - Infections and Deaths Trend Trajectory Analysis - 8th Apr 20
BBC Newsnight Focuses on Tory Leadership Whilst Boris Johnson Fights for his Life! - 8th Apr 20
The Big Short Guides us to What is Next for the Stock Market - 8th Apr 20
USD Index Sheds Light on the Upcoming Gold Move - 8th Apr 20
The Post CoronaVirus New Normal - 8th Apr 20
US Coronavirus Trend Trajectory Forecast Current State - 7th Apr 20
Boris Johnson Fighting for his Life In Intensive Care - UK Coronavirus Crisis - 7th Apr 20
Precious Metals Are About To Reset Like In 2008 – Gold Bugs, Buckle Up! - 7th Apr 20
Crude Oil's 2020 Crash: See What Helped (Some) Traders Pivot Just in Time - 7th Apr 20
Was the Fed Just Nationalized? - 7th Apr 20
Gold & Silver Mines Closed as Physical Silver Becomes “Most Undervalued Asset” - 7th Apr 20
US Coronavirus Blacktop Politics - 7th Apr 20
Coronavirus is America's "Pearl Harbour" Moment, There Will be a Reckoning With China - 6th Apr 20
Coronavirus Crisis Exposes Consequences of Fed Policy: Americans Have No Savings - 6th Apr 20
The Stock Market Is Not a Magic Money Machine - 6th Apr 20
Gold Stocks Crash, V-Bounce! - 6th Apr 20
How Can Writing Business Essay Help You In Business Analytics Skills - 6th Apr 20
PAYPAL WARNING - Your Stimulus Funds Are at Risk of Being Frozen for 6 Months! - 5th Apr 20
Stocks Hanging By the Fingernails? - 5th Apr 20
US Federal Budget Deficits: To $30 Trillion and Beyond - 5th Apr 20
The Lucrative Profitability Of A Move To Negative Interest Rates - Pandemic Edition - 5th Apr 20
Visa Denials: How to avoid it and what to do if your Visa is denied? - 5th Apr 20 - Uday Tank
WARNING PAYPAL Making a Grab for US $1200 Stimulus Payments - 4th Apr 20
US COVID-19 Death Toll Higher Than China’s Now. Will Gold Rally? - 4th Apr 20
Concerned That Asia Could Blow A Hole In Future Economic Recovery - 4th Apr 20
Bracing for Europe’s Coronavirus Contractionand Debt Crisis - 4th Apr 20
Stocks: When Grass Looks Greener on the Other Side of the ... Pond - 3rd Apr 20
How the C-Factor Could Decimate 2020 Global Gold and Silver Production - 3rd Apr 20
US Between Scylla and Charybdis Covid-19 - 3rd Apr 20
Covid19 What's Your Risk of Death Analysis by Age, Gender, Comorbidities and BMI - 3rd Apr 20
US Coronavirus Infections & Deaths Trend Trajectory - How Bad Will it Get? - 2nd Apr 20
Silver Looks Bearish Short to Medium Term - 2nd Apr 20
Mickey Fulp: 'Never Let a Good Crisis Go to Waste' - 2nd Apr 20
Stock Market Selloff Structure Explained – Fibonacci On Deck - 2nd Apr 20
COVID-19 FINANCIAL LOCKDOWN: Can PAYPAL Be Trusted to Handle US $1200 Stimulus Payments? - 2nd Apr 20
Day in the Life of Coronavirus LOCKDOWN - Sheffield, UK - 2nd Apr 20
UK Coronavirus Infections and Deaths Trend Trajectory - Deviation Against Forecast - 1st Apr 20
Huge Unemployment Is Coming. Will It Push Gold Prices Up? - 1st Apr 20
Gold Powerful 2008 Lessons That Apply Today - 1st Apr 20
US Coronavirus Infections and Deaths Projections Trend Forecast - Video - 1st Apr 20
From Global Virus Acceleration to Global Debt Explosion - 1st Apr 20
UK Supermarkets Coronavirus Panic Buying Before Lock Down - Tesco Empty Shelves - 1st Apr 20
Gold From a Failed Breakout to a Failed Breakdown - 1st Apr 20
P FOR PANDEMIC - 1st Apr 20
The Past Stock Market Week Was More Important Than You May Understand - 31st Mar 20
Coronavirus - No, You Do Not Hear the Fat Lady Warming Up - 31st Mar 20
Life, Religions, Business, Globalization & Information Technology In The Post-Corona Pandemics Age - 31st Mar 20
Three Charts Every Stock Market Trader and Investor Must See - 31st Mar 20
Coronavirus Stocks Bear Market Trend Forecast - Video - 31st Mar 20
Coronavirus Dow Stocks Bear Market Into End April 2020 Trend Forecast - 31st Mar 20
Is it better to have a loan or credit card debt when applying for a mortgage? - 31st Mar 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

The Making of China's Epic Economic Hard landing

Economics / China Economy Jan 10, 2012 - 07:41 AM GMT

By: Dee_Woo

Economics

Best Financial Markets Analysis Article1. The unsavory episodes of China's economy

For the better part of the past year, my concern about Chinese economy was constantly aggravated by the depressing stories of entrepreneurs who committed suicide, fleeted the country or emigrate to the western world in droves. Most media have blamed the credit crunch and monetary tightening for all these unsavory episodes. The public outcry for the deteriorating conditions of Chinese entrepreneurship climaxed with the seemly positive step PBOC(the People's Bank of China) took on Dec 5 2011 to alleviate the liquidity crisis: cut the RRR (reserve requirement ratio) to 21 percent from a record high of 21.5 percent.


Right now the outlook for Chinese economy is looking rather confusing: should it continue the painful structural adjustment to prick the economic bubble built up by a decade-long obsession with excessive growth? Alternatively, should it adopts the expansionary policy to reinvigorate the flagging economy? Either way China is approaching dangerously close to an epic hard landing.

2. It's not a liquidity crisis but the structural problem

For one, it's easy to lay the blame on the tightening monetary policy. Nevertheless, nothing can be further from the truth. The main overseas markets for Chinese goods, Europe and the US, are both battling a possible recession, which greatly tightens their purse strings. To make the matter worse, the cost push inflation, especially the wage inflation, is eating away the comparative advantage of China’s manufacturing industry. All this has nothing to do with the tight monetary policy but the structural change of China's economy.

(The manufacturing sector is bleeding. Purchasing Manager Index(PMI) has dropped to 49, lower than market expectation. This is the first time since Feb 2009 PMI contracted. The orders are declining, especially overseas orders, and the stocks are piling up.)

In any case, the difficult access to credit for Chinese private small and medium businesses (SMBs), the driving force behind China’s manufacturing industry, is a chronic problem long before monetary tightening. More than 70% of China’s banking market is controlled by the “big four”- Bank of China, the China Construction Bank, the Industrial and Commercial Bank of China and the Agricultural Bank of China. These state-owned commercial banks skew the monetary resource towards the state-owned enterprises or other privileged corporations. This allocation deficiency of China's banking system provides the breeding ground for China’s huge and complicated shadow banking network, where most credit-starved private SMBs seek costly funding. The shadow banking system is hardly regulated and monitored, and it's awash with cash that fleets the negative real interest rate in the commercial banks. In April 2011, 467.8 billion yuan of residential deposit left the commercial banks. We all can guess where the money ended up. Money is chasing positive yields into the wild west of shadow banks.

Contrary to what many might like to assume, China now is not even close to suffering a liquidity crisis. There is more than enough liquidity to go around. China’s M2 has surpassed that of the U.S. or that of Japan, as China’s M2 is around US$ 11.55 trillion, exceeding the U.S.’s $ 8.98 trillion and Japan’s $ 9.63 trillion. Regardless of all the hype of the tight monetary policy, In 2010, Chinese banks issued 7.95 trillion yuan of loans, breaching the government's target ceiling of 7.5 trillion yuan. In 2011,the total new loan stood comfortably close to 7.5 trillion. As of October 2011, the outstanding balance of RMB deposits totaled 79.21 trillion yuan, whose year on year growth rate is 13.6%. The PBOC's rate hike only removed 4.75 trillion yuan from circulation. According to Fitch ratings, China's total social financing in 2011 might top 18 trillion yuan (US$2.8 trillion), a rise of 3.5 trillion yuan from the official target due to inflow of non-banking liquidity. Meanwhile, the PBOC claimed the total social financing of the first 3 quarters in 2011 is 9.8 trillion yuan, 1.26 trillion yuan less than that of the year before. The PBOC's data suggests an effective tightening monetary policy while the Fitch report implies the opposite. The PBOC proves to be an inadequate central bank to rein in the liquidity binge Beijing has indulged itself in for so long. Under such a gloomy context, China's credit expansion against all odds is still breath-taking.

(Over the past decade, China's M2 surges past the US's by a wide margin from as low as nearly one-third of the US's.)

We obviously can't blame the tightening monetary policy for the sorry state of China's economy. We can't really be too optimistic on the loose monetary policy to turn around its fortune either.

3. The undoing of Beijing Consensus

Monetary policy alone won't fix the structural deficiency of China's economy. The well-being of China's economy is hugely leveraged on the consumption economy of the US and Europe. American and European economic turmoil together puts a massive strain on the demand for China's export. The increasing substantial wealth gap in China has shackled the domestic demand so much that it fails to pick up the tab left over by the US and Europe markets. China is now saddled with a serious excess capacity problem, which forces down the marginal returns on the investment and makes investment more effective in incurring inflation and bubbles rather than propel GDP and employment ahead. This is a serious sign of over-investing and overheating. In 2010, China's export/GDP ratio is about 37% , and Investment/GDP ratio is 45.8%. According to David M. Kotz and Andong Zhu's research, China's export plus fixed investment contributes almost 70% of GDP growth since 1999 while domestic consumption contributes roughly 30%. Using the export/investment combo to power economy ahead is what becomes well-known as Beijing consensus. It works beautifully for the past decade when the world is prospering in the globalization and free trade. However, now its good run is finished for good.

To overcome the current economic malaise, the US and Europe must check their deficit-fueled consumption economies into the rehab. They must increase their chronic low saving rate, produce more and import less. That means the export-led growth engine for China's economy may be gone for good.

(According to Economist Intelligence Unit and US bureau of economics analysis, China will depend on an export-led economy late until 2030.)

4. The consumption-led economy is the only way out.

The dire situation in the US and Europe calls for another round of quantitative easing. With both Japan and UK firmly committed to QE and market conditions deteriorating, the embattled US and Europe will be more and more reduced to monetary aggressiveness. In the end, we will see a global competition of currency devaluation. China will lock horns more frequently with the US, Europe and other export nations over currency issues. The trade tension will flare up.

The only way out for China is turning its economy into a consumption-led one. The other two options are: fight for the overseas markets in vain and be prepared for trade wars. Or try to reignite the economy with more wasteful investment and be prepared for a colossal asset bubble and epic hard landing.


5. The outlook for China's inflation and economic bubble

And also, don't be too optimistic about China's inflation prospect. Indeed, China's CPI tumbled to 4.2%,the lowest level since September 2010. Nevertheless, the battle against inflation is far from over. China is the world's biggest importer of food and commodity. With the global competition of loose monetary policies, the food and commodity inflation will be persistent, to say volatile the least. China will face the serious threat of imported inflation and cost-push inflation regardless of whatever monetary policy it adopts. That combined with negative real interest rate and diminishing marginal return in industries will push more and more money into asset investment and speculation. The inflation will be lurking if these structural problems persist.

Overall, there are both internal structural factors and external global factors that contribute to the making of an epic hard landing in China. China will be really vulnerable when the US and Europe both unleash the quantitative easing. These are things China has no control of. Nevertheless, the best China can do to avoid the worst is to continue the painful structural adjustment: marketize the “big four”-dominated banking industry to allow for more efficient monetary allocation; Transform the labor intensive low value-added economy to the high value-added knowledge economy; reform the wealth redistribution system to empower the broad consumer base and honor its promise of a consumption-led economy.

China's hard landing would be a tragedy not only to China but to the world. Without China's growth of consumption economy, the global economic recovery will be a prolonged and painful process. The icing on the cake for this article would be what I said in “The Boom And Bust Of China's Rise”: Hedge funds and Fed’s QE2 are not all to blame for all these. China's economy has already stood close to the edge. What speculators do is to push it over and profiteer handsomely from the chaos.

While the US enjoys the luxury provided by the dollar’s world currency status and diplomatic alliance with many major trade partners to export its liquidity and inflation, China enjoys none of that. They should look at the dollars in their hands with fear and doubt. So called Beijing consensus makes little sense, because the world is fast changing, pegging a country’s growth to a certain set of policy tools or a certain reserve currency(the US dollar) is equally dangerous. The battle between Keynes and Friedman has long proven the only consensus is to adapt and change. Right now China needs to adapt and change fast. Or else, this will be the best time in history to short China.

Dee Woo
--
Citizen Economist and Citizen Diplomacy Activist

http://www.businessinsider.com/author/dee-woo
http://www.forbeschina.com/column/wudi
http://cn.linkedin.com/in/dee8woo   

© 2012 Copyright Dee Woo - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules