China Desk

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Brad Setser thinks that China is again holding the RMB down to maintain export volume in the face of softening global demand. From the comments (my emphasis):

China prefers subsidizing US consumption of Chinese goods to subsidizing Chinese consumption of Chinese goods… if China’s foreign asset accumulation continues at $800b a year, it will add $3.2 trillion to its foreign portfolio over the next four years — more than it added in the preceding twenty…

Bloomberg also points out that by dodging the debt bubble bullet China’s banks have drifted to the top of the market cap tables as well as providing some of the only investment gains for their competitors:

Chinese banks hold three of top six spots among the world’s largest financial companies based on market value… The Chinese banks owe their rankings in part to having avoided almost all of the $480 billion in writedowns and credit- market losses that have sent bank stocks tumbling worldwide… Only two years ago, the world’s biggest banks were led by Citigroup Inc. and Bank of America Corp. of the U.S. and UBS AG in Europe… ICBC’s unaudited figures… show first-half profit rose more than 50 percent… Beijing-based China Citic Bank Co. said earnings jumped more than 150 percent in the same period. China Construction Bank followed, saying net income may have advanced more than 50 percent… Chinese funds and companies spent $19.3 billion buying stakes in Blackstone Group LP, Morgan Stanley, Barclays Plc, Fortis and Johannesburg-based Standard Bank Group Ltd. since May 2007 that are now worth $7 billion less on paper… China Investment Corp.’s $5 billion purchase of a 9 percent stake in New York-based Morgan Stanley, the second-biggest U.S. securities firm… has declined 18 percent… The $200 billion sovereign wealth fund also invested $3 billion in shares of New York-based Blackstone, manager of the world’s largest buyout fund, only to see their value decline 41 percent… By contrast, foreign banks’ investments in Chinese financial firms have fared much better, showing $50 billion of paper profits… HSBC is sitting on a $16 billion gain… Bank of America, which bought 9 percent of China Construction Bank for $3 billion in 2005, has a $14 billion paper profit…

And, for those many investors bullish on both oil and the RMB, has the FT got a deal for you:

Shareholders in Petrochina have approved a plan for China’s largest corporate bond sale by a listed company… up to Rmb60bn ($8.77bn) through one or more tranches of bonds with maturities of up to 15 years… In the first half of this year, 21 listed Chinese companies issued a combined Rmb74.5bn of domestic bonds. While tiny compared with more developed economies, this amount was 6.35 times larger than the corresponding period last year…

The moment of truth for the un-coupling thesis is at hand; as pretty much everyone agrees (which is a sign for extreme caution) that there will be a post-olympic slump in China. In order to beat the rush, the IHT has already come out with their announcement: “China’s post-Olympics economic slowdown has started before the Games have even begun.”

New orders at Chinese factories plunged last month. Exports are barely growing, after adjusting for inflation and currency fluctuations. The real estate market is weakening, with apartment prices sinking in southeastern China… Any slowing of growth, which has been spurred in part by China’s herculean investment program to showcase the Olympic Games that open this week, could prove a shock to Chinese workers who have been receiving double-digit pay increases each year… any significant slowing below its recent pace of 11 percent or more a year would also make it much harder to find jobs for the millions of people moving from rural areas to cities each year in search of work. Economists have been forecasting growth of 9 percent to 10 percent over the coming year, and these estimates are being ratcheted downward.

I’m pretty sure this is just MSM type spin and speculation – no sources, no hard data. Rodger Baker at Stratfor is also concerned at the difficulty business VIP’s are having getting visas for the Olympics, and reads into this a wider post-Olympic crisis lurking:

China’s rapid and contradictory economic and security policies, rising social tensions, and seemingly counterproductive visa regulations appear to be signs of a government in crisis. They are the reactionary policies of a central leadership trying to preserve its authority, stabilize social stability and postpone an economic crisis. At the same time, we see signs that the local governments, and even organs of the central government, are putting up steady resistance to the announcements coming from Beijing… It may be that the contradictory policies Beijing is tossing around these days will simply fade away after September and things will get back to “normal.” But already, Chinese officials are downplaying the previously hyped political and economic benefits of the Olympic games. They are now warning that economic conditions may not be so strong in the future, and at least internally discussing the distinct possibility that at least certain regions of China are facing the same economic crises faced by their mentors Japan, South Korea and the Asian tigers.

A few more specific items which may argue against the post-olympic slump thesis:

China’s tax revenues rose 30.5% in the first six months of the year. The country collected about $472 billion on a surge that reflected corporate profits in 2007. Almost half of the tax revenue came from value-added, consumption and turnover taxes, which rose 22.4 percent, 18.5 percent and 25.7 percent, respectively. Import tariffs showed the fastest growth, rising 34.9 percent to 395.6 billion yuan, followed by stamp tax on securities trading, which rose 34.2 percent to 83.7 billion yuan.

China’s booming Internet population has surpassed the United States to become the world’s biggest, with 253 million people online… a 56 percent increase from a year ago… The United States had an estimated 223.1 million Internet users… Total revenues for China’s Internet companies soared to 40.5 billion yuan ($5.9 billion) in 2007, up 48.6 percent from the previous year… revenues should keep growing at an annual rate of at least 30 percent in coming years, reaching 137.5 billion yuan by 2010… By contrast, U.S. online advertising revenues alone in 2007 were $21.2 billion (145.2 billion yuan)… China’s online population should keep growing by 18 percent annually, reaching 490 million by 2012…

A survey of 3,591 US companies with annual revenues of $25 million or above ranked China as the most favourable location for offshore investment… India was second with 45.1 percent, followed by Mexico with 30.1 percent, the United Kingdom with 25.4 percent and Canada with 22 percent.

An update: Setser doesn’t see signs of a slow-down yet, and has a good chart showing that the month to month variation isn’t large enough or serially trending.

(Posted by Paul from Technology Investment Dot Info)

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  1. Richard Kline

    One of the historical ways to a seat above the salt at the international banking table was not to go bankrupt when others were losing their assets. The massive inflations, destabilizations, and defaults of the Spanish fisc attendant upon the flood of specie from the Americas ruined the Genoese and other Italian bankers who loaned to the Spanish Crown–but the Dutch who ended up shut out of ‘investing’ in the Spanish financial Blob spent their money financing their own commodity trading and got rich for two centuries. (Other factors were in play, but then they always are, no?)

    So Chinese banks may become major players simply by not being allowed to buy bogus buck-bonds. They take currency risk, but that’s only going down ~%30 rather than ~+75%. Losing less can be the same as winning.  More than a few big US financial firms of the 19th century got that way by being out of the money on investments that took the other guys down the tubes. Think about it. I’ve wondered for years whether smart Gulfie sovereign capital would do the Dutch thing and come out of their peak earning decades as major international lenders. Doesn’t look like _they_ will, though: They are building castles in the sand with their dough rather than getting a piece of financing international capital flows. Some of the Qatari’s have thought big and right, but they had the least money, and those with more timid and without vision. It’s almost too late to get into the swing of things there, their capital hordes vast increase of late notwithstanding. Big capital movement takes expertise, experience, and pre-existing financing operations. We see this more and more in China, but nothing much like it in Arabia, where they are ‘investing’ in the losing bets of others rather than ‘financing’ the activities of others—unless Gulfie capital is secretly financing activity in Iran, for example, something regarding which I’ve wondered but haven’t seen any credible ‘what ifs’ by those in a position to have an opinion that counts.

    I am far from sold on the idea that China will have a major slowdown. Oh, they’ll have a slowdown of exports, or rather of some exports to some places. There are many, many other places for their economy to grow. If ex-peasant factory labor is their sweet spot of growth, then yes they will hit a bad patch as that vector flattens. If domestic investor innovation has any real traction, internet or many another place, then we will see some traction from it’s pull if it picks up, even without central government push: their is a great deal of off shore money invested into China, and by no means all of it is devoted to re-export operations. If ‘decoupling’ has any real meaning, it is not necessarily that ‘new vector’ Chinese growth will pick up for ‘export vector’ Chinese growth yuan for yuan in real time; there is likely to be a lag, particularly as off shore and domestic solid investor capital refocuses. —Which is just what the shuttering of all those excess Guandongese sneaker factories is, a creative destruction of old vector excess. . . . So what are those guys investing in _instead_? When that is known, we will know how much value to put on decoupling. I think that value will be positive, in two years a major positive. But that’s just my first best guess, so.

    Thanks for the yeoman posting, Paul. Yves and company are likely watching polar bears bob along on bits o’ glaciers or the like as we type this.

  2. Peripheral Visionary

    There may or may not be visible signs of a slowdown, but the problem is that the Chinese economy was built on a fundamentally shaky platform: low wages that simply could not last. Now that wage inflation has set in–and there is strong statistical support for that–the manufacturing will either move on in its pursuit of cheap labor, or settle down and unhappily deal with lower profit margins.

    And that leads to the second problem: that too many state-funded Chinese companies were run to create jobs, and therefore have thin profit margins. Profit margins are insurance against a downturn; without those margins, the Chinese companies will have to cut staff to match any slowdown in exports.

    The idea of the Chinese economy shifting from exports to internal goods and services is a nice one, but I don’t see how it can happen quickly enough. If factories are shutting down as quickly as stories indicate they are, the Chinese cannot stay at the same level without massive government stimulus–the road to inflation and eventual instability.

  3. Stuart

    "The idea of the Chinese economy shifting from exports to internal goods and services is a nice one, but I don't see how it can happen quickly enough."

    They'll do what we did in the '70s, invoke wage and price controls. Trudeau in Canada did his famous 6 & 5 during this time.

    In any event, they'll find a way. The incentive to do so, motivated by social unrest of hundreds of millions of unemployed, I would imagine to be quite acute.

  4. Anonymous

    Note to Richard Kline,

    You should start your own blog.

    Terrific posting. You have that broad sweep of history in front of you, proving the “last man standing thesis” of banking works every time (i.e. as a banker, be the gutless one under the table in a financial fight when everyone else is brave – and is killed – and you come out the winner).

    I call this the “Lock, Stock and Two Smoking Barrels” Theory of banking success.

    Oh, and when you look into the future, it’s so clear what the Chinese financiers will invest in: AGRICULTURAL LAND. The only true love for the Chinese is FOOD. Arable land is collapsing worldwide.

    There’s going to be big upside for phospherous and for arable land. Big upside.

  5. Richard Kline

    So Anon of 10:38, thanks for the endorsement. I don’t think I could cut it though. Yves’ ability to take the grind of posting every day elicits my admiration. —Unless there was some solid per diem in it, as I could desperately use a ‘career change’ on the day job front. Hmm.

    The real reason I made the point in comments here I sought to put in the foreground is that the illusion that our deliberate policy acts directly cause major social outcomes, and it is an illusion, is pervasive. Ideas such as “Major banks succeed because they play the game better,” or that “China is a success because they have a superior policy program,” are common expectations, but they do not withstand any serious scrutiny, certainly in historical perspective. Oh, policies have to have been superior at some point, some times; just plain luck only dominantes a few outcomes. Few consistently have success in their deliberate, decision-by-decision policies. What wins in the long term is sensible, sustainable processes, not the bold play.

    In that context, China training a gazillion hungry engineers is an optimal process. China brining in Chinese diaspora capital on favorable terms but keeping Western self-interested corporate capital at arms length is an optimal process. China capturing the low end export markets to Latin America and Africa—which no one else wanted but which make up in volume what they bring thinly in margin, and which keep the low end export sector humming along for now—are optimal processes. It’s not like they have no shortcomings. The downside to industrializing is truly horrendous environmental damage, for example, which China has in spades.

    Too many discussions about China’s transformation seem predicated upon the perception that this export market exists to service the US: it does not, we are just a valued customer, a large gear in their larger design. China can look at Taiwan or Korea, which went from negligible export activity to successful operators in a generation, and whose pace in transition China has cut in half. That is their goal, and the objective behind their ‘operational process’ decisions. China does not have the luxury of putting it’s feet up and counting the dollars rolling in, because they cannot stay where they are now in productive organization. They must either make the next leg up or they will fall back down the ladder again like Mexico or the Philippines—and they know it. So I expect they will find a way to make the jump.

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