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Growth Slows in China – to 9.2 Percent

On January 17, 2012, in Asia, Europe, by Tim

Along with another European credit downgrade by Standard & Poor’s and Greece once again edging closer to default (they’ve been edging closer to default for years now), slower growth in China is making headlines this morning, though, most nations would give their eye-teeth for an economy that is still expanding at a nine percent clip.

Retail sales were up 17 percent from year ago levels while year-over-year growth rates slowed during all four quarters of 2011 as the government tightened lending and found other ways to rein in soaring home prices and cool inflation.

So far, it looks like they’re succeeding. Hopefully, they won’t be too successful.

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The World’s Still-Inflated Housing Bubbles

On December 15, 2011, in Housing, by Tim

Checking in on the housing bubbles in Australia, Canada, and China…

Word came in this report this morning from The Age in Australia that Economist Steve Keen of Debt Deflation fame is garnering new respect as home prices there are set to drop by about four percent this year with even lower prices in store for 2012.

No news stories about home prices in Canada have crossed my computer screen lately, but, my guess is that, with the global economy and financial markets teetering, there are a lot of new home buyers and investors who are rethinking their purchase decision.

In China, we see shades of the U.S. housing bubble circa 2007 as the LA Times reports the natives are really getting restless, recent homebuyers now protesting outside of the offices of builders who have slashed prices to spur sluggish sales.

Home prices nationwide declined in November for the third straight month, according to an index of values in 100 major cities compiled by the China Index Academy, an independent real estate firm. Average prices in the Shanghai area are down about 40% from their peak in mid-2009, to about $176,000 for a 1,000-square-foot home.

Sales have plummeted. In Beijing, nearly two years’ worth of inventory is clogging the market, and more than 1,000 real estate agencies have closed this year. Developers who once pre-sold housing projects within hours are growing desperate. A real estate company in the eastern city of Wenzhou is offering to throw in a new BMW with a home purchase.

The swift turnaround has stunned buyers such as Shanghai resident Mark Li, who thought prices had nowhere to go but up. The software engineer closed on a $250,000, three-bedroom apartment in August, only to watch weeks later as the developer slashed prices 25% on identical units to attract buyers in a slowing market.

Outraged, Li and hundreds of others who paid full price trashed the sales office, scuffled with employees and protested for three days before police broke up the demonstration. Walking away now would mean losing the $75,000 down payment that he borrowed from his working-class parents.

“I still haven’t told them,” Li, 29, said of his home’s plummeting value. “It will just make them worry, and it’s already too late.”

This is well worth reading in its entirety to better understand two fundamental differences between the U.S. and China and how their outcome might be very different than ours.

First, this was a government-engineered slowdown that looks to be accomplishing its objective, however, the fear is that it could be too successful (in which case, the government will likely reverse course). Second, home purchases in China include hefty down payments, unlike the NINJA loans and their ilk  that were common when the U.S. bubble burst.

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The Slowdown in China

On December 5, 2011, in Asia, Housing, by Tim

Worrisome signs have been emerging from China in recent weeks that all is not well. Home prices have been notching modest declines of a fraction of a percent over each of the last three months (though this may be one case where the government’s data is manipulated even more than usual) and the manufacturing sector saw a modest contraction in November for the first time since 2009.

Today, the Chinese services sector notched its weakest growth in three months and, after the central bank loosened bank reserve requirements last week after two years of tightening, policymakers fret that slowing growth could lead to social unrest. Amid daily calls by pundits for a “hard landing”, the LA Times reports that the planned economy is in trouble.

According to an official New China News Agency report published Saturday, China’s top security chief warned provincial officials to brace for unrest if financial conditions continue to deteriorate.

Zhou Yongkang, a member of China’s nine-person Politburo Standing Committee, said the country should focus on developing better social management -– a euphemism for control aimed at stamping out opposition and unrest.

“The Party and the government have always paid a lot of attention to social management … but it still cannot keep up with the changes in economic and social development,” Zhou reportedly said, using typically dense party jargon.

“Faced with the negative impact of the market economy, we still have not established a complete social-management system,” Zhou continued. “How to establish a social management with Chinese characteristics to suit the socialistic market economic system in China is the most pressing task we face today.”

With the labor market now showing some distress as the number of strikes and other protests escalates, income inequality is an increasingly important issue to workers with increasingly idle hands and this is not good news for the government.

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Obama and China, Good Cops and Bad Cops

On November 14, 2011, in Asia, Currencies, by Tim

You’d think that there’s at least a little bit of a “Good Cop, Bad Cop” dynamic going on right now when President Obama talks to the Chinese about letting their currency strengthen at a faster pace. Of course, Obama is the good cop here with just about every GOP presidential hopeful playing the alternate role and one can easily imagine Chinese President Hu Jintao being told over the weekend, “Hey, I’m about the best friend you’re ever going to have in Washington. How about a little appreciation, currency-wise?”

As Hu made clear yesterday, from the perspective of the Chinese, they had no part in making any of the rules in the current global monetary system and feel little compulsion to play by them. Mindful of the Japan experience in the late-1980s when strong currency appreciation led to massive asset bubbles and two lost decades, they’re not likely to simply comply with the wishes of the West when it comes to their currency.

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Breaking Free from the U.S. Dollar

On August 8, 2011, in Asia, Currencies, by Tim

Amid all the headlines about the U.S. debt ceiling, European sovereign debt, and the U.S. credit downgrade over the last few days, was this Financial Times commentary by Yu Yongdin, a former member of the monetary policy committee of the Chinese central bank:

China can break free of the dollar trap

Chinese officials are understandably angry about the irresponsible brinkmanship demonstrated by their American counterparts in recent weeks. Unfortunately, anger counts for little in international finance. The danger facing the US is that after Tuesday’s debt deal any sense of urgency over a dire fiscal situation will dissipate. The danger for China is that it does not learn the right lesson – namely, that now is the time to end its dependency on the US dollar.

China is worried about the possibility of a US default for obvious reasons. As the largest foreign holder of US Treasuries, either a default or a downgrade would bring huge losses. Even after this week’s debt deal, however, the risk remains that US debt will continue to grow to the point where its government is left with no option but to inflate the burden away.
…
If there is any lesson China can draw from the US debt ceiling crisis, it is that it must stop policies that result in further accumulation of foreign exchange reserves. Given that many large developed countries are simply printing money (and the recent rumours are that the US might return to quantitative easing) China must realise that it can no longer invest in the paper assets of the developed world.

The People’s Bank of China must stop buying US dollars and allow the renminbi exchange rate to be decided by market forces as soon as possible. China should have done so a long time ago. There should be no more hesitating and dithering. To float the renminbi is not costless. However, its benefits for the Chinese economy will vastly offset those costs, while being favourable to the global economy as well.

Someday, the Chinese (and the Japanese) will surely catch on – maybe today is that day…

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Roach Calls U.S. Consumers “Zombies”

On June 21, 2011, in Economy, Our Culture, by Tim

Stephen Roach at Morgan Stanley doesn’t hold out much hope for higher levels of GDP growth in the U.S. in the wake of a three decade long credit binge that had Americans borrowing and spending like there was no tomorrow. It turns out there is a tomorrow, and that tomorrow is today, details of this saga provided in this story at CNBC.

U.S. consumers, hobbled by debt and high unemployment, have been deleveraging, a process that will take another 3 to 5 years, Stephen Roach, Morgan Stanley’s non-executive chairman and the author of The Next Asia told CNBC on Tuesday.

According to Roach, American consumers, whose buying habits account for 70 percent of America’s gross domestic product (GDP), had effectively become “zombies” after the financial crisis.

“In the last 13 quarters since the first quarter of 2008, consumer spending growth in the United States has grown an average annual rate of 0.5 percent. Never before has the American consumer…been this weak for this long,” he said. “So something big is going on post-crisis and that’s why I refer to them as the zombie generation.”

Oh well, American consumers have been called worse.

Just the fact that the label “consumers” is so thoughtlessly applied to the greatest generation of shoppers the world has ever seen – as if they were locusts – should have been a tip-off that the late-1990s/early-2000s U.S. spending boom wouldn’t last.

The whole “everyone gets wealthy through asset inflation” approach worked pretty good there for a decade or so, but, it just might be time to finally ditch the old adage, “Never count out the American consumer”. It sounds like Roach has already counted them out.

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