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China Cracks Down on Lending

On December 16, 2010, in Asia, Banks, by Tim

The Wall Street Journal reports($) that the Chinese government might be getting a bit more serious about curtailing lending in 2010, that is, with just a couple weeks left to go.

Shanghai regulators ordered banks in Shanghai, China’s financial center, to halt loans for fixed-asset investments—likely affecting construction and property development—for the rest of the year, in a fresh move to contain the flood of credit that has helped accelerate inflation.

The move is unlikely to have a significant economic impact by itself, but it is the latest illustration of the government’s broader struggle to use administrative measures to keep the economy from over-heating—even as other major economies are struggling to kindle healthy growth.

Shanghai’s banking regulator may be feeling the pressure to rein in the banks under its jurisdiction after new loans in the city grew particularly strongly in November.
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Chinese regulators have struggled to control new lending this year after banks circumvented the credit quota the government imposed on them by transferring large chunks of loans to lightly regulated trust companies and other outside investors. Those tactics increase the amount of credit in the economy, which some economists say has in turn helped drive higher consumer prices and further inflate the country’s stubborn property bubble. China’s consumer-price index rose 5.1% in November, the fastest gain since July 2008.

Maybe the Chinese government would be better off having another look at how they calculate inflation – that approach to managing the U.S. economy and its many asset bubbles worked wonders in the U.S. for decades.

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Gold Buying in India to Slow?

On December 16, 2010, in Asia, Commodities, by Tim

Those with a large stake in precious metals might want to pay close attention to the buying habits in rural India since, even though 2010 is expected to be a record year for gold imports, more and more reports are popping up about more and more Indians selling some of their gold to buy consumer goods and to take advantage of other investment opportunities. This Reuters story via Mineweb is typical of the lot.

Indian gold demand may diminish as consumers switch to other options

India’s gold demand will take a hit as increasingly prosperous rural consumers switch to other investment options and step up spending on discretionary items, setting the stage for China to overtake its neighbour as top consumer of the metal.

The Indian buyer has traditionally invested in gold as a hedge for bad times, but with prices of the metal soaring and a wave of strong economic growth swelling the country’s middle class, demand for consumer durables and appliances has spiked.
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Demand for gold from rural areas that account for about 70 percent of annual consumption, which averages 550 tonnes, is likely to fall to 50 percent in coming years, industry watchers say.

“With the government keen to make more savings avenues available, rural consumers would consider the newer instruments, taking away money from gold,” said Pinakin Vyas, assistant vice-president with IndusInd Bank, a large gold importer.

It seems inevitable that China will overtake India as the world’s number one consumer of gold if for no other reason than that they’re moving up from a smaller base. While owning gold has been a cultural norm in both countries for centuries, recent moves by the Chinese government to encourage and facilitate gold ownership (something that most Americans would surely view as quite odd) is likely to make a world of difference in overall demand.

Anyone care to offer a theory as to why the Chinese government would promote gold ownership? I have my own that is deserving of its own post, perhaps next week…

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China Central Bank Balks, Copper Price Soars

On December 13, 2010, in Asia, Commodities, by Tim

An important asset bubble dynamic is on display today as, after rumors of interest rate hikes swirled in China last week and inflation came in hot at 5.1 percent on Friday,  timid central bankers have chosen not to hike lending rates and, now, the price of copper has again soared to fresh record highs at over $4.20 per pound.

Details can be found in this report at Bloomberg and there will be more on this subject tomorrow in an excerpt from the current issue of the Weekend Update at Iacono Research, but, it appears that markets are again “emboldened” by the initial stages of monetary tightening and are bidding copper prices sharply higher (along with gold, silver, and other commodities), much as they did for precious metals in the late-1970s, internet stocks in the late-1990s, and housing about five years ago.

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The U.S. Falls Further Behind in Education

On December 8, 2010, in Asia, Our Culture, by Tim

Reports of how badly the U.S. is falling behind large portions of the rest of the developed world in education were all over the news last night. In this item at the Economist’s Free Exchange blog, the results are shown in graphical form.

Is it just me, or does it come as a surprise to anyone else that they’re so smart in Poland (that is, compared to the U.S.)? And why are they picking on Kyrgyszstan?

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Is the U.S. Worse than Europe? Yes.

On December 8, 2010, in Asia, Debt, by Tim

There’s at least one adviser to China’s central bank who isn’t afraid to say what most central bank officials probably think about the fiscal condition of the U.S. after another $900 billion in tax cuts/stimulus, at least according to this story at Reuters.

U.S. fiscal health worse than Europe’s: China adviser

The U.S. dollar will be a safe investment for the next six to 12 months because global markets are focused on the euro zone’s troubles but America’s fiscal health is worse than Europe’s, an adviser to the Chinese central bank said on Wednesday.

Li Daokui, an academic member of the central bank’s monetary policy committee, said that U.S. bond prices and the dollar would fall when the European economic situation stabilized.

“For now, market attention is still on Europe and for the coming 6-12 months, it will not shift to the United States,” Li said, when asked about U.S. President Barack Obama’s plan to extend tax cuts for all Americans.

“But we should be clear in our minds that the fiscal situation in the United States is much worse than in Europe. In one or two years, when the European debt situation stabilizes, attention of financial markets will definitely shift to the United States. At that time, U.S. Treasury bonds and the dollar will experience considerable declines.”

U.S. Treasury prices fell sharply for a second day on Wednesday as the proposed tax deal sparked concerns over the government’s ability to service its massive debt burden. Moody’s Investors Service said it is worried the tax cuts could become permanent, hurting U.S. finances and credit ratings in the long run.

That”ll be the day – when Moody’s, Fitch, or S&P downgrade U.S. debt…

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Russia, China Dump Dollar for Trade

On November 24, 2010, in Asia, Commodities, by Tim

You’d have to think that the idea of  the Chinese government having to exchange their yuan for U.S. dollars in order to buy oil from Russia has been something of a sore spot in Asian trade for quite a few years. Well, now the two countries are doing something about it by dumping the dollar for bilateral trade as reported at IBT.

China and Russia have said they will renounce the US dollar and use their domestic currencies in bilateral trade.

The announcement came as the leaders of both countries met in St. Petersburg to expand bilateral trade and energy-cooperation between the countries, according to an AFP report on Tuesday.

“We agreed to expand the possibilities for application of national currencies during trade and economic contacts,” said Russian Prime Minister Vladimir Putin after holding talks with the Chinese premier Wen Jiabao.

However, the move is not aimed at challenging the dollar but to protect their economies, as the countries started exploring other options in the wake of the global financial crisis.

With Russian ruble already trading on the Chinese exchange, yuan trade in Moscow is expected to begin in early December.

The bilateral trade between the two countries is estimated to reach above $50 billion by the end of 2010, according to the Russian government. A major chunk of the trade is transacted in US dollars currently.

You’d also have to think that Fed Chief Ben Bernanke’s latest money printing spree in which another $600 billion or so will be printed up to buy Treasuries over the next  six or eight months may have something to do with this…

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