Another week passed where most investors focused on the brewing storm in European debt markets. However, there were some important developments out of China. Last week saw the release of April inflation data, which showed another acceleration where both consumer and producer prices beat estimates. China’s consumer prices were 2.8% higher in April than a year earlier according to the National Bureau of Statistics, while producer prices were up 6.8%. Surveys of economists by Dow Jones
Newswires and Reuters both had expectations for the CPI to gain 2.7% and the PPI to gain 6.5%. Meanwhile, other data released showed Chinese banks extended 774 billion yuan ($113.5 billion) worth of new loans in April, up from 510.7 billion in March according to the central bank. This was well above expectations with analysts having tipped bank lending at 570 billion yuan for the month. In other data released, industrial output rose 17.8% year-on-year, below forecasts of 18.6%, while retail sales increased by 18.5% from a year earlier. Money supply as measured by M2 rose 21.5% at the end of April, compared to a 22% rise at the end of March. Urban fixed-asset investment gains 26.1% during the January-April period, above a 26.0% forecast.
Following the data release, noted China strategist David Roche said China’s economy is teetering on the edge of a major slowdown, though its not a shakeout in the property market that’s about the spark in the distress. Roche, an economic and political analyst who manages the Hong Kong based hedge fund Independent Strategy, says the world’s third-largest economy is now on the brink, faced with the inevitable reckoning that follows an extended bank-lending binge. “We’ve got the beginnings of a credit-bubble collapse in China” said Roche, predicting the economy will likely cool from its stellar double-digit growth rate to a 6% annual expansion as a result. This position is in line with many other analysts who declared the only way China managed to avoid recession during the global crisis was because of bridges, railways and other infrastructure-project spending, estimated to have accounted for about 90% of economic growth last year. Roche estimates that of the 11 trillion yuan extended to these entities, 85% was organized by local government financing vehicles and can never be repaid, and as much as 3 trillion yuan was wasted or stolen. Roche is betting against China’s banking sector on the expectation their share prices will get clobbered as problem loans begin to mount.
Moving on to the banking sector, a proposal by China’s four biggest banks to raise 287 billion yuan ($42 billion) from the securities markets was approved by China’s cabinet. The funds are intended to replenish capital ratios which have become depleted. The funds will be raised in a rights issue in Shanghai and Hong Kong. Banks are improving their capital base ahead of an expected dip in property prices by as much as 30%, in attempt to pre-empt any moves from Beijing to diffuse the housing bubble. Bernstein Research reported that they expect only 4% of outstanding mortgages in China will experience negative equity positions if housing prices fall by 30% across China. However, the report also noted that if there is a 40% dip in house prices, the number of underwater mortgages quickly rises to 16%, which would put banks under pressure.
Elsewhere, Beijing plans to raise the amount of funds it collects from state-owned enterprise beyond the current 5%-10% dividend payout level as part of efforts to drain the entities of excess cash and curb bad investments. The dividend ratio collected by the government is “too low” the Ministry of Finance was reported as saying.
Ahead of the World Cup, which is due to take place in South Africa this summer, Chinese firms are positioning themselves to take advantage of the event by grabbing sponsorship deals, and in some cases, using that as a spring board for longer term deals. Habrin Beer became an official supplier to the World Cup and Gree Electric Appliances is supplying air-conditioning units for tournament facilities. Involvement in the World Cup is serving longer-term goals, for example Yingil Green Energy which is a tournament sponsor is also using the opportunity to set up permanent sales offices in Johannesburg and elsewhere in the country.
Finally, Google Chief Executive Eric Schmidt said at the company’s annual shareholder meeting that Google’s status in the Chinese market is stable, following its decision to serve unfiltered internet search result to mainland China from Hong Kong. “The situation seems to be stable” Schmidt said, while noting the company has been able to maintain its sales force and engineers in China. Google opted in March to start redirecting searches made in mainland China to a Hong Kong based site, in order to avoid local political censorship.
Written by Joel Kruger, Technical Currency Strategist for DailyFX.com
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