HowWealthWorks.com

[Suresh]

Bloomberg: China Slashes Lending Rate to Support Slowing Economy
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The key one-year lending rate will drop 108 basis points to 5.58 percent, the People's Bank of China said on its Web site today. The deposit rate will fall by the same amount to 2.52 percent. The changes are effective tomorrow.

China's economy, the biggest contributor to global growth, will expand at the slowest pace in almost two decades next year, the World Bank forecast yesterday. Manufacturing shrank by the most on record in October as recessions in the U.S., Japan and Europe cut demand for exports and property prices fell at home.
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The bank lowered the reserve requirement for the biggest banks to 16 percent from 17 percent, effective Dec. 5. The requirement for smaller banks will fall to 14 percent from 16 percent. The central bank also reduced the interest rate that it pays on reserves deposited by commercial banks to encourage lending.

Cabinet Measures

Two hours after the rate cut, China's cabinet said it was studying extra measures to help struggling companies in the steel, auto, petrochemical and textile industries; to increase key commodity reserves; and to expand insurance for the jobless.

The government will also push ahead with fuel-price and tax reforms to help boost consumption, the cabinet said. A fuel-price cut would be the first in two almost years. The government regulates energy prices to contain inflation, which fell to a 17- month low in October.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Bloomberg: Yuan Falls, Erasing Weekly Advance, as China Limits Gains
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Commerce Minster Chen Deming said yesterday that China should maintain a stable exchange rate. Policy makers have stalled the yuan’s gains since the end of July as a government report showed the world’s fourth-largest economy expanded 9 percent in the third quarter, the slowest pace since 2005.

“We will see more slowdown next year,” said Liu Dongliang, a Shenzhen-based foreign-exchange analyst at China Merchants Bank Co., the country’s sixth largest lender. “The worsening fundamentals give almost no room for continued yuan appreciation.”

The yuan fell 0.25 percent to 6.8465 a dollar as of 5:30 p.m. in Shanghai, paring this year’s advance to 6.7 percent, according to the China Foreign Exchange Trade System.
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Bloomberg: China Central Bank Cuts Key Rates for Fifth Time in 3 Months
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The key one-year lending rate will drop to 5.31 percent from 5.58 percent, the People’s Bank of China said on its Web site today. The deposit rate will fall by the same amount to 2.25 percent from 2.52 percent. The changes are effective tomorrow.

It also cut the proportion of deposits that lenders must set aside as reserves by 50 basis points to 15.5 percent from 16 percent for big banks and to 13.5 percent from 14 percent for smaller ones.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

It's incredible to think despite China's credit growth in 2009Q1 of more than 30%, and M2 money supply growth of 25%, China's economy only grew about 6% year-over-year in the first quarter. Yu Yongding, director at the Chinese Academy of Social Sciences and former adviser to the People's Bank of China noted "that China has the highest M2 money supply-gross domestic product ratio in the world - at 180% of GDP - ... a 'very scary' prospect in terms of the inflationary outlook." When the excess money and credit supply makes its way into its producer price inflation rate, China's next export may be rising consumer price inflation rates around the world -- something we've expected since 2006 to eventually see.

By way of comparison to money supply growth rates in other regions, consider a chart from Standard Chartered depicting M2 expansion rates from around the world (hat tip to FT Alphaville):

[Suresh]

Bloomberg: China Bank Lending Funneled Into Stocks, News Says

Chinese new bank loans worth about an estimated 1.16 trillion yuan ($170 billion) were invested in the stock market in the first five months of this year, China Business News reported, citing a government economist.

That’s 20 percent of the 5.8 trillion yuan loans banks extended in the period, the Shanghai-based newspaper said, citing Wei Jianing, a deputy director at the macro-economics department of the Development and Research Center under China’s State Council.
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China’s Shanghai Composite Index has rallied 61 percent this year, the world’s third-best performer, after plunging a record 65 percent in 2008. The nation’s property sales jumped 45.3 percent to 1 trillion yuan in the first five months, the statistics bureau said June 11, compared with a 19.5 percent decline for all of 2008.

Record lending after the central bank scrapped loan quotas in November last year is helping the economy to revive after the weakest growth in almost a decade.

Some new loans must have entered the nation’s stock and property markets in the first quarter, Cheng Siwei, former vice chairman of the standing committee of the National People’s Congress, said June 27.

Market Rebound

About 2.4 trillion yuan worth of bank loans were invested in projects in that quarter, Cheng said, leaving a further 2.18 trillion yuan in new loans of the total.

“Where did it go? It’s undeniable that a portion of the lending may have flowed into stock and real estate markets and triggered the rebound in these two markets,” the former official said at a financial forum in Ningbo city in eastern China.

A further 30 percent of the loans in the first five months may have been used for discounted bill financing, or short-term credits used to fund working capital needs, China Business News said today. These funds may help form a financial bubble, the newspaper cited Wei as saying, adding this is the economist’s personal view.
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[emphasis added]
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Telegraph Media Group: China's banks are an accident waiting to happen to every one of us
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The half-reformed economy of the People's Republic cannot absorb the $1,000bn (£600bn) blitz of new lending issued since December.
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Fitch Ratings has been warning for some time that China's lenders are wading into dangerous waters, but its latest report is even grimmer than bears had suspected.

"With much of the world immersed in crisis, China appears to be one of the few countries where the financial system continues to function largely without a glitch, but Fitch is growing increasingly wary," it said.

"Future losses on stimulus could turn out to be larger than expected, and it is unclear what share the central and/or local governments ultimately will be willing or able to bear."

Note the phrase "able to bear". Fitch's "macro-prudential risk" indicator for China threatens to jump from category 1 (safe) to category 3 (Iceland, et al). This is a surprise to me but Michael Pettis from Beijing University says China's public debt may be as high as 50pc-70pc of GDP when "correctly counted".

The regime is so hellbent on meeting its growth target of 8pc that it has given banks an implicit guarantee for what Fitch calls a "massive lending spree".

Bank exposure to corporate debt has reached $4,200bn. It is rising at a 30pc rate, even as profits contract at a 35pc rate.

Fitch traces the 2009 bubble to the central bank's decision to cut interest on reserves to 0.72pc. Bankers responded to this "margin squeeze" by ramping up the volume of lending instead. Over half the new debt is short-term. Roll-over risk is rocketing. China's monetary stimulus since November is arguably more extreme than the post-Lehman printing of the US Federal Reserve, though less obvious to the untrained eye.
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Andy Xie, a Sino-bear and commentator for Caijing, said Western analysts are in for a rude shock if they think that China's surging demand for raw materials implies genuine recovery.

Commodity speculators have been using cheap credit to play the arbitrage spread between futures and spot on the oil markets. They have even found ways to trade lumber to iron ore by sheer scale of leverage. "They've made everything open to speculation," he said.

Mr Xie thinks the spring recovery is an inventory spike, to be followed a double-dip downturn into next year as stimulus wears off.

Reformers know what must be done to boost consumption. China needs a welfare revolution. But creating a social security net takes time, and right now Beijing is facing a social crisis as 20m jobless workers retreat to the rural hinterland.

So the regime is resorting to hazardous methods to keep excess factories humming: issuing a "Buy China" decree: using a plethora of export subsidies; holding down the price of coke, bauxite, zinc and other resources to lower production costs (prompting a complaint from America and Europe); and suppressing the yuan, again.

Protectionism is a risky game for a country that lives off global trade and runs a surplus near 10pc of GDP. Mr Pettis said he fears China is nearing its "Smoot-Hawley moment", repeating the US tariff blunder of 1930 that brought the world crashing down on Washington's head.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Vitaliy Katsenelson poses two explanations for staggering growth in China's domestic economy, one being outright lies and the other being 28.5% money supply growth. The two explanations may not be inconsistent as Mr. Katsenelson suggests though. China's debt-financed infrastructure spending may offset cutbacks in corporate and household expenditures. But, increase in energy consumption for producing infrastructure may not offset the decrease in the energy consumption of corporations and households. Moreover, once the infrastructure is completed, that increased energy consumption disappears.
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ContrarianEdge: The Simple Math of “Staggering” Chinese Growth
By Vitaliy Katsenelson
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Chinese non-export economy grew 23% in June! Before you start googling for that number, let me warn you. You won’t find it. I’ve computed it using fifth grade math.

Here is what we know: exports constitute about 35% of the Chinese economy and they dropped over 20% in June, while the Chinese economy (GDP) grew 8%. So the “X” is the growth rate of 65% of Chinese non-export economy.

0.35 x (-20%) + 0.65 x (X%) = 8%. If you were to solve for X you get 23%.

Enough with math, let me put this number in perspective. Chinese non-export economy grew at 3 times the rate of their GDP. I only have two, very contradictory, explanations for this:

1) The Chinese government is lying through its teeth about its economic miracle growth. It has the incentives to interrogate economic data until it confesses to the party line numbers. This is very plausible, as for months, the Chinese government was showing positive GDP growth while its consumption of electricity was declining. Obviously this doesn’t make much sense. Also, China is not famous for production of intellectual type goods (i.e. software, creation of toxic financial products – that is our specialty) which scale a lot better and don’t require proportional electricity consumption to grow GDP. China makes stuff and to make stuff you need a lot of electricity. Also, even if the growth is completely driven by building high story buildings (even if they collapse), highways, schools - these activities still require a lot of electricity.

2) The numbers are real, the monetary base was up 28.5% in June (again if you can trust that number) and thus the quality of growth is horrible.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

We can't help but wonder whether rampant money supply growth and cheap and easy credit in China has fostered overinvestment and malinvestment in infrastructure and/or production capacity. China may be setting itself up for its own version of Japan's Lost Decade.
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China Financial Markets: Squeezing out the exporters
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My friend Dan Rosen, of the Rhodium Group, has a very illuminating July 17 report that shows the composition of Chinese growth in the past decade. He shows that for the past five years net exports accounted for about 10% to 15% of Chinese GDP growth, before collapsing to minus 41% in 2009 YTD.

Until recently investment’s share of GDP growth peaked at around 65% in 2003 – a very high share by any standard – and going back the full thirty years of China’s reform period achieved an historical high astonishing of 81% in 1985. From 2005 to 2008 the investment share of GDP growth averaged around 40% – still high – and then in the first half of this year accounted for a mind-boggling 88% of this years GDP growth.

This year’s growth, in other words, is almost wholly a function of the massive increase in investment, and this increase in investment started out largely in the form of reopening production facilities and producing more “stuff”, without any significant rise in consumption. As we know, when production increases faster than consumption, either the trade surplus or inventories must rise.
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Financial Times: I've been an optimist on China. But I'm starting to worry
By Stephen Roach
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After coming to a virtual standstill in late 2008, at least as measured quarter-to-quarter, economic growth accelerated sharply in spring 2009.

A back-of-the envelope calculation suggests China may have accounted for as much as 2 percentage points of annualised growth in inflation-adjusted world output in the second quarter of 2009.
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Fearful that its recent economic short- fall would deepen, Chinese policymakers have opted for quantity over quality in setting macro-strategy, the centrepiece of which is an enormous surge in infrastructure spending funded by a burst of bank lending.
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Infrastructure expenditure (including Sichuan earthquake reconstruction) accounts for fully 72 per cent of China's recently enacted Rmb4,000bn ($585bn) stimulus. The government urged the banks to step up and fund the package. And they did. In the first six months of 2009, bank loans totalled Rmb7,400bn - three times the pace in the first half of 2008 and the strongest six-month lending surge on record.

This outsized bank-directed investment stimulus leaves little doubt as to how bad it was in China in late 2008 and early 2009. An unprecedented external demand shock, stemming from rare synchronous recessions in the developed world, devastated the export-led Chinese growth machine. That triggered sackings of more than 20m migrant workers in export-intensive Guangdong province. Long fixated on social stability, Beijing moved to arrest this deterioration. The government was determined to do whatever it took to restore rapid growth.

Yet there can be no avoiding the destabilising consequences of these actions. Surging investment accounted for an unprecedented 88 per cent of Chinese GDP growth in the first half of 2009 - double the average contribution of 43 per cent over the past decade. At the same time, the quality of Chinese bank lending most assuredly suffered from the rash of credit disbursements in the first half of this year - a trend that could sow the seeds for a new wave of non-performing bank loans.
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By 2007, investment and exports accounted for about 80 per cent of Chinese GDP. And now, in the face of a severe global recession, China has compounded the very problems the premier warned of: aiming a massive liquidity-driven stimulus at its most unbalanced sector.
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Unlike most, I have been a steadfast optimist on China. Yet I am starting to worry. A macro strategy that exacerbates worrying imbalances is ultimately a recipe for failure. In many respects, that's what the global crisis and recession of 2008-09 are all about. China will not get special dispensation from the most critical lesson of this post-crisis era.
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New York Times: Home Builder’s Shares Skyrocket in Shanghai Debut
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China State Construction Engineering, whose $7.3 billion initial public offering last week was the world’s biggest in more than a year, jumped as much as 90 percent before closing 56 percent higher at 6.53 yuan, or 96 cents, as investors ignored the company’s relatively high valuation and a 5 percent slide in the overall market to pile into the stock as it opened to general trading Wednesday.

Chinese shares have risen sharply this year, thanks to a government stimulus package that includes massive spending on infrastructure, housing and other construction. This has buoyed the earnings prospects of companies like China State Construction and others in the sector and helped to explain the enthusiastic demand for the stock.
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Bank lending has been a main driver of the solid economic growth in China....
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Stocks in Shanghai fell about 5.8% overnight. We don't know whether this is a one-day correction, or the start of something more serious. We can, however, observe whether Chinese stocks reflect strong underlying fundamentals. As you have gathered in this thread, the fundamentals supporting the current upward trend in Chinese stocks are artificial. That is, they are based on direct government largesse and government-directed cheap and easy lending, not on export strength or organically grown domestic consumption.

There's at least one money manager that is touting dividend-paying Chinese shares as the correct play for the times. Buying Chinese shares now appears ill-timed, as valuations reflect unsustainable assumptions of future demand. If dividend-paying Chinese shares are indeed a smart play, then there's time enough to get into them at a lower price -- probably after the current deflationary period runs its course.
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New York Post: YOU KIDDIN' ME?
QUESTIONING CHINA'S ROBUST REBOUND
By VITALIY N. KATSENELSON
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A paper published by John Makin at American Enterprise Institute explains very well how Chinese got their GDP growth:

"Once China had announced its 8 percent growth target, it began to disburse funds directed at a sharp increase in public-works spending," Makin wrote.

"It is important to understand that the disbursal of funds is recorded as GDP growth," Makin continued. "So the government can easily control the pace of growth by the pace at which it releases funds that have already been allocated in the stimulus package to the creation of higher production or growth numbers."
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"Funds disbursed for fixed-asset investment by state-owned enterprises or provincial governments are counted as having been spent when they are disbursed," Makin noted.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

China's money supply growth rate is 29%, which makes its 8.3% economic growth rate for 2009 less impressive than it might otherwise look.
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Bloomberg: China to Maintain Policies, Boost Consumption in 2010
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The government will ensure policy continuity, boost consumer spending and adjust growth models, the official Xinhua news agency reported, citing the annual central economic work conference between Dec. 5 and today in Beijing. President Hu Jintao and Premier Wen Jiabao attended the meeting, Xinhua said.
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The Communist Party’s Politburo said last month that existing monetary and fiscal policies would be maintained in 2010 and Premier Wen rebuffed calls for the yuan to strengthen.

China’s economic growth will accelerate to 9.1 percent in 2010 from an estimated 8.3 percent this year, the government- backed Chinese Academy of Social Sciences said in its economic outlook published today.

Growth accelerated to 8.9 percent between July and September, after plunging to 6.1 percent in the first quarter of this year, as the government’s $586 billion stimulus package spurred investment and consumption.
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China's Financial Markets: The difficult arithmetic of Chinese consumption
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Compared to non-Asian countries Chinese consumption rates are astonishingly low. Consumption for most European countries lies in the 55-65% range. Consumption for other developing countries can easily fall in the 65-70% range – where much of Latin America falls. US consumption has been around 70-72% in recent years.

Even by Asian standards Chinese consumption is off the charts. South Korean and Malaysian consumption is around 50% of GDP (although during and after the Asian crisis Malaysian consumption did drop to around 45% of GDP, before recovering). Other major Asian economies, like India, Japan, Taiwan and Thailand, show consumption in the 55-60% of GDP range. Compared to those numbers China’s 35% is astonishing, even if, as some claim it may be somewhat understated (which by the way may be true of other developing countries).
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Just growth in Chinese consumption alone does not help if it grows in line with GDP, and less so if it grows slower than GDP. In that case the imbalances will get worse, and while the impact on the trade account can be temporarily disguised if investment continues to surge, ultimately it just postpones the needed adjustment (and increases the cost if the investment surge is misallocated).

What kind of consumption growth will we need for the country to rebalance? The numbers are a little worrying. If China grows by 8% a year, consumption would have to grow by a little over 11% to raise the consumption share of GDP from 35% to 36% in one year. It would have to grow by a little over 9 1/2% annually to do it in two years. Consumption, in other words, must grow substantially faster than GDP for the rebalancing even to begin to take place. This is arithmetically true because China begins the process with such a low consumption ratio.

Look at it over the longer term. Just to return consumption to 40% of GDP over the next five years (and even that level is widely considered to be way too low, and probably unprecedented in the world excluding recent Chinese history), 8% average annual growth rates in GDP would require a tad under 11% annual growth in consumption. Similarly, 7% average annual GDP growth rates would require that consumption grow annually over the next five years by nearly 10%. To bring Chinese consumption in 20 years up to 50% of GDP, which is the low end for other high saving Asian countries, and far lower than any other large economy in Asia (and remember that large economies are less able to rely on exports to fuel growth than small countries), 7% annual GDP growth would require average annual consumption growth of just under 9% for twenty years.

In other words while GDP growth slows significantly from its 12-13% rate of the past several years, consumption will nonetheless have to surge at rates far in excess of the 8-9% growth rates of recent years in order for even a small, partial rebalancing to take place. I don’t think I have ever seen a case in which consumption has grown at nearly that rate for any length of time. I believe if China pulled it off it would be unprecedented.

Of course this will not be easy, and I think too many commentators underestimate the magnitude of the problem. China’s rebalancing process will even in the most optimistic of cases take many years before it can even reach the lowest consumption levels reached by other Asian countries that pursued investment-driven policies accompanied by too-low interest rates and undervalued currencies. This will be a long haul, and if I am right – if we need to see a transfer of income back for the state sector to the household sector really to get it going – we should expect much lower GDP growth rates over the next decade than anyone is currently projecting.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Bloomberg: China Asset Bubbles Will Burst on Inflation, Xie Says
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“It’s a less glamorous version of the Greenspan bubble and the story will end with inflation,” [former Morgan Stanley chief Asian economist Andy] Xie said, referring to former Federal Reserve Chairman Alan Greenspan, who was once regarded by some observers as the greatest central banker and has seen his legacy criticized since the U.S. subprime-mortgage market collapsed in 2007.
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“Markets are going to struggle in the next three to four months and then afterwards, China’s lending policy may help it along in the second half,” he said. “It’s possible that the A- share market may make a new high in terms relative to the Aug. 4 high this year.”

Xie said today that Hong Kong stocks are also about 30 percent “overvalued” and may face a “major correction” in the next four to five months as the market factors in a possible stimulus exit by the Fed. The market may recover in the second half, he predicted.

Morgan Stanley, Xie’s former employer, said this week that China’s stock market is headed for a “boom and bust” in 2010 because a rally in the first half may stall as inflation accelerates and the government withdraws some stimulus. The brokerage predicted that the MSCI China Index may rise to 81.7 next year, 29 percent higher than yesterday’s close.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

FT Alphaville: China’s (un)real GDP

Here’s a chart showing China’s GDP growth rate in real and (un)real terms from Sean Corrigan at Diapason Commodities:



As Corrigan observes, while real GDP rose from a worthy 7.9 per cent year-on-year growth rate in June to a commendable 10.7 per cent by year end — the nominal rate shot up from an anaemic 4.0 per cent to a shocking 26.9 per cent in the same period.

In Corrigan’s words, that implies:

[Suresh]

Bloomberg: China’s 2009 State Land Sales Cover 40% of Stimulus Plan’s Cost

China’s government netted 1.6 trillion yuan ($234 billion) from land sales last year, or 40 percent of the cost of the nation’s two-year stimulus package.

The figures, released this week by the Ministry of Land and Resources, showed state land sales rising to a record, helping to fund the 4 trillion-yuan plan.
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“Local governments were the biggest beneficiaries of China’s property boom in 2009,” said Xing Ziqiang, an economist at China International Capital Corp. in Beijing. “They may find that their financing is squeezed this year.”

China sold or allocated 319,000 hectares (788,266 acres) of land in 2009, 44 percent more than a year earlier and the equivalent of three times Hong Kong’s land mass. Sales revenue climbed 63 percent, according to the ministry’s data. Land sold for “real-estate use” accounted for 84 percent of sales by value, with property used for infrastructure and industrial purposes accounting for the rest.

Low interest rates, record lending and surging housing prices have encouraged developers to buy land and build up reserves of property.
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The 1.6 trillion yuan of income from land sales last year, the equivalent of about 5 percent of China’s gross domestic product, came after the land ministry boosted supply and simplified procedures for buyers to bolster the economy during the financial crisis, Xu said.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Associated Press: Report: China restricts loans to local government
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Regulators have ordered China's banks to step up lending to private businesses while restricting credit to local government projects, the industry regulator and a state newspaper said Wednesday.

The moves reflect government efforts to channel more credit to China's private sector while preventing overspending on unneeded real estate and other projects that Beijing worries could lead to financial problems.

Banks were ordered to lend more to small businesses this year than they did in 2009, the China Banking Regulatory Commission said on its Web site. That follows repeated government promises to help entrepreneurs who produce the bulk of China's growth and new jobs but largely missed out on stimulus aid last year.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Ambrose Evans-Pritchard posits that protectionism hurts the country with the trade surplus more than the country with the trade deficit. Presumably, Mr. Evans-Pritchard is claiming that if the currency received by the trade-surplus country can only be used to buy goods and services from the trade-deficit country, then foreign exchange in the trade-deficit country's currency is diminished in value if the trade-deficit country imposes protectionist measures against the trade-surplus country. For example, tariffs on Chinese goods and services would diminish the value of U.S. dollars already held in China's foreign exchange holdings by revaluing downward how many yuan can be exchanged for U.S. dollars.

I don't know what to make of this argument. First, it seems to ignore the possibility that China could re-balance its export-dominated economy so that more of the economy is directed to domestic needs. Second, it seems to ignore the fact that a great many products on the world market are denominated in U.S. dollars. If China opens up the foreign exchange vaults, it could drive up prices of commodities that the U.S. needs.

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Telegraph Media Group: Is China's Politburo spoiling for a showdown with America?
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Michael Pettis from Beijing University argues that China's reserves of $2.4 trillion - arguably $3 trillion - are a sign of weakness, not strength. Only twice before in modern history has a country amassed such a stash equal to 5pc-6pc of global GDP: the US in the 1920s, and Japan in the 1980s. Each time preceeded depression.

The reserves cannot be used internally to support China's economy. They are dead weight, beyond any level needed for macro-credibility. Indeed, they are the ultimate indictment of China's dysfunctional strategy, which is to buy $30bn to $40bn of foreign bonds every month to hold down the yuan, refusing to let the economy adjust to trade realities. The result is over-investment in plant, flooding the world with goods at wafer-thin export margins. China's over-capacity in steel is now greater than Europe's output.

This is catching up with China, in any case. Professor Victor Shuh from Northerwestern University warns that the 8,000 financing vehicles used by China's local governments to stretch credit limits have built up debts and commitments of $3.5 trillion, mostly linked to infrastructure. He says the banks may require a bail-out nearing half a trillion dollars.

As America's creditor - owner of some $1.4 trillion of US Treasuries, agency bonds, and US instruments - China can exert leverage. But this is not what it seems. If the Politburo deploys its illusiory power, Washington can pull the plug on China's export economy instantly by shutting markets. Who holds whom to ransom?
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Contrary to myth, the slide to protectionism after the 1930 Smoot-Hawley Tariff Act did not cause the Depression. Trade contracted more slowly in the 1930s than this time. The Smoot-Hawley lesson is that tariffs have asymmetrical effects. They devastate surplus countries: then America. Deficit Britain did well by retreating into Imperial Preference.

Barack Obama has never exalted free trade. This orthodoxy is, in any case, under threat in the West. His top economic adviser Larry Summers let drop in Davos that free-trade arguments no longer hold when dealing with "mercantilist" powers.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

The Shanghai Composite is presently around 2688 points.
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CapitalVue News: Andy Xie: China Asset Bubble Triggered By Long-term Low Interest Rate

Andy Xie, formerly chief Asia economist at Morgan Stanley, said the Chinese real estate market is 100 percent overvalued and that the intrinsic value of the Shanghai Composite Index is 2,000 points, reports 163.com. Xie compared the current Chinese housing market to the Japanese housing market of the 1980s and 1990s and predicts China's stock and real estate markets will decline slightly in the fourth quarter of this year, with a large decline coming in 2012. Xie said the asset bubble was triggered by long-term low interest rates and an over-supply of money.

In December, 1999, broad M2 money supply in China was 11.76 trillion yuan, rising to 60.62 trilion yuan in December 2009, said the report. The 415 percent rise in the money supply was matched by a 453 percent rise in Beijing real estate prices, said the report.

The average home prices in Shanghai in 2000 was 3,326 yuan per square meter, soaring to 26,000 yuan per square meter in Apirl 2010, said the report.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.