Read what these Chinese formers say in response to the follow article posted by some Indian regarding inflation. The Chinese formers are saying the West don't under China's situation, China's inflation is not as bad as people think, can be manage by the Chinese government easily. Read on to find out why...
China's credit bubble on borrowed time as inflation bites
The Royal Bank of Scotland has advised clients to take out protection against the risk of a sovereign default by China as one of its top trade trades for 2011. This is a new twist.
By Ambrose Evans-Pritchard
05 Dec 2010
It warns that the Communist Party will have to puncture the credit bubble before inflation reaches levels that threaten social stability. This in turn may open a can of worms.
"Many see Chinas monetary tightening as a pre-emptive tap on the brakes, a warning shot across the proverbial economic bows. We see it as a potentially more malevolent reactive day of reckoning," said Tim Ash, the banks emerging markets chief.
Officially, inflation was 4.4pc in October, and may reach 5pc in November, but it is to hard find anybody in China who believes it is that low. Vegetables have risen 20pc in a month.
The Communist Party learned from Tiananmen in 1989 how surging prices can seed dissent. "Inflation is a redistributive mechanism in favour of the few that can protect living standards, against the large majority who cannot. The political leadership cannot, will not, take risks in that regard," said Mr Ash.
RBS recommends credit default swaps on Chinas five-year debt. This is not a forecast that China will default. It is insurance against the "fat tail risk" of a hard landing, with ramifications across Asia.
The Politburo said on Friday that China would move from "relatively loose" money to a "prudent" policy next year, a recognition that credit rationing, price controls, and other forms of Medieval restraint are not enough. The question is whether Beijing has already left it too late.
Diana Choyleva from Lombard Street Research said the money supply rose at a 40pc rate in 2009 and the first half of 2010 as Beijing stoked an epic credit boom to keep uber-growth alive, but the costs of this policy now outweigh the benefits.
The economy is entering the ugly quadrant of cycle stagflation where credit-pumping leaks into speculation and price spirals, even as growth slows. Citigroups Minggao Shen said it now takes a rise of ¥1.84 in the M2 money supply to generate just one yuan of GDP growth, up from ¥1.30 earlier this decade.
The froth is going into property. Experts argue heatedly over whether or not China has managed to outdo Americas subprime bubble, or even match the Tokyo frenzy of late 1980s. The IMF straddles the two.
It concluded in a report last week that there was no nationwide bubble but that home prices in Shenzen, Shanghai, Beijing, and Nanjing seem "increasingly disconnected from fundamentals".
Prices are 22 times disposable income in Beijing, and 18 times in Shenzen, compared to eight in Tokyo. The US bubble peaked at 6.4 and has since dropped 4.7. The price-to-rent ratio in Chinas eastern cities has risen by over 200pc since 2004
The IMF said land sales make up 30pc of local government revenue in Beijing. This has echoes of Ireland where "fair weather" property taxes disguised the erosion of state finances.
Ms Choyleva said China drew a false conclusion from the global credit crisis that their top-down economy trumps the free market, failing to see that the events of 2008-2009 did equally great damage to them though of a different kind. It closed the door on mercantilist export strategies that depend on cheap loans, a cheap currency, and the willingness of the West to tolerate predatory trade.
China is trying to keep the game going as if nothing has changed, but cannot do so. It dares not raise rates fast enough to let air out of the bubble because this would expose the bad debts of the banking system. The regime is stymied.
"The Chinese growth machine is likely to continue to function in the minds of people long after it has no visible means of support. Chinas potential growth rate could well halve to 5pc in this decade," she said.
As it happens, Fitch Ratings has just done a study with Oxford Economics on what would happen if China does indeed slow to under 5pc next year, tantamount to a recession for China. The risk is clearly there. Fitch said private credit has grown to 148pc of GDP, compared to a median of 41pc for emerging markets. It said the true scale of loans to local governments and state entities has been disguised.
The result of such a hard landing would be a 20pc fall in global commodity prices, a 100 basis point widening of spreads on emerging market debt, a 25pc fall in Asian bourses, a fall in the growth in emerging Asia by 2.6 percentage points, with a risk that toxic politics could make matters much worse.
It is sobering that even a slight cooling of Chinas credit growth led to economic contraction in Malaysia and Thailand in the third quarter, and sharp slowdowns across Asia. Japans economy will almost certainly contract this quarter.
Albert Edwards from Societe General said the OECDs leading indicators are signalling a "downturn" for Asias big five (Japan, Korea, China, India, and Indonesia). The China indicator composed by Beijings National Bureau of Statistics has fallen almost as far as it did at the onset of the 2008 crash.
"I remain convinced we are witnessing a bubble of epic proportions which will burst catching investors as unawares as the bursting of the Asian bubbles of the mid-1990s. Ignore these indicators at your peril," he said
In a sense, inflation is a crude way of curbing Chinas export surpluses and therefore of resolving a key trade imbalance that lay behind the global credit crisis.
If China continues to stoke inflation and blaming the US Federal Reserve for its own errors help there will no longer be any need for a yuan revaluation against the dollar, and the US Congress can shelve its sanctions law.
On a recent visit to a chemical plant in Suzhou, I was told by the English manager that wage bonuses for staff will average nine months pay this year. This is what it costs to keep skilled workers. His own contract is fixed in sterling, which has crashed against the yuan over the last two years. "It is a sobering experience," he said.
China may have hit the "Lewis turning point", named after the Nobel economist Arthur Lewis from St Lucia. It is the moment for each catch-up economy when the supply of cheap labour from the countryside dries up, leading to a surge in industrial wages. That reserve army of 120m Chinese migrants everybody was so worried about four years ago has already dwindled to 25m.
Chinas problem is that this is happening just as the aging crisis starts to bite. The number of workers will decline in absolute terms within four years. The society will then tip into precipitous demographic decline. Unlike Japan, it will become old before it is has built a cushion of wealth.
If there is a hard-landing in 2011, Chinas reserves of $2.6 trillion or over $3 trillion if counted fully will not help much. Professor Michael Pettis from Beijing University says the money cannot be used internally in the economy.
While this fund does offer China external protection, Mr Pettis notes wryly that the only other times in the last century when one country accumulated reserves equal to 5pc to 6pc of global GDP was US in the 1920s, and Japan in the 1980s. We know how both episodes ended.
The sons of Mao insist that they have studied the Japanese debacle closely and will not repeat the error. And I can sell you an ocean-front property in Chengdu.
Person 1
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If Chinese economy takes a hit, raw material exporters, like India, will be hit too.
BTW, vegetable prices in China market were cut in half in Nov, only several days after Chinese gov took actions.
Even many speculate that China has property bubble, but Beijing's or shanghai's property price is still not higher than India's Mumbai. Don't foegt China's economy is almost 4 times of India's.
China is in fast track of urbanization, 25 million people are moving into cities each year. China's apartment supply will lag behind of demands for long time. Another thing is that 70% of Chinese urban residents got their apartment for almost free during socialism era. Price jump or drop will not hurt these people too much. For others, many apartments are fully paid or they paid minimum of 30% down payment. All these have nothing in common with the bubble in Japan and US. In other words, Chinese banks are still safe.
Person 2
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Chinese banks also maintain a reserve ratio much higher than the US. It takes time to retire loans since loans are contract specified and enforced legally, thus total loan value will take time to contract from the record amount of loans signed in 2009.
In the end, bear investors haven't made a single cent on China in the last 20 years, not compared to bull trenders on China.
person 3
---------Many "experts" simply ignore the difference of economical system in China and western countries. In China, gov has huge financial resources (not just print bills as US is doing)to deal with any problems.
Person 4
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I just spent a semester studying advanced international monetary economics, and this stuff is very complicated. My personal opinion is that China's leaders took a very conscious and informed decision on the choice of its monetary policies, all policies have advantages and disadvantages and Chinese leaders know very well what their objectives are and what costs they are incurring to attain those objectives. Current generation of Chinese leaders are highly educated and consists of a large portion of economics, engineering and science majors, and they know the importance of looking at these issues from an objective and scientific point of view.
The problems between China and US are also structural, its not just as easy as making China revaluate the Yuan, infact, that will do close to nothing, the trade gap exploded after China revaluated the Yuan in the 2000s, exactly the opposite of what many US politicians claim a revaluation's effects are. What we see is friction between 2 economies in very different positions and 2 ends of the monetary policy spectrum.
What I see in the US is a history of irresponsibility, starting from the Bretton Woods peg, to the Reagan Dollar, to the Plaza Accord, and continuing to current events with China. America's love to point its fingers internationally and never at itself continues to amaze me time after time. Current American fiscal and monetary problems resemble the Reagan administration down to the smallest detail, and America is simply pushing the exact same agenda which in the Reagan administration proved to be incapable of fixing the basis of its problems. I reckon it is like putting a band-aid over a huge gashing wound and expecting it to magically
heal itself.
Person 5
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Here is an article on this matter of inflation:
China's growth projected to be 10.5 percent in 2010, 9.6 percent in 2011: IMF
WASHINGTON, Oct. 6 (Xinhua) -- China's growth is projected to average 10.5 percent in 2010 and 9.6 percent in 2011, driven by domestic demand, the International Monetary Fund (IMF) said in a report Wednesday.
The Washington-based international lending agency made the projection for the annual fall meetings this weekend of the 187-nation IMF and its sister lending organization, the World Bank.
"The slight moderation in recent activity is expected to continue through 2011 in light of tighter quantitative limits on credit growth, measures to cool off the property market and limit bank exposure to this, and the planned unwinding of fiscal stimulus in 2011," the IMF said in its report.
The report said this year's sustained growth in retail sales and industrial production confirms that private sector activity has advanced beyond the lift from government stimulus.
"On average over 2010-11, private domestic demand is poised to contribute two-thirds of near term growth, and government activity about one third, whereas the contribution from net exports will be close to zero," the report said.
Despite the robustness in domestic demand, the pickup in inflation in 2010 reflected mainly higher food prices rather than core inflation, the report said.
The report said China's increasingly wide trading network is driving growth in numerous economies, especially commodity exporters.
The report said Asia's medium-term growth depends on the rebalancing of drivers of growth -- greater reliance should be put on domestic markets instead of foreign demand.
The report said such a rebalancing in China, the world's second largest economy, is critical to enhance the role of household consumption in domestic growth.
The report also recommended that China implement reforms to health care, education, and pension systems to enhance the social safety net.
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