Signs of Chinese financial instability provoke market nervousness

It's interesting how they are playing this out. I read this this morning before I headed out for work. I thought I'd post it and see what some of our more economically astute members thought. I'll check back after work.

Signs of Chinese financial instability provoke market nervousness

News that the Chinese central bank will tighten credit for the second time this year provoked a nervous reaction in share and commodity markets. While the measure was relatively small—an increase in the reserve requirement ratio for banks by half a percentage point from February 25—investors took it as a further sign of instability in the Chinese economy.

The reaction highlights the importance of China and its continued growth to the global economy. Massive bank lending was the main component of the stimulus measures that kept China growing at 8.7 percent in 2009. However, last year’s flood of easy credit—9.6 trillion yuan ($US1.4 trillion), double the 2008 figure—has fuelled speculation in real estate and shares that it is simply unsustainable.

Despite Beijing setting a lower lending target of 7.5 trillion yuan for 2010, new loans in January alone reached 1.39 trillion yuan—more than for the previous three months. Property prices were up 9.5 percent in January from a year earlier, generating fears in ruling circles that China could face an asset bubble collapse on the scale of Japan in the early 1990s. At the same time, the government is concerned that further tightening of bank lending will slow economic growth.

Simply to rein in inflation? Never underestimate the Chinese when it comes to numbers.

This is certainly something to keep an eye on.

The global financial crisis cut the price of Chinese stocks in half, but the subsequent recovery has taken them back into bubble territory. If you factor in an average of earnings over the past 10 years to take out some of the volatility, Chinese stocks now trade at 50 times the average 10-year earnings per share. The comparable figure for U.S. stocks is 15 -- and even that's not cheap by historical standards.

The bubble is even more apparent in real estate. According to figures in a Financial Times column by Peter Tasker, a Tokyo analyst for Arcus Research, the Tokyo real-estate bubble of 20 years ago peaked with apartment prices at 12 to 15 times average household income. In major Chinese cities now, the comparable price for an apartment is 15 to 20 times average household income.

When real-estate speculation exceeds that of the Japanese real-estate bubble, investors are right to worry. And that's why even some minor saber rattling, such as the increase in reserve requirements by the People's Bank of China on Tuesday, is enough to rattle China's stock markets and developing markets around the world.

articles.moneycentral.msn.com...

Just like the Japanese seemed destined to "take over" economically a few decades ago, maybe the chinese will also end up being a flash in the pan.

China is all smoke and mirrors. Every country in the world is living behind a facade!

Originally posted by centurion1211
Just like the Japanese seemed destined to "take over" economically a few decades ago, maybe the chinese will also end up being a flash in the pan.

Don't think so.

The heat has cooled down, for sure, but the Pan is still on the burner.

reply to post by centurion1211

Just like the Japanese seemed destined to "take over" economically a few decades ago, maybe the chinese will also end up being a flash in the pan.

:shk:

That would be disappointing news to all of those who have already crowned China as the world's superpower and, nonetheless, our daddy.

reply to post by jam321

...China as the world's superpower and, nonetheless, our daddy.

Erm... make that Japan (for now)...

Japan Overtakes China

Originally posted by centurion1211
Just like the Japanese seemed destined to "take over" economically a few decades ago, maybe the chinese will also end up being a flash in the pan.

The only reason Germany and Japan cannot overtake America are their smaller sizes. If they have just 75% of US population and land area, America would eat dust.

reply to post by SLAYER69


Chinese Premier Warns of Challenges to Economy Dated 2/2/10

This is only significant because the Chinese Premier Wen Jiabao is warning that things are not looking good, that there is trouble on the horizon. "The economic situation at home and abroad remains complex, with increased uncertainty in the international market" Now that is an understatement!

The Chinese real estate bubble, the rise in bad debt, inflexibility in decision making, good old boy banking and business and a top heavy one party system has put China in a severely compromised situation compounded by the worldwide economic and financial collapse.

They are trying harder, however as evidenced here: "China beat the global financial crisis with a democratic and scientific approach to decision making, borrowing from experts' wisdom and taking into account citizens' concerns, he said

I say just watch how often China tightens its bank lending the next few months as an indicator of how serious China thinks its bank problems are becoming. The central committee has a very tight hand on economic affairs and is in a good position to apply the brakes.

Nevertheless, I've been saying China is in big trouble in the long run and especially now. China is Japan on steroids! Remember Japan in the early '90s?

Seems like China can't dump US dollar without hurting its own economy.

China can reduce its holdings of dollar assets, but should not "overdo" it as the country tries to adjust the structure of its dollar asset-dominated foreign exchange reserves, analysts said.

The country's foreign exchange reserves amounted to nearly $2.4 trillion by the end of last year - a third of the global total - raising concerns that the massive scale of the holdings could backfire.

About 70 percent of the reserves are dollar assets, according to various estimates by scholars, and the high proportion means that once the dollar's value slumps, China will incur huge losses.

But it is equally difficult for China to dump its dollar assets because that could lead to a domino effect on other investors and cause depreciation of China's holdings.


"China is in a dilemma," said Dong Yuping, economist at the Chinese Academy of Social Sciences.

www.chinadaily.com.cn...

There is a huge commercial real estate problem in China that the West is hardly aware of. Over the past decades an insane amount of office space has gone up all over China...especially where its not needed. A lot of "growth" was based on investment inputs rather than actual outputs. Growth that relies on investment input ALWAYS leads to diminishing returns...crack open your econ 101 or 102 textbook. Academic economics is a farce in many ways but they sure got that one right.

Some say the planet earth has never seen the amount of overcapacity anywhere -- including the US and Japan real estate bubbles -- in history.

Currently, either under development or existing, there is enough unused office space to give every man, woman, and child in China a cubicle-sized workspace. Think about the insanity of that for a moment, let it sink in. Shanghai and Beijing are littered with massive, beautiful, brand-spanking new and TOTALLY EMPTY office buildings 60 or 70 stories high. It's like Stalinst building projects on steroids...probably the most unhealthy mix of capitalism and communism you could imagaine, at least from a capacity economics point of view.

That fact alone should scare the living **** out of anyone long on China. Let's not forget that a bunch of Chinese companies that have nothing to do with Real Estate have pourned their capital into the market in the last few years. Sound familiar? The US housing bust could actually be dwarfed by an upcoming Chinese real estate glut. It probably won't kick in for at least a year or two but when it does its going to blindside a heck of a lot of analysits.

reply to post by silent thunder

Jack Rodman, who has made a career of selling soured property loans from Los Angeles to Tokyo, sees a crash looming in China. He keeps a slide show on his computer of empty office buildings in Beijing, his home since 2002. The tally: 55, with another dozen candidates.

“I took these pictures to try to impress upon these people the massive amount of oversupply,” said Rodman, 63, president of Global Distressed Solutions LLC, which advises private equity and hedge funds on Chinese property and banking. Rodman figures about half of the city’s commercial space is vacant, more than was leased in Germany’s five biggest office markets in 2009.

www.finance-commerce.com... yst-predic

I think they took the movie Field of Dreams to heart.

Build them and they will come.

reply to post by silent thunder



I'm glad you brought it up and not I, in my latest thread [China DEMANDS! ] I was accused of Being Anti-Chinese.

China's overheated economy headed for shocking downfall, experts say

Beijing's office vacancy rate of 22.4 percent in the third quarter of last year was the ninth-highest of 103 markets tracked by CB Richard Ellis Group Inc., a real estate broker. Those figures don't include many buildings about to open, such as the city's tallest, the $970 million 74-story China World Tower 3.

Empty buildings are sprouting across China as companies with access to some of the $1.4 trillion in new loans last year build skyscrapers. Former Morgan Stanley chief Asia economist Andy Xie and hedge fund manager James Chanos say the country's property market is in a bubble.

"There's a monumental property bubble and fixed-asset investment bubble that China has under way right now," Chanos said in a Jan. 25 Bloomberg Television interview. "And deflating that gently will be difficult at best."

[edit on 21-2-2010 by SLAYER69]

reply to post by SLAYER69


Or is China doing the correct thing ?
in limiting and rolling back the over-leverage the Banks have painted themselves in a corner with?

heck they don't want a Chinese version of Goldman Sachs or Morgan or Citi spoiling their finance system too

Also, since central planning of the economy & industries results in a very uneven economic landscape...
i'm guessing the planners/controllers/leadership is taking actions so that the larger society can 'catch up'
... using the newly found public desire for more Chinese entrupenurs, who will devise home based services to continue the internal growth of their fledgling consumerism & budding 'middle class'



PS: at least their Gov't isn't exacting capital punishment on the Bank execs., as they did with many other top managers/ CEO equivelents, who mismanaged their industries & foisted contaminated products on unsuspecting buyers.

reply to post by silent thunder

There is a huge commercial real estate problem in China that the West is hardly aware of. Over the past decades an insane amount of office space has gone up all over China...especially where its not needed.

Because market forces were not in place to control supply and demand of office space! The loans were made by the corrupt "good old boy" based banking system still in place in China.

My estimates of bad loans on the books is 25% or higher although China of course makes much lower estimates. If any sort of financial hiccup comes along on top of what they already have absorbed, a major financial collapse can and will occur.

Careful folks, it might happen after all.

China's building bubble about to burst

Yup that dreaded chinese asset bubble.

Dr. Doom...

You may know Dr Faber by his moniker of "Dr. Doom", and when this man talks, markets listen. He correctly identified the tech bubble, and now he's setting his sights on China. Specifically, Dr. Faber is concerned about the way in which Beijing’s decided to slam the brakes on growth -- via a sharp reduction in lending. That he says, will drag down any and every company that soared higher during the recent China boom. "I would not buy Chinese stocks here," Faber tells the Fast Money desk. (1)

reply to post by St Udio

Or is China doing the correct thing ? in limiting and rolling back the over-leverage the Banks have painted themselves in a corner with?

China's Macro Control to be Tested in 2010

Even the Chinese are in doubt whether their economic policies will work in this economy:

Too much public investment caused weak private investment and overcapacity in some industries like steel, said Zhang Xiaoqiang, vice chairman of the NDRC. "There's uncertainties about economic growth restructuring and fiscal stimulus plans," said Tang Min, vice secretary-general of China Development Research Foundation.