Property slump in China

According to documents obtained earlier this year by the Financial Times, the China Banking Regulatory Commission (CBRC) ordered domestic banks to weigh the impact of a 30 per cent decline in housing transactions in "stress tests" aimed at determining the health of the Chinese financial system. While Beijing has been trying to rein in sky-high property prices, a China property slump would have a big ripple effect on the global economy. Construction of property accounted for more than 13 per cent of China's economy last year.

In April, the CBRC told banks to test their loan books against a 50 per cent fall in prices, and also a 30 per cent fall in transaction volumes. In October, however, property transactions fell 39 per cent year on year in China's 15 biggest cities, according to government data. Nationwide, transactions dropped 11.6 per cent, up from a 7 per cent fall in September.

The fall-off in transactions has affected developers' cash flows and, in some cases, their ability to repay bank loans.

Rising defaults after a lending surge in 2009 and 2010, much of which ended up in the property sector, were cited by the International Monetary Fund this month as one of the Chinese financial sector's biggest risks.

The CBRC has not released the results and declined to comment. But one analyst who reviewed the stress-test documents said they did not take into account the impact fewer deals and lower property prices would have on bank collateral.

(source: FT, November 21, 2011)

Greece's Rolling Waves

by Bob Dowling, June 6, 2010

BlackRock's Peter Fisher on the fervid turns of the Chinese economy, Europe's jagged path to recovery and misdirected U.S. financial regulatory reforms

For most of his career, Peter R. Fisher, vice chairman of BlackRock, has been known as a behind-the-scenes player in global financial markets, starting from the time he managed the open market desk at the New York Federal Reserve Bank and oversaw its foreign currency operations. As undersecretary at the U.S. Treasury, he was the bond guy who cancelled America's 30-year bond, winning praise and consternation in the market.

At BlackRock since 2004, he served as Chairman of BlackRock Asia and was responsible for overseeing the firm's businesses in Japan, Korea, China, Taiwan, Singapore and Southeast Asia. Now he is head of BlackRock's Fixed Income Portfolio Management, which has bond assets under management exceeding US$ 1 trillion – making them the largest bond market player in the world.

When asked about the unmitigated horror of the Greek debt crisis on the euro zone, Fisher said there were encouraging signs that European politicians would be willing to drastically adjust fiscal policy. There were less varnished words for U.S. politicians on regulatory reform and what he says are policy actions that will only breed more trouble in the securities industry. Fisher spoke to Caixin in a June 3 interview.

China's Growth

Caixin: What are your thoughts on how China has handled overheating in the economy?

Fisher: They are trying to cool it off and they deserve a lot of points for what they've done so far. But how enduring will that be? Can they get in a comfort zone of somewhat slower growth? The risk for their banks is that slowing down might leave them assets on their balance sheet that are less than desirable as they work through their own property bubble.

Caixin: How would you define slower growth for China?

Fisher: Maybe with all the recent reports of wage pressures they will try to keep growth in a range of 6 percent to 8 percent to reduce the risk of more rapid inflation. Wage gains in the coastal areas could be leading to inflation that will be faster than they are comfortable with. Growth in a 6 to 8 percent range could be a soft landing for China.

Caixin: What do you think of Chinese banks becoming more aggressive lenders in the U.S. both for themselves and for the state's reserve fund?

Fisher: You would expect the Chinese banks to try to diversify the sources of their asset growth and if this creates a source of credit for the U.S. economy, this could be win-win.

Caixin: What about China's ever expanding US$ 2.4 trillion reserve fund – should more of that be invested in China?

Fisher: China's growth has been investment intensive and I agree with those who suggest that China needs to rebalance and get a greater contribution from domestic consumption. To make that switch, many suggest that they have to improve their social safety net. While I would not disagree, I would put more emphasis on the need for the Chinese banking system to better serve consumers, to provide – in effect – a private sector safety net that allows consumers to have confidence in their ability to borrowing against future income. That said, a big part of China's high savings rate really isn't on the personal side, it's on the corporate side and the challenge is one of encouraging more effective recycling of investment from the state industries.

Caixin: You want a bigger consumer lending side for China's banks?

Fisher: Absolutely. They need a way of converting high savings into more personal investment.

Caixin: Do you see China's foreign surplus as ever expanding?

Fisher: There are still large capital flows going into China. But the level of foreign investment is not likely to sustain the pace it has been at for the last 20 years. One source of that surplus is the investment flow. The other is the trade surplus which also may not always grow at such a high rate.

Bob Dowling is a New York-based editorial advisor for Caixin Media

Chinese Central Bank Governor Zhou Xiaochuan Pledges Fast, Forceful Policies for China Growth

By Li Yanping and Luo Jun, published on Bloomberg.com, March 6, 2009

Chinese central bank Governor Zhou Xiaochuan pledged fast and forceful policies to restore confidence and prevent the global financial crisis from deepening the nation’s economic slump.

“If we act slowly and less decisively, we’re likely to see what happened in other countries: a slide in confidence,” Zhou said at briefing in Beijing. The central bank has “ample room” to fine-tune monetary policy after a record surge in lending in January, he said.

The central banker said he saw “signs of stabilization and recovery” in the world’s third-biggest economy, echoing Premier Wen Jiabao’s confidence that the nation’s 8 percent growth target for 2009 remains within reach. Collapsing exports because of the global recession have dragged growth to the weakest pace in seven years and cost the jobs of 20 million migrant workers.

“This isn’t the time to be cautious with the measures you roll out, it’s time to overdo it,” said Dariusz Kowalczyk, chief investment strategist at SJS Markets Ltd. in Hong Kong. “The outlook for the global economy has deteriorated dramatically.”

The Shanghai Composite Index closed 1.3 percent lower on concern that the global recession is deepening. The yuan was little changed against the dollar as of 4:48 p.m. in Shanghai.

Premier Wen restated the 8 percent target in an annual speech to China’s parliament yesterday, the equivalent of a U.S. State of the Union address.

Slump in Confidence

Fast and forceful policies are preferable to “prevent confidence slumping during the financial crisis,” Zhou said.

China’s confidence contrasts with U.S. Treasury Secretary Timothy Geithner’s warning yesterday that his nation’s recession is deepening as it starts a $787 billion stimulus program of public works.

China’s official manufacturing index rose for a third month in February, from a record low in November. Initial public offerings of shares may resume, the nation’s securities regulator said today. Wen has cited growth in power output and consumption, loans and retail sales as positive signs.

Chinese banks doled out a record 1.62 trillion yuan ($237 billion) of loans in January and more than 800 billion yuan last month, Liu Mingkang, chairman of the China Banking Regulatory Commission, said in Beijing yesterday. The regulator plans to conduct spot checks of bank loan books to “ensure quality of growth,” Liu said.

Lending Quotas

Loans and money supply may have grown too quickly, Zhou said, after China cut interest rates, scrapped quotas limiting lending and pressed banks to support a 4 trillion yuan stimulus package. The jump in lending exceeded the central bank’s expectations, he said.

The government will study the results of its existing stimulus package before deciding whether to take any new measures, Zhang Ping, head of the National Development and Reform Commission, said in Beijing today.

The People’s Bank of China cut interest rates five times in the final four months of last year, including the biggest single reduction since the 1997-98 Asian financial crisis, leaving the benchmark one-year lending rate at 5.31 percent. There have been no cuts in 2009.

China needs “stable and relatively fast growth” to create jobs, boost incomes and ensure social stability, Premier Wen said yesterday.

Not everyone is convinced that China will meet its 8 percent goal.

Lower Growth Forecasts

The 6.8 percent gain in the fourth quarter was down from 9 percent for all of 2008 and 13 percent for 2007. The International Monetary Fund forecasts the economy will grow 6.7 percent in 2009, the least in almost two decades.

Economist Kowalczyk sees a 6 percent expansion this year and warns that surging unemployment may undermine social stability if the government fails to do more to boost growth.

China’s exports may have fallen 20 percent in February from a year earlier, the 21st Century Business Herald newspaper reported today, citing an unidentified trade official. Imports may have also fallen 20 percent last month, it said.

The nation’s trade surplus for February may be $7 billion, the newspaper reported. That would be less than a fifth of the size of January’s surplus.

“China’s economic conditions may appear less dismal than its Asian peers, but the government’s growth target of eight percent seems too optimistic,” said Sherman Chan, a Sydney- based economist at Moody’s Economy.Com.