Wednesday, October 26, 2011

China - Wishful thinking by US media

Warning signs of cracks in China's economy are surfacing, but analysts disagree about whether they portend a crash or merely a need for caution. The U.S. Senate bill that would place tariffs on imports from a country found to be manipulating its currency, clearly aimed at China, is raising more red flags.
The fallout from either of these situations could be devastating to U.S. agricultural exports: In fiscal year 2010, China imported ag products worth $20.3 billion from the U.S. -- 18% of the total -- and 2011 most likely was even higher.
China is an especially important market for soybeans. They account for more than half of total U.S. exports to China and, conversely, China takes more than half the soybeans we export -- and about a quarter of U.S. soybean production.
China's economy could be headed for a breakdown, according to Patrick Chovanec, an American who teaches in the International MBA Program at the Tsinghua University School of Economics and Management in Beijing. "I've been saying since the year began that China is due for a correction, and I believe it could be a lot worse than most people expect. Exactly how it will unfold or whether we've already reached a tipping point remains to be seen," he said.
Chovanec cites changes in the relationship between the new-home market and the resale market as an indication that developers have overbuilt on speculation and now are over extended.
"With credit conditions tightening, they systematically ran through the credit lines available -- first, the banks, then high-yield bonds, then private wealth management vehicles that have been popping up all over China, then loan sharks. Finally, with no options left, they had to start selling some of their inventory at whatever price they could," Chovanec said.
This led to collapsing prices on new homes. In Shanghai, for instance, sales of new properties in the first half of September were down more than 50% from a year earlier, despite record-high inventories.
"Well, the government has been targeting urban coastal real estate to control inflation," Jim Rogers, investor and best-selling author, told DTN. "So this is a sign their policy moves are working."
What's different in China vs. the housing mess in the U.S., said Rogers, is that "In the U.S., you could buy four or five houses with no job and no money down. Nowhere in China can you do that."
China's consumer price index is still rising at more than 6%, but the regulated deposit rate at banks is 3.5%. "As a result, China's banks recently have seen a rush of withdrawals as savers seek higher yields elsewhere," said Chovanec. China Securities Journal reported that deposits at China's four biggest banks fell $65.7 billion in the first half of September -- and the money was channeled into speculative assets.
"It is now becoming clear that the actual yields being generated in China are not living up to what was promised, and this is showing up in valuations of stocks and bonds," Chovanec said. This is affecting the value of China's currency, the renminbi. "Speculators now may be rushing to turn their renminbi into dollars to take their money out of China."
However, based on the latest Purchasing Manager Index, released last week, he concludes, "Whatever cracks may be emerging, China's economy has not yet turned the corner to a 'crisis' moment. But tensions and contradictions lurk below the surface, and the evidence is mounting that the fabric of China's investment-led growth is starting to fray and unravel."

The renminbi, or yuan, became China's currency in the late 1940s, but was basically used domestically, with U.S. dollars used for trade through the end of the 20th century. As trade grew, it was pegged to the dollar, though since 2005, it has been allowed to float in a narrow margin, based on a market-basket of currencies. Many countries argue that the renminbi is as much as 35% to 40% undervalued, making Chinese products cheaper in world markets, and pressure is increasing for the government to let the currency trade freely.
Now, a bill in the U.S. Senate would require the Obama administration to apply tariffs on imports from countries that manipulate their currency when the White House determines that a currency is misaligned. A country so accused would have 90 days to rectify the situation before the tariffs went into effect.
Earlier this week, China warned that passage of the bill violates the World Trade Organization's rules regarding protectionist tariffs and could provoke a trade war. Furthermore, in a statement on China's official government website, Ma Zhaoxu, spokesman for the foreign ministry, reiterated that Beijing's position is to continue "strengthening the flexibility of the renminbi exchange rate," implying that the Senate's radical move, at the very least, is unnecessary. The renminbi has appreciated 7% since June 2010, when the central bank loosened controls.
"I really hope someone stops this," Rogers told DTN. "No one has ever won a trade war. Ever. This could bring the world into depression. Why, it could cause World War Three. It could play out the way Smoot-Hawley did in the 1930s -- it's a 'beggar thy neighbor' policy. When you slap someone in the face, what do they do? They react. Then it goes back and forth. The U.S. wants a cheaper dollar relative to the renminbi. That will make other countries unhappy. They will react."
What might the Chinese do? "Well, for one thing, they could not buy U.S. bonds -- or sell the ones they hold," Rogers said. "That would pressure interest rates in the U.S. How would the government finance its debt? It could lead to even higher deficits."

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