Bharat Rakshak

Reversing its role as the world’s fastest-growing buyer of United States Treasuries and other foreign bonds, the Chinese government actually sold bonds heavily in January and February before resuming purchases in March, according to data released during the weekend by China’s central bank.

China’s foreign reserves grew in the first quarter of this year at the slowest pace in nearly eight years, edging up $7.7 billion, compared with a record increase of $153.9 billion in the same quarter last year.

The main effect of slower bond purchases may be a weakening of Beijing’s influence in Washington as the Treasury becomes less reliant on purchases by the Chinese central bank....

There have also been some signs that Americans may consume less and save more money in response to hard economic times. This would further decrease the American dependence on Chinese savings.

The abrupt slowdown in China’s accumulation of foreign reserves instead seems to suggest that investors were sending large sums of money out of mainland China early this year in response to worries about the country’s economic future and possibly its social stability in the face of rising unemployment.

Evidence of such capital flight included a flood of cash into the Hong Kong dollar. Mainland tourists were even buying gold and diamonds during Chinese new year holidays here in late January....

Some economists contend that slower growth in Chinese foreign currency reserves is not important to the economic health of the United States, even though it may be politically important. In the first quarter, instead of the Chinese government sending money out of the country to buy foreign bonds, Chinese individuals and companies were buying many of the same bonds.

“The outflow would mostly end up in the U.S. anyway,” even if China is no longer controlling the destination of the money, said Michael Pettis, a finance professor at Peking University, in an interview on Thursday..

There have also been some signs that Americans may consume less and save more money in response to hard economic times. This would further decrease the American dependence on Chinese savings.

Aside from that, let me just make one brief observation: This week I’ve been reading scores of articles on the financial crisis from a wide array of Chinese media, some written in English and others translated into English. One thing I suddenly realized today: Nearly every single one of them begins by stating matter-of-factly, in more or less these words, “The global recession, which was caused by America’s financial irresponsibility….” At a point later on in each article, with uncanny regularity, appears another matter-of-fact reference, this time to the certainty that China’s situation is now improving, the worst is over and it’s now just a matter of putting the finishing touches on a successful stimulus plan.
Now, I am the first to admit this disaster was to a very large extent caused by American fiscal irresponsibility. However, I also know that the exact same message planted in the opening sentences of one article after another after another after another is no coincidence and is part of a propaganda campaign that has two clear intentions:
1. To make it clear that it was America’s malfeasance that spoiled the party, and
2. To make it clear that China is bouncing back rapidly and was better prepared for catastrophe (through its savings) and better prepared for the arrival of new world order to come.

After decades of massive economic growth and the migration of villagers to cities, the scarcity of water in China is more dire than ever

LokeshP wrote:6.1%

this is going to hurt PRC much. the Coastal vs Interior confrontation will start in earnest as the Coast wallahs are squeezed and they are are reluctant to part money for interior...

here, one hongkongese-investing textile enterprise now wants to fire some workers,but worker now go to strike against such a fire.

Dilbu wrote:

here, one hongkongese-investing textile enterprise now wants to fire some workers,but worker now go to strike against such a fire.

I wonder what Mao might have done. He wont disapprove strikes for sure. Armed uprisings would be even better. Time for revolution I say.

Suraj wrote:Liu: Do you reside in Tianjin ?

I've heard anecdotal stories from acquaintances with business interests in the region, about significant job losses in the Shanghai-Suzhou area as well.

ashi wrote:Economist is kissing up some a$$ here ...

Bamboo shoots of recovery
http://www.economist.com/finance/displa ... tures_box2

If a collapse in domestic demand led China’s economy down, it can also help lead it up again. Not only is China’s fiscal stimulus one of the biggest in the world this year, but the government’s ability to “ask” state-owned firms to spend and state banks to lend means that the government’s measures are being implemented more rapidly than elsewhere. To take one example, railway investment has tripled over the past year.

Only about 30% of the government’s 4 trillion yuan ($585 billion) infrastructure package is being funded by the government. Most of the rest will be financed by bank lending, which had already soared by 30% in the 12 months to March, twice its pace last summer. JPMorgan thinks that this credit and investment boom could lift GDP growth to an annualised pace of over 10% in each of the next three quarters.

Also, about half of the increase in investment is on public infrastructure. This will inevitably include some white elephants, but in a poor country, the return on infrastructure investment is generally high. There is no need to build “bridges to nowhere”, when two-fifths of villages lack a paved road to the nearest market town.

The biggest task for China is to find a new engine for future growth. It cannot rely on exports, nor can the investment stimulus be sustained for long. Without stronger consumer spending, China’s growth will be much slower than in recent years. Reforms to improve health care and the social safety net will take many years to encourage people to save less.

Andy Xie, an independent economist based in Shanghai, suggests that the quickest way to boost consumption would be for the government to distribute the shares that it holds in state-owned enterprises to households, and to force those firms to pay larger dividends. But the authorities in Beijing are unlikely to take his advice. How else would it lean on big firms to support the economy in times like these?

Suraj wrote:Liu: Do you reside in Tianjin ?

I've heard anecdotal stories from acquaintances with business interests in the region, about significant job losses in the Shanghai-Suzhou area as well.

Arya Sumantra wrote:dog meat is common in Korea too. Many amirkhans who generally mock yindians for not eating beef are themselves shell shocked when they hear about man's best friend being on dinner table in east asian restaurants.
They have a saying in chinese: Any animal that has the back pointing towards the sky can be eaten.
That only leaves man out

rundstedt wrote: She reside in Changsha, capital of Hunan province.

The crowd of about 220 people, who had come to hear Zuo and other authors and academics speak on the topic of "Unhappy China," cheered.

For a growing number of Chinese, the solutions to the problems of the country's present -- including the income gap between rich and poor and the manipulation of the court system by state officials and company executives -- lie in its past, with the teachings of Mao Zedong.

The most influential critics, known collectively as the New Left, are not like the dissidents or political exiles of a previous generation. They are not calling for an overthrow of the Communist regime. Their recommendations and criticisms are, instead, based on a belief that state power can redress the injustices created by free markets, privatization and globalization. Their views are also characterized by a fierce nationalism and criticism of the West.

Their rise comes as the Communist Party, which has held absolute power since 1949, faces growing discontent over unemployment, contaminated infant formula that has sickened more than 300,000 babies, shoddy construction that led to the collapse of thousands of school buildings during last year's Sichuan earthquake and corruption among public officials at all levels.

Wang, a professor of humanities who is considered the leading New Leftist, has said that China is caught between two extremes: "misguided socialism" and "crony capitalism."

Zuo has been critical of the robber barons who took advantage of the privatization of state enterprises. He has argued that because they did not have to pay back government-run banks and did not adequately compensate workers, they essentially looted the state's coffers.

"Today in China, those elite are lazy and do nothing. They failed to generate any innovations even after spending all that money from taxpayers," he said. "China's current achievements are more a product of efforts by industry workers, rural workers."

Blogger Yang Songlin, a 60-year-old who used to run his own business in Henan province, said he began to attend the meetings because of his concern that China had veered from its founding principle of helping the ordinary man. "Bureaucrats, big bosses and intellectual elite formed a joint, strong interest group while Chinese laobaixing, like workers and rural farmers, were marginalized and benefited little from the reform process," he said.

He has been fighting government officials and developers in his home town who have, in his view, illegally seized land from farmers. In the Mao era, he said, there was little corruption because there was a powerful system of checks and balances.

During 30 years of capitalist-style economic reforms pioneered under Deng Xiaoping, Fan said, "we had been sticking to one goal: America's today is China's tomorrow, and we should work for that." Now, with the United States in crisis, Fan said, "Chinese people are beginning to reflect on this phenomenon -- whether the financial crisis is not only purely economic or financial but something that arose because of a development-path issue, that there might be a problem for us to pursue such a path."

CARACAS, Venezuela — As Washington tries to rebuild its strained relationships in Latin America, China is stepping in vigorously, offering countries across the region large amounts of money while they struggle with sharply slowing economies, a plunge in commodity prices and restricted access to credit.

In recent weeks, China has been negotiating deals to double a development fund in Venezuela to $12 billion, lend Ecuador at least $1 billion to build a hydroelectric plant, provide Argentina with access to more than $10 billion in Chinese currency and lend Brazil’s national oil company $10 billion. The deals largely focus on China locking in natural resources like oil for years to come.

China’s trade with Latin America has grown quickly this decade, making it the region’s second largest trading partner after the United States. But the size and scope of these loans point to a deeper engagement with Latin America at a time when the Obama administration is starting to address the erosion of Washington’s influence in the hemisphere.

“This is how the balance of power shifts quietly during times of crisis,” said David Rothkopf, a former Commerce Department official in the Clinton administration. “The loans are an example of the checkbook power in the world moving to new places, with the Chinese becoming more active.”

Mr. Obama will meet with leaders from the region this weekend. They will discuss the economic crisis, including a plan to replenish the Inter-American Development Bank, a Washington-based pillar of clout that has suffered losses from the financial crisis. Leaders at the summit meeting are also expected to push Mr. Obama to further loosen the United States policy toward Cuba.

Meanwhile, China is rapidly increasing its lending in Latin America as it pursues not only long-term access to commodities like soybeans and iron ore, but also an alternative to investing in United States Treasury notes.

One of China’s new deals in Latin America, the $10 billion arrangement with Argentina, would allow Argentina reliable access to Chinese currency to help pay for imports from China. It may also help lead the way to China’s currency to eventually be used as an alternate reserve currency. The deal follows similar ones China has struck with countries like South Korea, Indonesia and Belarus.

As the financial crisis began to whipsaw international markets last year, the Federal Reserve made its own currency arrangements with central banks around the world, allocating $30 billion each to Brazil and Mexico. (Brazil has opted not to tap it for now.) But smaller economies in the region, including Argentina, which has been trying to dispel doubts about its ability to meet its international debt payments, were left out of those agreements.

Details of the Chinese deal with Argentina are still being ironed out, but an official at Argentina’s central bank said it would allow Argentina to avoid using scarce dollars for all its international transactions. The takeover of billions of dollars in private pension funds, among other moves, led Argentines to pull the equivalent of nearly $23 billion, much of it in dollars, out of the country last year.

Dante Sica, the lead economist at Abeceb, a consulting firm in Buenos Aires, said the Chinese overtures in the region were made possible by the “lack of attention that the United States showed to Latin America during the entire Bush administration.”

China is also seizing opportunities in Latin America when traditional lenders over which the United States holds some sway, like the Inter-American Development Bank, are pushing up against their limits.

Just one of China’s planned loans, the $10 billion for Brazil’s national oil company, is almost as much as the $11.2 billion in all approved financing by the Inter-American Bank in 2008. Brazil is expected to use the loan for offshore exploration, while agreeing to export as much as 100,000 barrels of oil a day to China, according to the oil company.

The Inter-American bank, in which the United States has de facto veto power in some matters, is trying to triple its capital and increase lending to $18 billion this year. But the replenishment involves delicate negotiations among member nations, made all the more difficult after the bank lost almost $1 billion last year.

China will also have a role in these talks, having become a member of the bank this year.

China has also pushed into Latin American countries where the United States has negligible influence, like Venezuela.

In February, China’s vice president, Xi Jinping, traveled to Caracas to meet with President Hugo Chávez. The two men announced that a Chinese-backed development fund based here would grow to $12 billion from $6 billion, giving Venezuela access to hard currency while agreeing to increase oil shipments to China to one million barrels a day from a level of about 380,000 barrels.

Mr. Chávez’s government contends the Chinese aid differs from other multilateral loans because it comes without strings attached, like scrutiny of internal finances. But the Chinese fund has generated criticism among his opponents, who view it as an affront to Venezuela’s sovereignty.

“The fund is a swindle to the nation,” said Luis Díaz, a lawmaker who claims that China locked in low prices for the oil Venezuela is using as repayment.

Despite forging ties to Venezuela and extending loans to other nations that have chafed at Washington’s clout, Beijing has bolstered its presence without bombast, perhaps out of an awareness that its relationship with the United States is still of paramount importance. But this deference may not last.

“This is China playing the long game,” said Gregory Chin, a political scientist at York University in Toronto. “If this ultimately translates into political influence, then that is how the game is played.”

China Overtakes Germany in Auto Output
New figures reveal that China overtook Germany and the U.S. last year to become the world's largest producer of automobiles

By Ray Massey

Last updated at 11:04 AM on 23rd April 2009

* Comments (17)
* Add to My Stories

With a flying lady on the bonnet, its vast classical radiator and familiar contours, it looks for all the world like a Rolls-Royce.

Hop inside, and the massage seats, pure wool carpet, subdued lighting and wine cabinet add to the impression.

But the car in question could hardly be less British. It is actually a Geely GE, made in China.

Although Geely claims to be ‘re-inventing the classic’, it seems Rolls-Royce bosses disagree.

They are consulting lawyers after seeing this Chinese-made car audaciously displayed just feet from the classic brand’s Phantom at the Shanghai Motor Show.

‘Our colleagues in Shanghai are taking a serious look at it,’ a spokesman said. ‘Rolls-Royce Motor Cars is very protective of its brand image and takes seriously any attempt to imitate its products.

‘Rolls-Royce is currently keeping its options open and is in consultation with its legal advisers.’

The grille, the Flying Lady mascot, also known as the Spirit of Ecstasy, and the Rolls-Royce name and initials are specifically protected.

With its ??250,000 price-tag, the original Rolls-Royce Phantom has always been the preserve of the privileged few.

But costing just ??30,000, the GE, which stands for Geely Excellence, appears to offer a ‘luxurious mobile palace’ on a much tighter budget.

For your money, you get an air purifier with separate air conditioning, described as an ‘oxygen bar’, cigar storage, a refrigerator and a ‘starlight’ interior roof lining – a signal feature of the original Phantom.

Chinese car companies have a reputation for copying foreign classics – sometimes leading to legal action.

Four years ago Shuang-Huan Auto created a lookalikeof Honda’s CR-V grass-and-gravel off-roader. So incensed were Honda that they sued Shuang-Huan, which counter-sued.

Geely already has links with British icons.

It builds taxis for London under licence.

And it is one of the companies said to be considering buying out Britain’s Vauxhall and Germany’s Opel from the ailing U.S. parent company General Motors, which is on the brink of bankruptcy.

ROLLS-ROYCE PHANTOM

BUILT: Goodwood, Sussex

PRICE: ??250,000

ENGINE: Mammoth 6.75litre V12

LENGTH: 19ft 2 inches

TOP SPEED: Artificially restricted to 150mph / 0-62mph: 5.7 seconds

FEATURES:

Original 'Grecian-style' large grille. Spirit of Ecstasy mascot, also dubbed 'The Flying Lady'. Romantic 'starlight Headliner' in roof to emulate night sky. Drip dry umbrellas hidden in rear doors. 9 standard wood veneers. 44,000 different exterior colours.
Cashmere blend headliner. Lambswool rugs Special soft leather interior

THE GEELY EXCELLENCE

BUILT: Zhejiang, China

PRICE: circa ??30,000

ENGINE: 3.5litre V6

LENGTH: 17ft 6 inches.

TOP SPEED: 110mph (estimated) 0-62mph: 10 seconds (estimate)

FEATURES:

Single rear 'throne'. Pastiche 'Grecian-style' large grille. Flying Lady-style mascot
Romantic 'starlight Headliner' in roof to emulate night sky. Glass interior divider
Pure wool carpet. 'Six star' safety. Cigar store. Refrigerator. Wine cabinet

amit wrote:Nayak,

You haven't noticed the most vital difference in the Spirit of Ecstasy statutes.

The doughty old RR Sprit of Ecstasy is modestly holding back...err hmm ... her headlights (this is a phamily phorum).

Now see what the Geely Sprit of Ecstasy is doing? G(l)eefully strutting her stuff?

rundstedt wrote:those bad quality imitation brands are poplular in rural markets of china, because they are cheap enough. But it's difficult to find them in urban. Sadly those fake goods are entering indian and african markets more and more by indian businessmen, in those areas, ppl could not pay for real chinese goods.

Purush wrote:

rundstedt wrote:those bad quality imitation brands are poplular in rural markets of china, because they are cheap enough. But it's difficult to find them in urban. Sadly those fake goods are entering indian and african markets more and more by indian businessmen, in those areas, ppl could not pay for real chinese goods.

I could be wrong, but AFAIK, none of the above chinese made crap is available in India.

China is really looking at a lot of other options to get away from the U.S. dollar. The latest report is that it has been building huge gold reserves. There is no doubt that China wants to get out and away from the U.S. dollar now. We have heard SDRs, copper and precious metals all mentioned as plays out of U.S. dollars. How this will play out on currency markets and in the U.S. government bond market is no at all clear.

ward. After all, China is the world’s largest dollar investor, and no one else would have less interest in seeing the value of the US currency plummet. The PBOC might be the promptest to support the dollar, not least because it would suffer a huge capital loss in the event of a dollar depreciation. In a recent New York Times column, Paul Krugman argues that China has “driven itself into a dollar trap, and that it can neither get itself out nor change the policies that put it in that trap in the first place.”

This situation might appear unprecedented. But in truth, all this is not brand-new.

French foreign reserves policy during the Great Depression

Economic history offers one striking example of a country being trapped by the huge volume of its foreign reserves. This country was France, the period was the early 1930s, and the currency at stake the pound sterling. The episode ended up dramatically. Sterling suffered a major currency crisis, French authorities lost a lot of money, and their subsequent policy largely contributed to the Great Depression.

The origin of the problem lay in the government’s decision of 1926 to peg the franc to the sterling and dollar, two years before re-establishing the gold standard. Since the trade balance was in surplus and capital was flowing into the country, this goal was achieved through public purchases of foreign exchange. The Bank of France therefore accumulated a bulging portfolio of foreign holdings. At the end of the 1920s, the country held more than half of the world’s volume of foreign reserves.

French policy over subsequent years has been heavily criticized for being destabilizing. British contemporaries, like Paul Einzig, accused France of using its reserves in order to weaken the pound before the sterling crisis of September 1931. Others have noted that French conversions of foreign assets into gold after 1931, by imposing constraints on their money supplies, put intense deflationary pressures on other countries on the gold standard.

France’s Sterling Trap in 1931

Why did France engage in a policy that had such dramatic consequences? In a recent work, I explore the motivations behind the French reserves policy of this period. Spending time in the archives, I was able first to reconstitute the evolution of the reserves currency composition, and second, to identify the reasons invoked for the allocation decisions. Last, I have combined this information with market indicators of the perceived risk of reserves currencies.

France’s problems were similar to those of China today. The Bank of France was a private institution and its primary objective was to avoid capital losses. Its reserves were allocated between sterling and dollar. From 1929 to 1931, there were fears that the pound might be devalued and the Bank started shifting to the dollar.

However, in implementing this policy, the Bank was also constrained by its position as a large player on the exchange market. So, as sterling’s weakness worsened at the end of 1930, the Bank was in a trap: it could not continue selling pounds without precipitating a sterling collapse and a huge exchange loss for itself. The only workable option left was to support the pound. French policy therefore suddenly turned cooperative. The Bank halted the sterling liquidations, and even intervened on the market in order to support the British currency.

When the pound eventually collapsed, the Bank of France was put into a state of technical bankruptcy. It was only able to survive thanks to a state’s rescue, obtained under tough conditions. Moreover, there were now rising fears over the dollar. The will to avoid further losses therefore led authorities to convert all their dollar assets into gold (figure 2), a policy that heavily contributed to the global monetary contraction of the 1930s.

Lessons for today?

What are the lessons for today? China’s objective function today certainly differs from those of France in the interwar years. But French experiences in the early 1930s are a reminder that when there is growing risk on reserves currencies, foreign reserves can be both a source of instability for the international monetary system, and a burden for large holders.

The Chinese want to weaken the U.S.'s power derived through its currency status. They have been setting the stage to do so for some time. However, they want to act in a way that benefits them in the short- and long-term. Cutting loose in an uncontrolled fashion now benefits no one with the world economy in dire straits. However, when the economy does right itself, you should see some major changes in the currency markets.

Let's look at the latest figures. In conjunction with the stimulus program, the banks issued nearly 5 trillion RMB in new loans in the first quarter, a historically high level. Because there was basically no share issuance or new corporate bond issuance, the 5 trillion from the banks was really the main engine for 1Q 2009. The 5 trillion is almost the size of the US fiscal stimulus package and basically 1/6 of China's 2008 GDP. As far as I know, this is the largest monetary easing in this period of time as a share of a country's GDP (that didn't go into writing off bad debt, that is). Impressive indeed, but what did China get in return?

1. To be sure, fixed asset investment grew by 25+%, which was one of the intended effects of monetary easing of this magnitude.
2. Official PMI, which mainly reflects sentiment among SOEs or state corporation, went back into positive territory, but private sector PMI was still in negative territory at the end of March.
3. There has been a pretty impressive stock market rebound in the A share.
4. The housing market is showing some sign of life after a long winter. Sales in many major cities are going up significantly, even driving up prices in some cases.

So far so good, BUT...

When we look at figures for non-investment economic activities, things do not look good at all. In fact, it is down right disappointing after pumping 5 trillion into the economy.

1. First of all, export and FDI continue to fall at a pretty fast pace, which can't be helped.
2. More alarming, inventory for many industrial goods continue to build UP! According to a recent note by Stephen Green's team, refined oil inventory is up over 35% YoY as of the end of February.
3. Coal inventory seems to have gone down, but that's because many coal mines have ceased to operate. The 21st Century Business Herald reported that 50-70% of mines are "resting" for the moment. Iron ore mines are facing the same problem as international iron ore now costs less than domestic ore.
4. Electricity usage continues to be in negative territory.

There is then the widely cited figures of 12% increase in urban income at the end of 2008 and increase in car sales in first quarter. In the first instance, I have no idea how the income figures were produced, but they almost always miss migrant workers, who are also urban residents. On the car sales, China Economist already points to a recent FT article which questions whether sales of minivans will help car company profitability. Finally, employment, which supposedly was the main point of the stimulus, was only marginally improved by the 5 trillion. Most large projects haven't gotten going yet as land still needs to be procured. The biggest employment impact was that the 5 trillion prevented the mass bankruptcy of hundreds and perhaps thousands of firms. However, some firms are staying alive by laying off or furloughing workers, like the coal mines.

So, really, when it comes down to it, the 5 trillion bought:

1. some psychological relief
2. some more sales of real estate, thus delaying the bankruptcies of many developers
3. an upbeat stock market, for a while
4. prevented the bankruptcy of numerous state firms, especially in the airline, coal, electricity, and steel sector

The most alarming thing is that these "positive" effects of pumping money into the economy lasts only as long as the money keeps flowing. If for whatever reason, the central government decides to slow down the pace of lending (and there are signs they are thinking of doing so), ALL of the above benefits will collapse relatively quickly. Imagine; if the flow of funds slows significantly, the psychological relief will disappear quickly, as will short-term loans to developers; the upbeat market sentiment will follow as speculative funds withdraw suddenly from the market. SOEs, which are building UP their capacity and inventory as we speak, will face growing losses from depreciation and deflationary pressure on output. Without free flow of bank loans, they will begin to default on their previous loans. Speculative demand for real estate will also collapse, given that inventory is expected to reach over 1 billion sqmtr some time in 2009 (again citing SCB report by Green et al.).

What does this mean? The central government cannot stop or even significantly slow this pace of lending until export picks up in a significant way, else the bubble will burst. This is a race against time. At some point, this pace of lending will lead to a serious NPL problem or inflation, or both. If by that point, export and domestic household consumption remain anemic, I am not sure what options the central government will have.

ashi wrote:Can this be real?
Goldman Sachs Raises China Economic Growth Forecasts: 8.3% for 2009 and 10.9% for 2010
http://www.bloomberg.com/apps/news?pid= ... nSHaqsTGx0