China’s unregulated shadow banking sector poses an increasing risk to the country’s financial stability that could spread to other countries, credit rating agency Fitch said on Monday.
China has tens of thousands of non-bank lenders that are providing increasing amounts of credit to businesses and government outside the mainstream, regulated banking sector, a situation that is stoking systemic risk, Fitch said.
There is little visibility on where the money is going, who is lending it or what the credit quality of assets is, meaning traditional warning signs of trouble will not function properly.
“It is a wild west atmosphere in many respects and that is one of the reasons why we are so worried,” Fitch Senior Director Charlene Chu told a conference in Frankfurt.
Regulators had little insight into the non-bank sector.
“It is a material risk because a growing amount of credit is being extended through channels that they don’t have transparency or control over,” Chu said.
Chinese authorities have been working to improve transparency in the financial sector, but Fitch said it was hard to get a handle on the problem, which hurts the effectiveness of monetary policy, will complicate the winding down of any institutions that fail and could also eventually put downward pressure on China’s sovereign rating.
The country’s bank regulator, the China Banking Regulatory Commission (CBRC), publishes statistics on non-performing loans, for example, but this is of limited use, Chu said.
“A 1 percent NPL ratio has little signaling value when 36 percent of all outstanding credit resides outside Chinese banks’ loan portfolios,” she said.
Banks are likely to be on the hook for bailing out non-banks in trouble, because the only efficient way to deal with shadow bank exposures is to transfer the risks to the formal banking sector, Chu said.
The country was already seeing defaults in trust and wealth management products that could be an early sign of trouble.
“Stress will appear in the weakest parts of the financial sector, which tend to be non-bank financial institutions on the fringe of the system – and gradually work its way inward,” she predicted.
While there are some factors mitigating the situation, such as China’s closed capital account, deep central bank reserves, the fact that funding is largely domestic and the main borrowers and banks are state-owned, there was still a potential for contagion, Chu said.
The foreign owners of stakes in Chinese banks already saw big writedowns on those stakes in the 2008 financial crisis and this could happen again, she pointed out.
There is also about $1 trillion in credit exposure by foreign banks to Chinese banks and corporations but this was also manageable.
“The bigger issue is what is it going to mean for growth and confidence, which could play out in a very negative way because China has been so important to the global growth story,” she said.
Source: Reuters “Fitch warns on risks from shadow banking in China”
Risks are rising that China’s economic growth will slide further in the second quarter after weekend data showed unexpected weakness in May trade and domestic activity struggling to pick up.
Evidence has mounted in recent weeks that China’s economic growth is fast losing momentum but Premier Li Keqiang tried to strike a reassuring note, saying the economy was generally stable and that growth was within a “relatively high and reasonable range”.
China’s economy grew at its slowest pace for 13 years in 2012 and so far this year economic data has surprised on the downside, bringing warnings from some analysts that the country could miss its growth target of 7.5 percent for this year.
“Growth remains unconvincing and the momentum seems to have lost pace in May,” Louis Kuijs, an economist at RBS, said in a note. “The short-term growth outlook remains subject to risks and we may well end up revising down our growth forecast for 2013 further.”
Exports posted their lowest annual growth rate in almost a year in May at 1 percent, exposing a more realistic picture of trade following a crackdown by authorities on currency speculation disguised as export trades to skirt capital controls, which had created double-digit rises in export growth every month this year even as world growth stuttered.
May exports to both the United States and the European Union – China’s top two markets – both fell from a year earlier for the third month running.
Imports fell 0.3 percent against expectations for a 6 percent rise as the volume of many commodity shipments fell from a year earlier.
The volume of major metals imports, including copper and alumina, fell at double-digit rates. Coal imports fell sharply.
“The trade data reflects the sluggish domestic and overseas demand, signaling a slower-than-expected recovery in the second quarter,” said Shen Lan, an economist at Standard Chartered bank in Shanghai.
A government factory survey of purchasing managers and a similar poll sponsored by HSBC, both issued earlier this month, showed export orders falling in May, suggesting the outlook remained grim.
Inflation, bank-lending growth and investment were below expectations in May, while factory output and retail sales rose around the same pace as in April.
China’s consumer inflation slowed to 2.1 percent, the lowest in three months, while producer prices (PPI) fell 2.9 percent, the lowest since September. A Reuters poll had forecast consumer inflation at 2.5 percent and factory-gate prices down 2.5 percent.
“The inflation data showed China’s economic growth continued to slow down. Second-quarter growth is probably even slower than the first quarter. In particular, the PPI data showed very weak demand,” said Jianguang Shen, chief China economist at Mizuho Securities Asia in Hong Kong.
Central bank data showed Chinese banks made 667.4 billion yuan ($109 billion) in new loans in May, below market expectations of 850 billion yuan and down from April’s 792.9 billion yuan.
M2 money supply rose 15.8 percent from a year earlier, slightly below a median forecast of 15.9 percent, while total social financing, a broad measure of cash in the economy, was 1.19 trillion yuan versus 1.75 trillion yuan in April.
Retail sales, fixed-asset investment and industrial output met expectations, rising 12.9 percent, 20.4 percent and 9.2 percent from a year earlier, respectively.
RATES AND OTHER REMEDIES
Economic growth slipped to 7.7 percent in the first quarter, down from 7.9 percent in the previous quarter. Both the International Monetary Fund and the Organization for Economic Co-operation and Development cut their forecasts for China’s economic 2013 economic growth in May, to 7.75 percent and 7.8 percent, respectively.
But the further loss of momentum in the April and May could prompt the central bank to try to give the economy a lift, said Jian Chang, China economist for Barclays in Hong Kong.
“We had expected an L-shaped economic recovery in China and that the growth would stabilize at around 7.9 percent,” Chang said.
“We now think China’s growth will stabilize at around 7.6 percent (this year). The possibility for the central bank to cut interest rates is now rising,” Chang said.
However, government economists from top think-tanks in Beijing told Reuters this week that the new leadership of President Xi Jinping and Premier Li will tolerate quarterly growth slipping as far as 7 percent year-on-year before looking to lift the economy, focusing on economic reforms rather than short-term stimulus.
Li was quoted by state television as saying that China’s economy was generally stable, while China Central TV reported that Xi told U.S. President Barack Obama during his visit to the United States that “we are confident of maintaining long-term sustainable economic growth”.
He acknowledged China was at a “critical moment of economic restructuring” but that it would bring “enormous” potential, the TV said.
Cutting interest rates would be a difficult decision for the central bank for fear that providing cheaper credit could exacerbate a rise in property prices, which policymakers have been trying to contain.
“Property prices will jump if it cuts rates as recent government cooling measures have not achieved desired results,” said Tang Jianwei, senior economist at Bank of Communications in Shanghai.
“And cutting rates may not be effective in slowing speculative money inflows, which are mainly driven by expectations of yuan appreciation.”
Most economists agree however that the government will avoid major stimulus along the lines of its 4 trillion yuan package unleashed in the global financial crisis in 2008. It sparked a lending boom, which fuelled a property bubble and left local governments under a pile of debt.
The new leadership is keen to push economic restructuring towards domestic consumption and away from reliance on exports and investment for growth.
Sources told Reuters in May that a consensus had been reached among top leaders that reforms would be the only way to put the world’s second-largest economy on a more sustainable footing.
Source: Reuters “China’s economy stumbles in May, growth seen sliding in Q2”
China’s industrial profits growth quickened in April from the previous month, though the government noted that the pickup was due mainly to a low comparative base, indicating that the world’s second largest economy still faces slack domestic and external demand.
Chinese firms made profits of 436.7 billion yuan ($71.22 billion) in April, up 9.3 percent from the same month last year, quickening from a year-on-year growth of 5.3 percent in March, the National Bureau of Statistics said on Monday.
The improved gains in April were caused by the low comparison base in the same month a year earlier, Yu Jianxun, an official from the bureau’s industrial department, said in a statement accompanying the data.
Profits had fallen 2.2 percent in April last year from 2011, compared with gains of 4.5 percent year-on-year growth in March 2012, said Yu.
In the first four months on 2013, Chinese firms made total profits of 1.61 trillion yuan, up 11.4 percent from the same period a year ago, the NBS said (www.stats.gov.cn).
Among the 41 industries tracked, 30 posted profit growth and eight reported a profit drop in the first four months compared with the year earlier period. Three sectors reported turnarounds in profitability.
Profits for manufacturers of computers, telecommuications equipment and electronics were up 44.8 percent from the same period last year, while those in the electricity and heat production and supply industry leapt 92.6 percent.
The ferrous metal smelting and rolling industry reported a 38.6 percent year-on-year increase in profits during the period, while profits in auto manufacturing rose 12.9 percent.
Petroleum refining, coking and nuclear fuel processing sectors swung into profit from losses in the first four months, while profits in oil and gas exploration dropped 7.9 percent.
The figures come after the HSBC/Markit flash purchasing managers index, the earliest indicator of China’s industrial activity, showed a contraction for the first time in seven months in May as new orders fell.
The PMI added to concerns that China’s economic recovery has stalled and that a sharper cooldown may be imminent.
($1 = 6.1316 Chinese yuan)
Source: Reuters “China profit growth quickens, no harbinger of recovery”
As universities annually pump out triple the graduates they groomed a decade ago, the proportion landing jobs has fallen to an alarming new low
Yang Biao has spent every weekend for the past two months at job fairs. The 25-year-old, who will finish a Chinese literature degree at Beijing University of Technology in July, has also sent out nearly 200 job applications.
“I do feel like I’m running out of time and I’m getting more anxious as each day passes,” he said. “But I can only cross my fingers and hope I will no longer need to live off my parents.”
Yang is one of a record nearly seven million students who will graduate from mainland universities this year and enter the job market during a marked economic slowdown.
By early this month, 52.4 per cent of mainland students about to graduate had signed job contracts, down seven percentage points on the same time last year. In the industrial hub of Guangdong, the rate was 46 per cent, and in Beijing, home to such top universities as Peking and Tsinghua, it was just 33.6 per cent.
Graduates majoring in English, law, computer science and technology, accounting, international trade and industrial and commercial administration are finding it harder to find jobs.
President Xi Jinping made a high-profile visit to a job fair in Tianjin on May 14 to reassure jobseekers, pledging to create more jobs by boosting economic growth. Xi told the graduates he met that having a job was the foundation of people’s livelihood and that employment struggles were becoming a global problem, Xinhua said. He was quoted as saying that only economic development could help improve the situation.
A day later, Premier Li Keqiang chaired a State Council meeting that outlined several measures designed to keep the employment rate for graduates no lower than last year.
The State Council also promised to tackle discrimination and inequality in the job market and to provide jobseekers from poor families with one-off allowances to help them find jobs.
Yang, from a rural family, said more than half his classmates were still looking for a job by the middle of this month. Because he was about to graduate from a less prestigious university, he did not expect a well-paid job, just one that could support him.
He said he had turned down a job offer from a Beijing kindergarten with a base salary of 1,700 yuan (HK$2,130) a month because it was not enough to make ends meet, given that he would have to move out of his parents’ home on Beijing’s outskirts to work in the city centre. Yang tried to get into a postgraduate school to further his studies and boost his competitive edge, but failed the entrance exam in February.
Another jobseeker, Ji Yinrui , said the cost of pre-employment accreditation courses in the computer and IT sector was a bigger problem for him than the tight job market. Ji, who will graduate from a university in Tianjin with a degree in computer science and technology, said many big-name employers in the computer and information technology sector required newly graduated jobseekers to take accreditation courses from privately run career training institutions as a condition for recruitment.
But such courses, which lasted up to six months and cost between 10,000 yuan and 20,000 yuan, were beyond the reach of jobseekers like him from poor rural families.
“I understand the employers’ concerns about a general lack of workplace skills among graduates nowadays, but isn’t that an issue about how we’ve been taught in universities?” he said. “Because what we’re required to learn at the private training schools is exactly what we should have been taught at university, especially during our last semester.”
Ji’s hunt began in November and he has given himself another two months to land a job, even a part-time one, because he says it is time to stop relying on his parents and stand on his own feet.
Citing a survey by the National University Student Information and Career Centre, China Central Television reported on May 19 that demand for recruits by employers with more than 1,000 employees was down by 3.6 per cent compared with last year.
A university degree no longer guarantees a decent job on the mainland because a reckless, government-led push for expansion since the late 1990s has seen the number graduating each year more than triple in the past decade.
The prospects of landing highly sought-after positions at government agencies and state-owned enterprises are often linked to power and money.
Some 500 college graduates in Shanxi lost tens of millions of yuan between 2008 and last year to a rogue job agency in a scam in which they were each swindled out of between 200,000 yuan and 500,000 yuan paid in return for promises of jobs in the state-owned sector.
As competition in the job market gets fiercer, those from less privileged families also face all sorts of discrimination and administrative barriers.
Zhao Lili, a postgraduate student in Beijing originally from Henan, said she faced twin difficulties in job hunting – as a woman and someone without Beijing household registration, or hukou.
“Many recruiters have shown no interest in me after learning that I’m not a local resident because they think I’m more of a liability than a local applicant,” she said.
Zhao, who is studying business management, said a far larger proportion of male students in her faculty had found jobs than had female students.
Xiong Bingqi, deputy director of the Beijing-based 21st Century Education Research Institute, said governments needed to play a bigger role in creating jobs, boosting transparency in recruitment and addressing inequality in access to sought-after positions.
Xiong also warned against a public preoccupation with statistics about the job outlook for university graduates, which could put pressure on universities to doctor their employment figures and force students to rush into jobs they disliked.
Studies by Mycos Data, a mainland consultancy specialising in higher education, show that 38 per cent of university graduates in 2009 left their jobs after six months.
“So job-creation efforts for college graduates are not a seasonal issue, but should begin shortly after students enter universities and continue all the way through the first three or five years of their career and even longer,” Xiong said.
Source: SCMP “Alarming drop in Chinese graduates landing jobs”
As evidence mounts that China’s economy is losing momentum, economists are fast abandoning their rosy recovery forecasts and bracing for what could be the country’s slowest growth rate in 23 years.
In the space of five months, analysts have swung from confidently predicting a modest pick-up in the world’s second-biggest economy to pondering the chance that China will miss its own 7.5 percent growth target this year.
Concerns that Beijing’s growth target may be under threat came to the fore on Thursday, when a preliminary survey of Chinese factories showed manufacturing activity shrank for the first time in seven months in May after both new domestic and export orders fell.
“Yes, the 7.5 percent target is under threat,” said Ken Peng, an economist at BNP Paribas in Beijing.
“China does not have a recession, but there will not be a recovery.”
Unlike previous years when any wobble in the Chinese growth engine was countered with heavy government intervention to stabilize activity, economists are counting on things being different this time.
There will be no big-bang stimulus like the 4 trillion yuan ($652 billion) package unveiled after the 2008/09 financial crisis to spur growth, analysts say. Instead, leaders appear to be banking on China adjusting to a new norm of slower and hopefully better-quality growth that requires less state planning.
Sources close to Beijing told Reuters this week that China’s plan to spend $6.5 trillion to urbanize its economy is running into snags as the government weighs the pros and cons of another spending binge that would escalate local debt problems and likely add to inflationary pressures.
Just how much growth will cool without policy action is difficult guesswork, but a string of underwhelming Chinese economic data have led some economists to contemplate worst-case scenarios of growth sinking below 7 percent in 2013.
“What investors are worried about is whether the situation in China right now is a lot more menacing than growth slowing to the 7 handle,” Tao Wang said in a note this week after cutting her 2013 gross domestic product forecast to 7.7 percent, from 8 percent.
It was always a close call.
Forecasts of a mild economic revival in China were predicated on activity picking up to 8 percent in 2013, quickening a shade from last year’s 7.8 percent, which was the worst showing in 13 years.
And calls for an economic cooldown now centre on growth dipping below 8 percent, but still above the government’s increasingly-vulnerable 7.5 percent target.
The last time China’s growth sunk below 7.5 percent was in 1990, when the economy expanded by just 3.9 percent.
Even before Thursday’s dismal survey results of Chinese factories, a host of banks had started slashing their 2013 growth estimates for China, and more are set to do so.
Bank of America-Merrill Lynch pared its growth forecast this month to 7.6 percent from 8 percent, Standard Chartered cut its estimate to 7.7 percent from 8.3 percent, and ING last month reduced its prediction to 7.8 percent from 9 percent.
BNP Paribas, Credit Suisse and Societe Generale are all in the midst of revising their 2013 growth forecasts.
To complicate matters, analysts cite different reasons for what is hobbling China’s economic growth, which unexpectedly eased in the first quarter after an initial promising rebound fizzled in just three months.
Lackluster wage growth, which is at a five-year low, is the biggest drag on consumption, some say. A government campaign to curb wasteful public spending is also hurting retail sales.
Others say anemic growth in factory output and trade is offsetting resilient investment, while some argue that government infrastructure spending has waned amid tighter state controls over alternative financing.
Global demand also has remained stubbornly weak, with the euro zone now in its longest-ever recession, offsetting some signs of improvement in the United States.
One of the rare points of agreement is that China’s property sector – the one industry that the government wants to slow – is ironically on a rebound.
The other is that China’s days of double-digit economic growth rates are over, and that the economic structure needs to be changed to let consumption overtake investment as the most important driver of growth.
“What the last couple of months has shown is that we have exhausted this China growth model and what we need now is the next China growth model,” said Alistair Thornton, an economist at IHS. ($1 = 6.1340 Chinese yuan)
Source: Reuters “Rosy China growth forecasts fade on further signs of slowdown”
China’s factory activity shrank for the first time in seven months in May as new orders fell, a preliminary manufacturing survey showed, entrenching fears that its economic recovery has stalled and that a sharper cooldown may be imminent.
The flash HSBC Purchasing Managers’ Index (PMI) for May fell to 49.6, slipping under the 50-point level demarcating expansion from contraction for the first since October and sending Asian financial markets sharply lower.
The final HSBC PMI stood at 50.4 in April.
The lack of vigor in the world’s second-biggest economy implies its ability to meet the government’s 7.5 percent growth target this year is increasingly difficult, analysts said, albeit it is still possible.
The soft data also sharpens Beijing’s policy dilemma over whether to act to stabilize activity, or tolerate an orderly slowdown while focusing on reducing the country’s dependence on exports and investment for growth, changes that would bring longer-term benefits.
Yao Wei, an economist at Societe Generale in Hong Kong, said the debate favors policy inaction from Beijing for now, as long as economic growth remains above 7 percent.
“We don’t think it will trigger any cyclical policy move as long as the job market is fine,” she said.
“China is really on a path of structural (growth) deceleration. It’s possible (to meet the growth target) but it’s becoming increasingly difficult.”
The PMI survey suggested China is up against weakness both at home and abroad. A sub-index measuring overall new orders dropped to 49.5, the lowest reading since September, suggesting domestic consumption is not strong enough to offset soft global demand.
Asian stock markets extended early losses after the report, with Japan’s Nikkei tumbling more than 7 percent. Oil, copper and rubber prices also retreated on concerns about softer Chinese demand, while the Australian dollar and riskier assets such as emerging Asian currencies skidded.
Thursday’s PMI revived investor worries about whether China can sustain an economic revival this year, after annual growth slumped to a 13-year trough in 2012. China’s factory output and investment performance for April released earlier this month had already underwhelmed markets.
The run of dismal data reports have prompted economists to slash their growth forecasts for China.
UBS this week downgraded its 2013 growth target for China to 7.7 percent, from 8 percent, and Societe Generale is in the midst of lowering its estimates. Bank of America-Merrill Lynch cut its China 2013 growth forecast earlier this month to 7.6 percent from 8 percent.
If the economy meets the government’s growth target and expands 7.5 percent this year, it would still be its worst performance in 23 years.
JOBS ARE KEY
The HSBC flash PMI comes about a week before the final reading and is the earliest indicator of how the Chinese economy is faring each month.
The PMI survey showed new export orders hovered below the 50-point level in May, though the rate of decline slowed from April.
Still, the weak showing implied foreign demand remained lethargic due to a patchy U.S. recovery and Europe’s nagging debt crisis, and echoes weak export momentum seen in Taiwan and South Korea in May.
In a reflection of the cooldown in the vast factory sector, both indices for input and output prices stayed muted in May to be near troughs seen in the third quarter last year.
“A sequential slowdown is likely in the middle of the second quarter, casting downside risks to China’s fragile growth recovery,” said Qu Hongbin, an economist at HSBC.
Yet, barring a slump in the labor market, most analysts believe Beijing will opt to stay on the policy sidelines. Measures such as reducing corporate taxes may be enacted, but only as part of broader tax reforms, not to pump-prime growth.
A stable employment market ranks high among China’s policy priorities as the Communist Party justifies its one-party rule with tacit promises of economic prosperity.
Although Chinese media has reported that a record 7 million graduates will join the labor force this year, there are few reports of widespread discontent among job hunters. Thursday’s PMI also pointed to a stable employment market.
“We believe the government will not loosen monetary policy to stimulate the economy in the second quarter because the labor market is still tight and although headline activity indicators are weaker, they are not collapsing,” Zhiwei Zhang, chief China economist at Nomura, said in a note.
Chinese leaders for their part appear to be comfortable for now with moderating economic growth.
Chinese Premier Li Keqiang said last week the country has limited room to rely on government spending or policy stimulus to spur its growth, dispelling market speculation that Beijing may act to pump-prime its economy.
At the depth of the global financial crisis in 2008/09, an estimated 20 million rural migrant workers lost their jobs, prompting Beijing to unveil a 4 trillion yuan stimulus package to shore up the economy and guarantee employment.
The latest sputter in China’s growth engine is clearly taking a toll on its corporate sector, but there are no signs of major defaults on loans.
Among China-listed companies which have posted their first-quarter earnings, 67 percent missed market expectations, ThomsonReuters data showed.
Zoomlion Heavy Industry Science and Technology Co Ltd (1157.HK)(000157.SZ), China’s second largest construction equipment maker, reported a 72 percent plunge in its first-quarter earnings from a year earlier.
Government data this week also showed that profit growth in China’s giant state firms cooled in the first four months of the year.
Source: Reuters “China factory activity shrinks for first time in seven months: flash PMI”
China’s factory output growth was surprisingly feeble in April and fixed-asset investment slowed, rekindling concerns that a nascent recovery is stalling and adding to pressure on policymakers to take action to stimulate the economy.
However, China’s already-easy monetary policy and rising home prices complicate the options available to Beijing’s new leadership, leading some analysts to say that any response could be limited to fiscal measures.
Annual industrial output grew 9.3 percent last month, according to data released by the National Bureau of Statistics on Monday, up from a seven-month low hit in March but still missing market expectations for a 9.5 percent expansion.
“Economic activity remains weak,” said Liang Youcai, a senior economist at the State Information Centre, a government think-tank.
“We now expect second-quarter gross domestic product growth of around 7.8-7.9 percent if there are no stimulus measures.”
Monday’s data dealt a further blow to investors’ hopes for a decisive revival of the world’s second-largest economy, following last month’s announcement that growth unexpectedly cooled in the first quarter of the year to 7.7 percent.
Growth in fixed-asset investment, an important driver of China’s economy, also disappointed in April. Investment rose 20.6 percent in the first four months from the same period a year ago, compared with expectations for a 21 percent rise.
Only retail sales met market expectations, growing 12.8 percent in April from a year ago.
For investors, the big question now is whether China’s economic rebound remains intact. This month’s evidence underlines Beijing’s growing policy dilemma, with economists saying that a recovery — if at all — is still fragile.
Data last week showed China’s consumer inflation, although muted, quickened more than expected in April, narrowing the scope for Beijing to further ease monetary policy if growth swoons.
Worse, surprisingly strong trade figures last week that were incongruous with subdued foreign demand suggested a substantial flow of hot money betting on a rising yuan is sneaking past China’s capital controls.
A flow of speculative cash into China is a headache for Beijing as it may fuel a rally in the country’s frothy property market, where prices are already at all-time highs.
“Monetary policy is now facing a dilemma,” said Jiang Chao, an analyst at Haitong Securities in Shanghai. “On the one hand, the central bank cannot cut interest rates for fears of reigniting property inflation. But on the other hand, China is seeing mounting hot money inflow pressures.”
April’s factory output data showed makers of transport equipment experienced one of the sharpest slowdowns last month compared with March. Crude oil output was another major decline.
China’s state-led infrastructure construction boom has been a major contributor of growth since the 2008/09 financial crisis as local governments pump-primed their economies.
Yet the sector has slowed in the past two years after profligate state spending accumulated a pile of government debt worth as much as 20 trillion yuan ($3.25 trillion), leading Beijing to order banks to reduce funding for the industry.
However, some analysts say Beijing could relax controls over financing of state infrastructure projects should economic growth slacken further.
A researcher at a state think-tank told Reuters last week that some local governments are already lining up financing options for their planned infrastructure projects in case they get a green-light from Beijing. He declined to be named due to the sensitivity of the matter.
Beijing has so far offered few clues about its policy plans, saying little beyond its stock phrase of keeping economic growth “stable”.
Within the government, state researchers say policymakers are debating over whether to focus on short-term demands or long-term benefits. There are arguments for Beijing to take action and stimulate growth now, or hold off and focus instead on restructuring the economy for the long haul.
China wants to promote consumption and cut its reliance on investment and exports, a transition that could be painful in the short-term as it constrains the government’s ability to unveil any new large-scale fiscal stimulus.
Ting Lu, an economist at Bank of America-Merrill Lynch, said he did not believe Beijing would succumb to the temptation to try to lift economic growth in the near term.
“Policymakers will resist introducing stimulus measures unless growth slides much further,” Lu said. “However, we believe that these new policymakers will try to avoid disrupting credit supply.”
Credit supply in China has risen rapidly in recent months as governments and companies sought financing outside the traditional banking sector amid Beijing’s clampdown on property and infrastructure investment.
The trend extended into April, when M2 money supply grew 16.1 percent, above forecasts for a 15.5 percent gain. China’s easy credit conditions, combined with its lackluster real economy, has led some analysts to worry that money is being used for financial speculation rather than actual investment.
A Reuters poll last month showed analysts expect China’s economy to grow 8 percent this year, up from 7.8 percent in 2012, although many economists say the risks are for growth to disappoint.
Analysts have struggled to track the turns in China’s economy in the past year, often proving to be too upbeat.
Predictions that a mild economic recovery was under way this year proved overly optimistic after growth sputtered between January and March. Calls in 2012 for a growth rebound were also nine months too early, materializing only in the fourth quarter. ($1 = 6.1417 Chinese yuan)
Source: Reuters “Risks to China recovery seen as factory output underwhelms”
Investors convinced China’s currency is once again a one-way bet upward should think again: signs of slowing economic growth could cut short the yuan’s rally.
Investors and companies have been pouring funds into China in recent months, helping send the yuan to a series of record highs.
But with evidence of a slowdown mounting, investors thinking of joining the rush into yuan would do well to remember 2011 and 2012, when fears of a Chinese hard landing sent the yuan, or renminbi, tumbling.
“Does this herald a return to the old status quo of one-way FX appreciation? Our medium-term answer is ‘no,’” Paul Mackel, head of Asian FX research for HSBC in Hong Kong, wrote in an April 14 note to clients. The latest inflows, he wrote, were driven by financial inflows, including speculators betting the yuan will rise. “These expectations could reverse in the future should the domestic and external environments change.”
A Reuters analysis of official data indicates that $181 billion in so-called “hot money” portfolio investment flows entered China in the first three months of 2013.
And that estimate may understate the true figure, since it doesn’t include those inflows that many economists suspect have been disguised as trade payments.
The inflows have helped push the yuan up 1.1 percent since April. Though hardly dramatic by the standards of freely floating currencies, most analysts began the year forecasting gains of only 1 to 2 percent in 2013.
China’s foreign exchange regulator responded earlier this week with new rules aimed at plugging holes in China’s capital controls that punters have exploited to bet on appreciation.
The new rules spooked China’s currency market: yuan traded outside China, or offshore yuan, suffered their worst one-day drop in 15 months on May 6, while yuan traded in China’s more regulated currency market, or onshore yuan, fell by the most since December. But the currency quickly recovered to scale new highs on May 8 and May 9.
China’s problems with hot money put it among the many emerging economies coping with the frustrations of rapid capital inflows from the United States and Europe, where central banks have pushed interest rates to record lows in an effort to revive growth, sending domestic investors in search of higher returns abroad. That has sparked concerns of a global “currency war,” with central banks cutting interest rates to help keep their own currencies from rising.
In the past week, central banks in Australia and South Korea surprised markets with rate cuts, and New Zealand’s central bank said it had been selling its own currency to stem its rise.
While the yuan’s own exchange rate was once fixed, in 2005 China began letting its value fluctuate around a set rate. With its trade surplus ballooning and its foreign exchange earnings soaring, the question was not whether the yuan would rise or fall, but how quickly authorities would let the currency rise.
In late 2011, as fears that China’s credit-boom would burst and send the economy into a sharp “hard landing,” the market got its first taste of downside risk.
Even the most pessimistic forecast would have left China growing at a rate most countries would envy, but the fear of a sharp Chinese slowdown was enough to spook investors and cause a sharp drop in a seemingly unshakeable market.
Chinese companies that had sold dollars short during years when the yuan was a one-way bet rushed to buy them back, helping to speed the yuan’s decline. Onshore yuan fell 1.3 percent through the first seven months of 2012, the currency’s first bout of sustained declines since China’s modern foreign-exchange trading system was launched in 1994.
The yuan’s tumble appeared for a time to have cured the market of its faith in the yuan’s perpetual ascent. But in August 2012, the market shifted again. As fears of a euro zone break-up eased and China launched a mini-stimulus program to revive growth, investors’ taste for yuan returned.
When the yuan began rising anew in the fourth quarter of 2012, companies that had accumulated large dollar holdings earlier in the year scrambled to sell them, accelerating the yuan’s climb. By late November, when confidence in the recovery peaked, China’s onshore foreign exchange market ground to a virtual halt, as dollar bids disappeared from the market, forcing the central bank to step in to buy dollars itself.
The central bank was still buying dollars in the early months of 2013. Balance of payments data shows that it bought $157 billion in the first quarter, the most since the fourth quarter of 2010.
“Non-FDI capital flows have returned to China on improved global risk sentiment and signs of stabilization on the Chinese economy,” Wang Tao, head of China economic research at UBS in Beijing, wrote in late April, using an abbreviation for foreign direct investment.
Currency traders say China-based companies have also been “over-hedging” their dollar holdings by buying forward contracts for yuan, fuelling the yuan’s rise. A Reuters analysis of yuan purchases by companies shows that China-based importers and exporters are now buying yuan at the fastest pace since 2010.
But even as Chinese companies and global investors lay ever-bigger bets on the yuan’s rise, worries about China’s economy are stirring, threatening a 2011-style correction. GDP grew at 7.7 percent in the first quarter, down from 7.9 percent in the last three months of 2012 and well below analysts’ expectations of 8.0 percent. Industrial output and fixed-asset investment also disappointed.
Purchasing managers’ indexes, which gauge economic activity, also suggest China’s manufacturing and service sectors were still weak in April.
If such indicators continue to disappoint, a 2011-style correction may not be far behind. The latest regulations, which target fake trade invoicing used to convert excess dollars to yuan, are also likely to bring reported export growth down to levels economists view as more realistic, given weak external demand.
That could sap confidence in China’s economy and its yuan.
“It’s going to be quite difficult for the renminbi spot exchange rate to appreciate much in the short-term. We think the recent moves have slightly overshot,’ said Robert Minnikin, senior foreign exchange strategist at Standard Chartered in Hong Kong. “The data is not super strong,” he said. “If anything, there’s a risk that we could see a bounce in dollar-CNY.”
Source: Reuters “Analysis: Bullish yuan herd leaves China fundamentals in the dust”