China: Behind the headlines

15th June 2012

The Macroeconomics of Chinese kleptocracy  – Bronte Capital

"This piece makes a valid point, looking at the systematic way in which depositors earn negative real interest rates in China. The biggest banks in China are majority-owned by the State and have tended to be tools for the policies of the Ministry of Finance. They are given lending targets to hit every month. Historically it has been a problem that – in hitting these targets – many took the path of least resistance, lending to their friends in the state-owned companies or on infrastructure projects rather than digging out smaller, growing companies. A similar thing could have happened recently with May's lending numbers. It is a classic command economy problem.

The banks are not competitive as it stands. Yet the government wants them to be profitable, so they set benchmark rates, telling them to lend at 6% and pay 3% for deposits. When inflation is running at 3% or more – as it has been recently – it creates a negative real interest rate for savers.

This is all true, but exactly the same thing is happening here with low deposit rates well below inflation and no-one is calling the UK a kleptocracy. The difference is that in China, negative real interest rates are enshrined in the benchmark rates.

More recently, at the time of the most recent interest rate cut, the Ministry of Finance said that in order to attract depositors, banks could pay up to 110% of the benchmark rate. It also said that it could lend at 80% of the benchmark. This gives the banks an opportunity to compete.

I would disagree that the one-child policy has encouraged saving. I would suggest that with four grandparents doting on one grandchild, it has actually been a factor in the expansion of consumer spending in China.

The next wave of development in China may involve insurance products. The Chinese have a need to smooth out their income across their lifetime. This was seen in America in the 1960s. To accommodate this, the banks will have to reform and launch more competitive products than those savings vehicles currently on offer so. This will go some way to addressing this problem"

China's high oil imports are all about Iran – Reuters

"The Chinese have historically been good contrarian buyers of commodities. They have often bought into weakness in the copper market, for example. This article seems to suggest that they have lost their touch and have being buying oil at recent high points in the markets. It could be that they have got it wrong this time. I would not rule out the possibility that they have been buying Iranian crude oil while there are Western sanctions in place. I don't think they would have scruples about doing that.

Amore interesting indicator at the moment, we believe, is the coal market. It is used for electricity, which powers the nation's heavy industry and is therefore more important as an indicator for industrial production than oil imports. Also, electricity demand indicators are a lot more difficult to fix than GDP numbers. There is no doubt that the growth in electricity production has slowed sharply in recent months, suggesting weakness in Chinese growth."

China and India ‘heading for economic slowdown' – Telegraph

"There is no doubt that economic activity is slowing in China. The second quarter is unlikely to be strong. The Chinese government has started to take steps to mitigate this weakness. The government has been behind the curve, in our view. Equity markets could see that China was slowing and anticipated a compensatory stimulus. It is coming now, but is later and smaller than expected.

Some slowdown in Chinese economic growth is welcome and indeed has been engineered by the government. They may have gone a bit too far in tightening and perhaps didn't reverse it quickly enough. However, the impact of the Eurozone crisis is a definite concern. The Eurozone is a major export partner for China.

The question is whether that stimulus will be sufficient to get growth going and I believe we are probably in for one or two sticky quarters. However, there is fair amount of disappointment already priced into markets and this may present a real opportunity for investors as equity prices in Asia could drop more than the reality of the situation demands. Asia is still the best-capitalised, fastest growth part of the world. It has governments that are likely to do the right thing to stimulate growth. Investors have to ask where they would rather be."


More on Mindful Money:

The great fall of China?

Is the sun setting on China?

How to avoid media spin – Edmund Harriss' media diet

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