Making sense of what comes after the Olympics

The Olympics are finally over, and with a spectacular ending that reportedly had Jimmy Page performing “Whole Lotta Love”. I didn’t see the performance – I was in a park just south of the Olympic Stadium with three friends, trying to get a glimpse of the fireworks – but I am definitely curious to know what the very prim leadership were thinking as the guitar chords crashed about and as someone (presumably) screamed out “Wanna give you every inch of my love” (although perhaps in deference to the local leaders they skipped the vocals).

Whatever the fate of the Olympics, the up-and-down struggling in the stock markets that characterized the Olympic period is certainly not over. On Friday, the last trading day of the Olympic period, the SSE Composite declined by 1.1% to close at 2405, which brings a net loss of just over 11.8% for the SSE Composite since August 8, the day of the Opening Ceremonies.

Today, the market bucked the trend (sort of). After a quick downward break in the first half-hour of trading, the market recovered and was pretty strong for most of the day. The best performers were the banks, who have been reporting good earning growth. In the last hour of trading, however, on admittedly weak volume, the market suddenly gave up most of its gains, with the SSE Composite closing the day at 2414, up by just under 0.4%. The Shenzhen markets did not do as well, and most Shenzhen indices ended the day down by 0.4-0.5%.

I spoke to various friends in the market to get information on what has been driving trading, but it was hard to get a sense of strong conviction either way. Economic numbers are ambiguous, and I think most participants are hoping for some sort of fiscal stimulus, while at the same time dreading that it won’t make much of a difference anyway. I think there is also a lot of nervousness about a psychological post-Olympic let-down. After all the anxious excitement of the Olympics, with the constant, non-stop coverage in the press and on television, there will be little left of the color and excitement and a lot of work repairing the disruptions. I don’t know when and how the many migrants and poor who were ejected from the city will return, but I would guess that their welcome will be muted. Meanwhile we have been getting sporadic press reports about the cost to farmers within the region of the Olympics water policies.

The main thing is that now that the Olympics are finally over, we should quickly return to a less colorful reality, and policy-makers and analysts will get back to trying to figure out what the next few months are going to look like. Today there was confirmation of sorts of the fiscal stimulus package reported last Tuesday in a JP Morgan note. One of the most widely read of local financial periodicals, the Beijing-based Economic Observer, had an article in today’s paper citing unnamed sources who claimed that the CPC’s Central Financial Leading Group had put together a fiscal plan to support a faltering economy, although this plan had yet to be revised by the Ministry of Finance or approved by the state Council.

According to the summary of the article on the newspaper’s website (which, by the way, seems to mistake the JP Morgan note for a “Morgan Stanley report”):

A market report stating that high-level Chinese officials were considering a 200 to 400-billion-yuan economic stimulus package has led to temporary surges in stock prices and debates amongst economists. Though no forthcoming official confirmation since the Morgan Stanley report was released on August 19, the EO learned from sources in the Ministry of Finance that an “expansionism” formula was under study in case the economic growth slowed further.

The proposed formula might include 150 billion yuan of tax incentives and 220 billion yuan of additional expenditures, mainly to be spent on public facilities and services. Some held that the Chinese market was still growing healthily and that such interventionist measures were unnecessary.

If there really is such a program and if it is executed, and the newspaper cites an unnamed MoF official who claims that the proposal would have to go through many more stages before it became policy, the total fiscal stimulus would amount to a little under 1.5% of GDP.

Meanwhile Gregor Neuman alerted me to an article in today’s ChinaStakes. According to the article, in July, for the first time since 2003, tax growth has experienced a dramatic decline:

According to Ministry of Finance (MoF) statistics, China’s total revenue in July was RMB 532.325 billion, an increase of 13.8% over the same month last year. But this growth rate is 19.3 percentage points lower than in July, 2007, and 19.7 percentage points lower than the growth rate in the first half of the year.

The article goes on to say most sources of tax revenues showed sharp declines in growth rates, with corporate income tax actually down 4.2% from last July. Comprising RMB 149.6 billion of China’s total tax revenues of RMB 5323 billion for July (28%), the decline in corporate income tax was credited by the MoF to:

a decline in companies’ performance. Between January and May, profits of industrial firms with annual sales revenue of more than RMB 5 million increased by 20.9%, a growth rate 21.2 percentage points lower than in the same period last year. Due to RMB appreciation and raw material and energy price hikes, in the first half of the year about 65,000 small and medium-sized enterprises went broke.

I haven’t looked at these numbers beyond the ChinaStakes article and I am very far from being any kind of expert on the fiscal revenue and expenditure side, but I do think it is worth noting that these numbers seem extremely volatile. I have mentioned several times in the past my concern that the surge in tax revenues over the last four years has been more than matched by a surge in fiscal expenditures, but I suspect that if something were to diminish or even reverse revenue growth (an economic contraction, perhaps?) it might not be quite as easy to slow expenditure growth in line with revenues.

As if to comment on my concerns, the article goes on:

Professor Liu Heng of the Central University of Finance and Economics said the tax decline would likely continue due to the economic slowdown but would not largely affect fiscal expenditure. On July 8, the MoF warned departments to be ready for pressure on spending in the coming year. In the first half, budgeted income of local governments was RMB 1.526521 trillion, and the budgeted disbursement was RMB 1.806929 trillion, showing a deficit of RMB 280.408 billion.

Meanwhile, tax from land and real estate, a major source of the local governments’ incomes, has also declined drastically. In July, land-related tax increased by 79.4% over the same month last year, for a total of RMB 14.306 billion, but this was 25 percentage points lower than in July 2007.

Land transfer income has also decreased, due to the real estate market doldrums. This income should have been included in the government’s budget but, in fact, has not been, so the budgeted incomes of local governments don’t represent their real income level.

Liu Heng thinks the tax decline “won’t be a big problem”, since China has put a certain amount of money from its tax income every year into a rainy day account.

Perhaps. Unfortunately, as the saying goes, when it rains, it pours.

As an aside, on Saturday the South China Morning Post published the third of my biweekly “Money Matters” column. This week’s column was about foreign currency reserves and why they cannot be part of any fiscal stimulus package. You can read the article here

6 Responses to "Making sense of what comes after the Olympics"

  1. DJC   August 27, 2008 at 9:35 am

    Australia’s Rio Tinto predicts China post-Olympics games boom surge in demand from China could cause a bounce in commodities prices as restrictions on industrial activity around Beijing are eased after the Olympics.Vivek Tulpule, chief economist of the mining group Rio Tinto, which is due to announce half-year results on Tuesday, said the region affected by the restrictions, which were introduced to try to improve air quality, contributes more than a quarter of China’s gross domestic product.“The Olympics have acc­entuated the usual summer slowdown in commodities demand,” said Mr Tulpule in an interview with the Financial Times. “When activity is allowed to start around ­Beijing, there will be a post-Olympics jump.”China is the world’s biggest consumer of commodities such as copper and iron ore, and is Rio’s biggest customer. Mr Tulpule expects Chinese GDP growth to moderate from 10 per cent this year to 9 per cent in 2009, but says domestic consumption and investment will remain resilient, even if export growth slows.He said that many of the less developed, highly populated provinces in Chian’s interior, such as Shaanxi and Jiangxi, were showing high rates of fixed asset investment, increasing at above 35 per cent in the first half of the year. This is taking the form of investment in projects such as roads and airports and is part of the ur­banisation of these regions.Most of these provinces consume significantly less steel than Shanghai or Beijing on a per capita basis. Mr Tulpule says that if steel consumption in Henan province, with a population of 98m, were to move towards Japanese levels, demand would rise by 41m tonnes, the equivalent of Germany’s annual steel consumption.He predicts that strong demand from China and other emerging markets will make up for weaker demand for commodities in the developed world. “Despite the panic about falling metals prices, I am seeing very strong markets for 2009.”

  2. DJC   August 27, 2008 at 9:39 am

    Asia Is About to Give U.S. a Kick in the Fannie it will tell the next leader — be it Republican John McCain or Democrat Barack Obama — how willing foreigners are to continue financing the U.S.’s way of life. Alas, there are good reasons for the U.S. to learn how to live without Asia’s money.The great stampede out of dollar assets that many analysts predicted hasn’t happened. Demand for U.S. debt has been quite resilient amid a sliding dollar and a widening credit crisis. Even problems at Fannie Mae and Freddie Mac haven’t yet precipitated a massive capital exodus.The operative word is “yet.” The almost $10 billion drop in central-bank holdings of agency debt this month doesn’t necessarily mean the flight is afoot. Yet Asia is anxiously awaiting news of how the U.S. handles troubles at government- sponsored mortgage-finance companies.Catastrophic Risk“If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,” Yu Yongding, a former adviser to China’s central bank, said last week. “If it is not the end of the world, it is the end of the current international financial system.”Even if Fannie and Freddie are bailed out, recent events mark the end of the U.S.’s financing arrangement as we know it. It’s a reality for which the U.S. should now plan.China alone will be a prickly customer to deal with. A conservative estimate would put China’s U.S. agency holdings at 10 percent of its gross domestic product.Say the U.S. opted not to repay investors on time and in full. How would China’s 1.3 billion people, awash in post- Olympics confidence, respond to the wealthy U.S. leaving China with big losses? If the tables were turned, you can just imagine the public outcry for the U.S. to stop lending to China.

  3. DJC   August 27, 2008 at 11:49 am

    Across the developing world, it is an open secret that the IMF is de facto controlled by the US Treasury Department. The IMF talk about transparency is laughable given its close interagency ties to US Intelligence Agencies. The Neo-liberal IMF imposes a punitive fiscal and monetary regime that impoverishes indigenous populations for the narrow economic interest of US banking institutions. Just ask anyone on the streets of South Korea, Indonesia, or Argentina what the initials of the IMF represent: “IMF” – I’m Fired.The collapse of the Indonesian economy during the late 1990 Asian Economic crisis was not an accident. It was carefully orchestrated by the US Treasury Department/IMF to discredit the Asian Developmental Economic model. In the aftermath of the Soviet Union collapse, the high growth Asian economies were designated the primary strategic threat to US global hegemony. The industrial economies of Southeast Asia and South Korea were emasculated by the IMF in order ensure US global dominance into the next century. Yet the diminution of Southeast Asia and South Korea, ironically ensured that China would become the preminent industrial-economic power across Pacific Rim Asia.

  4. Guest   August 27, 2008 at 3:48 pm

    DJC,We all see your great optimism on China. Especially your consistent message that a US/EU recession will barely affect China’s high growth, as you argue that China doesn’t rely nearly as much on exports as most think. However, how do you explain why China’s leadership is so inflexible about allowing the yuan to appreciate against the dollar? A stronger yuan would mean cheaper raw materials imported esp oil, a boon for domestic-based growth and investment. Sure makes it sound like exports are in fact absolutely critical to China’s continued growth.

  5. Alex Wang   August 28, 2008 at 7:00 am

    You’re joking, right?”The collapse of the Indonesian economy during the late 1990 Asian Economic crisis was not an accident. It was carefully orchestrated by the US Treasury Department/IMF to discredit the Asian Developmental Economic model. In the aftermath of the Soviet Union collapse, the high growth Asian economies were designated the primary strategic threat to US global hegemony.”And accoring to you the same people who came up with such a brilliantly conceived and orchestrated plan are also too incompetent to keep the US banking system from collapsing. Given your strength in critical thinking I am guessing that you went to school in China, where conspiracy theories abound.

  6. Nostrodamus   August 28, 2008 at 7:19 am

    My prediction: After many years of mismanaging their currency and banking system, as people like Professor Pettis have been warning, China will have a financial crisis. One year later DJC will find incontrovertible proof that the crisis was nefariously forced onto China by an evil US adminstration intent on slowing China’s rise.