In the latest example of what we have dubbed “the most over-hyped theme in emerging markets,” the Carnegie Endowment’s Yukon Huang defends China’s imbalanced growth model as a natural consequence of rapid urbanization in an FT Alphavile guest post. He writes, “urbanization largely explains both the decline in labor’s share of income and the increase […]
The amplified shock from Japan’s March 11 earthquake, then tsunami, then nuclear crisis has rippled through the supply chain of its emerging Asia (EM Asia) neighbors. Production shutdowns and weakened demand in Japan began to register in Asia’s trade channels in the weeks following the disaster. As the extent and duration of disruptions to production in Japan become more apparent, the severity of regional supply chain interruptions and the effects on EM Asia’s industrial production and export volumes and prices through 2011 can be better anticipated.
China can blow bubbles faster and bigger than just about any other country, but the Extraordinary Salt Mania of March 2011 takes the cake for speed, size and bizarreness. The brief, dazed run on salt by investors following the March 11 tsunami demonstrates China’s susceptibility to speculative bubbles and the potential to pass on the effects to international markets (discussed further in our China Monthly).
China’s banks pay out massive dividends relative to their internal capital generation capacity. This is a recipe for capital destruction. The heads of China’s largest state-owned enterprises (SOEs) tend to have a ministerial ranking, equal to a State Council member or provincial governor, but the heads of China’s largest banks are ranked a notch lower. Central Huijin, a division of China’s sovereign wealth fund, has a majority ownership stake in China’s largest banks and can control them directly through the board room, whereas the other SOEs report to an organization that is technically not even part of the government. It is hardly surprising therefore that while most SOEs pay miniscule dividends, state-owned banks routinely pay out 50% of profits in dividends. Resource companies, the SOE sector with the next highest required payout ratio, only pay 10% and many SOEs do not pay any dividends; meanwhile, they receive subsidized capital from the banks.
The “days of rage” sweeping through the Middle East and North Africa (MENA) have raised questions about the possibility of a similar movement erupting in China. At a glance, the ingredients for uprising appear to be present. Online calls for a “Jasmine Revolution” in China resulted in a massive staging of security forces at the planned protest sites, which could be taken as a sign of the Communist Party’s insecure grip on power. Like several of the MENA governments, China’s ruling elite is plagued by corruption and is preparing for a transfer of power. Inequality has devolved to Sub-Saharan levels, and the political system provides few outlets for popular grievances to be aired. However, China is unlikely to face a popular uprising for six reasons, discussed in more depth in our latest China Monthly.
A Bloomberg News article from Michael Forsythe on China’s National People’s Congress is making waves today. Coming on the heels of the failed “Jasmine Revolution” in China, the article seeks to show that the NPC is representative of the widening income gap in China.
The richest 70 of the 2,987 members have a combined wealth of 493.1 billion yuan ($75.1 billion), and include China’s richest man, Hangzhou Wahaha Group Chairman Zong Qinghou, according to the research group Hurun Report. By comparison, the wealthiest 70 people in the 535-member U.S. House and Senate, who represent a country with about 10 times China’s per-capita income, had a maximum combined wealth of $4.8 billion, data from the Washington-based Center for Responsive Politics show.
The People’s Bank of China (PBoC) hiked the one-year deposit and lending rates by 25 basis points (bps) after the local markets closed yesterday. In contrast with consensus, RGE had been foreseeing a modest hike to the lending and deposit rates—a stance we reaffirmed in our most recent China Monthly—despite signals that the central bank was content to tighten credit conditions with quantitative measures. (On October 11, the PBoC initiated a temporary required reserve ratio [RRR] hike of 50 bps for the largest state-owned banks.) Following the interest rate hike, one-year deposits will pay 2.5% starting today, when the benchmark one-year lending rate will increase to 5.56%. The 25-bp move seems to signal the end of the abacus-based 27-bp hikes we had come to expect from the PBoC.
Beijing’s currency regime will come under the spotlight tomorrow in Washington as tempers (and political posturing) are rising alongside the trade deficit with China. In the first eight months of 2010, China’s trade surplus with the U.S. rose 29% y/y to US$115 billion while its overall trade surplus shrank 16% to US$104 billion, according to the Chinese data. [Though, as Michael Pettis points out in a recent blog post, there are problems with using bilateral trade data to estimate imbalances.]
Despite our expectations of a soft landing in 2010-11, we think the probability of a domestic banking crisis is increasing in China. We now believe there is nearly an even chance that the banking sector will face a solvency crisis in the next five years due to the surge in credit in 2009. As described in a previous RGE Analysis, such an outcome may not result in a liquidity crisis, but it would keep China in a boom-and-bust cycle, defer domestic and global rebalancing and restrain growth. The banking sector’s stock of nonperforming loans (NPLs) declined yet again in Q2 2010, but non-payments on commercial bill financing jumped 10% q/q. Given the strong revenue and profit growth most companies saw in H1, we think this is an important warning sign for the banking sector, and our assumption that NPLs would only increase by RMB1.7 trillion by the end of 2013 may be too optimistic. We are pleased so far with the regulatory zeal to recapitalize China’s banks and take stock of the growing risks on banks’ balance sheets ahead of the coming flood of bad loans—an attitude from which Western regulators might learn a thing or two. Still, the China Banking Regulatory Commission (CBRC) is beginning to look more and more like a little Dutch boy with his finger in the dike.
The China Automotive Technology & Research Center (CATRC) reported that passenger car sales jumped a whopping 59.3% y/y in August to 977,300 units, up from a 15% y/y and 822,300 units in July. The CATRC data supposedly tracks retail deliveries of autos, so in theory it should be a better metric of demand than the more prevalent China Association of Automobile Manufacturers (CAAM) data that tracks wholesale delivers.