For the past two months there have been very strong rumors in the markets that next year’s new lending quota was going to be set somewhere between RMB 6.5 trillion and RMB 7.0 trillion. For comparison’s sake, total new lending last year amounted to RMB 9.6 trillion, and this year the quota was RMB 7.5 trillion.
But to me RMB 6.6-7.0 trillion seemed likely to be low (and ”low” is a relative word here – compared to the years before 2009 these are actually very large numbers). We have been telling clients for months, for example, that even ignoring the reportedly large amounts of loans shifted off bank balance sheets this year, it was very unlikely that 2010 would end with new lending below the RMB 7.5 trillion quota. In fact by the end of November we were already over RMB 7.4 trillion, so I suspect we are going to finish the year with total new lending at pretty close to RMB 8 trillion. Add in the loans taken off bank balance sheets and we have easily blown through the 2010 quota.
Tuesday’s South China Morning Post has an article suggesting that we may have been right:
China will probably target a limit of about 7.5 trillion yuan (US$1.1 trillion) in new loans next year, the same as this year’s target, a leading official newspaper reported on Tuesday, an indication that policy could be slightly looser than expected. Control of credit issuance is one of the most important monetary policy tools in China and many in the market had assumed that Beijing would lower the new lending objective next year as a way of tamping down on inflationary pressures.
But the report on the front page of the China Securities Journal, citing an unnamed source described as authoritative, suggested otherwise. “The Chinese economy is very big now and a target of 7.5 trillion yuan in new loans will not trigger all-round inflation,” the newspaper quoted the source as saying.
The quota hasn’t been set, and may even be set at RMB 8 trillion, but even this number is, I suspect, going to be lower than the reality. It is proving very difficult to keep growth up in China except with massive increases in bank-driven investment, even though this year China got a lot of help from the surge in the trade surplus. Next year I suspect it will be much more difficult to count on a surging trade surplus to generate domestic growth, and consumption is not going to kick in, so we are pretty much left with growing investment if policymakers want to keep growth rates in the 9-10% range, which they almost certainly do.
Part of this unbalanced investment-driven growth will be supported by hot money inflows, which are already worrying the PBoC. Here is what an article in Tuesday’s People’s Daily said:
State Administration of Foreign Exchange (SAFE) stressed the need to strengthen supervision of cross-border capital flows on Dec. 13. It also advocates actively responding to and fighting against hot money and other unusual cross-border capital flows as well as guarding economic and financial interests of national security.
To safeguard national economic and financial security, from the beginning in February 2010, China has been cracking down on hot money. SAFE is organizing special actions in some cities that have a large volume of foreign exchange business.
As of the end of October this year, a total of 197 cases of foreign exchange violations have been verified, and the total amount of money involved reached 7.34 billion U.S. dollars.
SAFE recently issued a document on the further regulation of trade, foreign direct investment, return investment, overseas listing and other sources of cross-border funds flows. These guidelines aim to strengthen banks’ short-term external debt management and obligations to examine the authenticity in the foreign exchange business. This will further aid the crackdownon illegal capital inflows and prevent financial risks brought by cross-border “hot money” inflows.
Hot money inflows are at least part of the reason why the PBoC has been so slow to raise interest rates, and this is likely only to get worse over the next few months.
The new normal
On Wednesday an article in the People’s Daily trumpeted a Merrill Lynch report that said 9% growth was the “new normal” for China.
The Chinese economic growth is forecast to slow to 9.1 percent in 2011, from an estimate of 10.3 percent this year, and the 9 percent growth is expected to be a new norm for China in the post-crisis period, Bank of America Merrill Lynch said in a regional economic outlook report released on Tuesday.
After fluctuations since late 2008, China’s gross domestic product (GDP) growth has stabilized at about 9 percent in both year on year and sequential terms, in comparison with the average 11-percent growth in years before the crisis, said the report.
…From 2012 to 2015, the report forecast the Chinese economy is likely to expand by 9 percent, 8.5 percent, 8 percent and 8 percent, respectively. And for the subsequent five years of 2016- 2020, China’s GDP growth might average at 7 percent.
It is interesting that the consensus is starting to shift downwards, and that 9-10% for the rest of the decade is no longer the default expectation, but I am not sure that even the Merrill Lynch numbers are plausible. I think too many economists are seriously underestimating how difficult the transition to a new growth model is likely to be.
Still, we are starting to see a shift in expectations. Perhaps symbolic of that shift is an article in last week’s New York Times by the always-perceptive David Barboza:
For nearly two years, China’s turbocharged economy has raced ahead with the aid of a huge government stimulus program and aggressive lending by state-run banks. But a growing number of economists now worry that China — the world’s fastest growing economy and a pillar of strength during the global financial crisis — could be stalled next year by soaring inflation, mounting government debt and asset bubbles.
Two credit ratings agencies, Moody’s and Fitch Ratings, say China is still poised for growth, yet they have also recently warned about hidden risks in its banking system. Fitch even hinted at the possibility of another wave of nonperforming loans tied to the property market.
In the late 1990s and early this decade, the Chinese government was forced to bail out and recapitalize these same state-run banks because a soaring number of bad loans had left them nearly insolvent.
Those banks are much stronger now, after a series of record public stock offerings in recent years that have raised billions of dollars from global investors. But last week, an analyst at the Royal Bank of Scotland advised clients to hedge against the risk that a flood of cash into China, coupled with soaring inflation, could result in a “day of reckoning.”
I already wrote in early November an entry suggesting that we were starting to see some leading Beijing policymakers and advisors warning about a rapid slowdown in growth – the numbers bandied abut were in the 6-7% range. This is till very much a minority view, but I have almost no doubt that during 2011 all the growth expectations are going to be revised sharply downward. By the end of next year, I suspect that the consensus will be that for the rest of the decade we should expect growth rates in the 6-7% range for China.
Do I believe these lower numbers? Not really. About a year and a half ago I wrote in a Financial Times article that, assuming consumption growth could be maintained at 8-9% a year, Chinese GDP growth would average 5-7% annually over the rest of the decade.
My prediction caused a lot of strong disagreement and accusations of being overly pessimistic, but the truth is I think I was being optimistic. If GDP growth slows so substantially, it seems to me that consumption growth of 8-9% will be very hard to maintain, so I would argue that we should be prepared for even lower average growth numbers, perhaps in the 3-5% range. But I do think the consensus next year will migrate down to the 6-7% range, even though next year’s growth should remain high – probably in the 9% range.
Slowing growth?
Will that be a disaster? Here is where I disagree with Barboza’s article. He says:
A sharp slowdown in China, which is growing at an annual rate of about 10 percent, would be a serious blow to the global economy since China’s voracious demand for natural resources is helping to prop up growth in Asia and South America, even as the United States and the European Union struggle.
And because China is a major holder of United States Treasury debt and a major destination for American investment in recent years, any slowdown would also hurt American companies.
I am not sure why Chinese holdings of USG bonds suggest that a Chinese slowdown will hurt US companies, but I have already explained why I do not think a sharp slowdown in Chinese growth is necessarily bad for the world. It will be very bad for commodity exporters – or at least non-food commodity exporters, since I think the demand for food from China will continue strong – but the overall effect on the rest of the world depends on the evolution of China’s trade balance. A contraction in the surplus creates net demand for the world, and so might even be marginally positive.
This marginally positive outcome won’t be evenly distributed, of course. Non-food commodity exporters will be badly hurt, while commodity importers and manufacturers will benefit.
I don’t even think such a rapid slowdown in Chinese growth will be bad for China. Again it depends on how it takes place. If there is a serious attempt at rebalancing the economy by raising wages, interest rates and the currency, China can manage a much slower GDP growth rate while still maintaining a fairly high growth rate in household income and consumption. I discussed this in more detail in an entry last moth.
In the spirit of end-of-the-year pieces let me suggest a few things to watch for 2011. First, although I do not believe inflation is going to be as big a problem as many think (I believe the Chinese financial system has a built-in inflation-stabilization mechanism – see my November 18 entry), if I am wrong and inflation continues to rise, this will create a real problem for monetary policy.
Second, debt levels are worryingly high and are starting to act as a serious constraint on the rebalancing process. My friend Victor Shih at Northwestern University has done great work in trying to figure out the government balance sheet, and he worries, correctly, in my opinion, that it is becoming increasingly difficult for the PBoC to raise interest rates without creating a great deal of financial distress in government-related entities. Even the PBoC balance sheet is a real problem. How can they raise RMB interest rates without running a huge negative carry?
Third, the trade constraints are going to get worse, not better. Ashoka Mody and Franziska Ohnsorge have a very interesting piece on Vox that suggests that we shouldn’t count too heavily on consumption growth in the developed world to boost global demand. That means we are going to spend the next few years fighting over anemic demand growth, and we will be apportioning that demand via trade disputes.
Fourth, although GDP growth rates next year will be very high to see off the current leadership, I am pretty sure that by the end of the year there will be much more concern about the rebalancing process and what that will mean for growth rates. In order to get those high growth rates, I don’t think we need to take the 2011 lending quota too seriously. Whatever it is, it will be breached.
Happy holidays and have a great 2011.
The RSS reader version of this post (I use Google Reader) is peppered with the phrase “Levitra online order”. Other feeds don’t have this so there may be an infection on the host.
Mr. Pettis, could you be more specific as to how the massive growth in money supply since 2009 would fail to create serious inflation in 2011? I read your November 18th entry, but I think your analysis there fails to state exactly where the new money will go.
Given that the Chinese elites (courtesy of Wikileaks) distrust their own statistics, this all strikes me as diving a Formula One without a tach of reliable gauges. Best of luck in the new year, cadres.
Any comment on the Daily Mail story of today: The ghost towns of China: Amazing satellite images show cities meant to be home to millions lying deserted
Read more: http://www.dailymail.co.uk/news/article-1339536/Ghost-towns-China-
Satellite-images-cities-lying-completely-deserted.html#ixzz18Yuf0K6J
hi Prof. Pettis and Merry Christmas to you too.
On this lending quota and growth, i have been talking about it with several people involved in policy and some who were at the central economic work conference last weekend.
In my opinion the greater part of the “increase” in the quota over what was expected is because the banks have to move around 1 trillion of lending back onto their books during 2011. In June 2010 the regulators ordered a stop to off balance sheet lending (although another 200-300 billion went on in July and August). The total for 1H 2010 was already over a trillion (no exact figures here), and i think total loans sitting off balance sheet (including the 2009 ones) must be around 2 trillion RMB. They can’t move it all back on next year, but since what they do move must show up as NEW LENDING (and thus affect the quota), it was necessary for the 6.5 trillion to be increased in order to accomodate the transfers.
As for growth, apparently at the Central Economic Working Conference thing there was a general acceptance that growth would be slowing especially from 2012 moving forwards, and that above previous year averages inflation would become a fairly permanent feature – hence the raising of the target to 4%. (The same technique as the Amsterdam authorities used to stop marijuana crime!)
So there were discussions of growth falling to 7% in a couple of years, and further after that (down to 5-6% etc).
Michael,
The scenario you outline seems like a big net positive for the U.S.: the commodities we import fall or moderate; those we export will stay steady; our share of production growth should rise. It would also seem a net positive for India, Thailand, the Philippines, Vietnam, etc.
But although it might be an intermediate term positive for the U.S. et al., do you think the short-term shock here in the U.S. will be significant?
I looked back and it’s amazing how little an effect Japan’s Nekkei/real estate crash had on the U.S. But we didn’t have 10% unemployment then.
Michael writes “this year China got a lot of help from the surge in the trade surplus”.
Factually there was no surge in China’s trade surplus this year. On a trade statistics basis (fob-cif) China’s trade surplus in 2009 was $219bn. So far in the first 11 months of this year it is $171bn. Except in the wholly improbable case that the December trade surplus is $48bn (November’s was $23bn) therefore China’s trade surplus, far from surging in 2010, actually fell in absolute terms and as a percentage of GDP it of course fell more sharply.
Michael and I have been having a polemic for over two years on prospects for the relative performance of China’s and the US’s economies during the financial crisis. His analysis has been shown to be wrong over this period on the general course of the financial crisis. He argued for example at the outset of the financial crisis that: ”I continue to stand by my comment… that the US would be the first major economy out of the crisis and China one of the last.’ In reality, as I pointed out, in an earlier exchange the opposite would occur: ‘China will be the first major economy out of the crisis and it will emerge from it before the US.’
The facts clearly confirm that China passed through the financial crisis far more strongly than the US – in the three year period since the 4th quarter of 2007 China’s GDP has grown by more than 30% while the US’s has not expanded at all.
Despite his erroneous analysis Michael Pettis’s blog is edited in such a way as to make it a very valuable forum for discussion on China. But stating as facts trends which do not exist does not help clarity in such a debate.
Michael, there are a lot of ifs involved in this entire China game. As someone who believes in credit bubbles and mal-investment, I have to believe China presents a dangerous picture. I have read from many sources that investment is over 60% of the Chinese economy. We are looking at debt expansion in the near 20% of GDP and that is double the reported GDP growth rate. China has a means of dealing with the credit, but relative to western countries, it is still a poor country. Though I have no way of knowing from the data I read, I have to assume much of the investment in China is foreign, as in the plant and factories built there. Demand in the west is going to slow and it is clear trade isn’t the sole determinant of economic value.
I have to agree your lower estimates are much closer to the truth. An observer with any kind of basis of economic knowledge has to question the massive construction of real property that lies outside of the capacity of the masses to consume. When you put into the equation the growing load of debt placed on the system, the building inventory of capacity in consumer and productive assets and the fact that the economy in China is building capital investment, good and bad, a slow down in this sector threatens the entire economy.
I was in Dallas back in the 1980′s when we had such a boom. Over 20 years later, they started converting downtown office space to condos for the very reason that it was never occupied. The USA is a rich country and to some extent could live through the mal-investments made. Still, the DFW economy was affected for years. Just a 20% slowdown in the building sector in China would result in a loss of 12% of the economy. I suspect their entire game isn’t much different than the USA in the 2002 to 2007 period, using loose money to push on a string.
Dear Michael,
One cannot argue with forecasts; one can only wait and see if they are right. Yours are plausible enough.
The answers to a few questions might help my understanding.
1) How is China’s (private plus public) debt/gdp ratio evolving?
2) Could you possibly provide a link to Victor Shih’s research?
3) You say re the PBoC’s B/S, “How can they raise RMB interest rates without running a huge negative carry?” What carry is that?
4) Doesn’t raising RMB interest rates run the risk of popping the real estate bubble?
May I ask a true or false question?
The Readjustment process will mean thousands of state-supported manufacturer bankruptcies (In China) as most operate on razor-thin margins. This is inevitable is it not?
Finally.
Could China be affected by any Euro-Bond write-downs such as the ones that could happen in Ireland if the citizens reject the austerity budget?
Best Wishes and Luck in 2011
How is China going to avoid residential and commercial property collapse or does this not matter? According to James Chanos the Chinese economy is 60% capital investment. He thinks it is a bubble that is going to collapse. Is he right or wrong? Michael says that investment will slow down as lending growth slows and that this will have a serious detrimental effect on the hard commodities producers like Australia so even if there in no property PRICE bubble in China there may well be a construction industry/capital investment bubble the popping of which is likely to be detrimental in Australia. Which apparently is where Chanos’s short bets are mostly located.
Merry Christmas! Michael, and Best Wishes for the New Year.
Dear Professor Pettis,
I very much reading your posts. The two central questions I have been trying to answer in the past year (alluded to in your post) are: i) how long can the PBoC continue to sterilize and maintain a negative carry? And ii) what are the limits on the size of its balance sheet?
Any answers or insights would be greatly appreciated!
Thank you and happy holidays,
Martin
SK, sorry, I am still trying to clean that problem up.
Kunal, in a financially repressed system monetary growth is more likely to lead to asset bubbles than to CPI inflation. And as inflation rises faster than nominal interest rates, it reduces both household income and the real cost of capital. In that case there is downward pressure on consumption, upward pressure on production, and more money flowing into asset purchases. It is interesting, by the way, that jewelry and furnishings are among the components of the CPI basket that are seeing the biggest price increases.
Nada, I think the problem of the quality of statistics is pretty widely-known in China, not least by the leadership. There have been and continue to be serious attempts to improve the quality of macro data, but this was never going to be easy in a system undergoing the pace of transformation that China is/
B Tomko, I wasn’t able to find the article but there has been a lot of comment about empty towns.
Houhui, thanks for the color. This whole issue of off-balance-sheet lending is and will continue to be problematic. It is hard to get a real sense of the numbers, but I think if they truly expect 9% growth it will be impossible for them to put RMB 1 trillion back on the books next year if they also plan truly to maintain a new lending quota of under RMB 8 trillion. Investment is the only still-functioning engine of growth.
Bob, the whole question of what impact a Chinese slowdown will have on the US and the world is pretty complicated, and obviously depends heavily on the nature and timing of the slowdown, but I guess my main point is that we shouldn’t all be so quick to assume that it will be a blow to growth outside China. The US should be working with China so as to help engineer a slowdown and rebalancing that is the least painful both for China and for the rest of the world, and it seems to me that there are ways to minimize the pain.
John Ross, I am not sure how many times I will need to say this, but the idea that the crisis is over and we know the outcome is absurd, and fortunately not widely accepted among Beijing economists. The global imbalances have not been reversed, Chinese domestic imbalances are worse today than they were three or four years ago, debt in China and around the world is high, rising, and in some cases (China, Europe) threatening to explode with contingent liabilities, and there is little reason to expect a surge in global consumption. If the crisis is truly over, this has been the quickest resolution of a crisis in 200 hundred years of globalization cycles, excluding the one that ended in 1914, and the only one that ended without any rebalancing of previous imbalances. I suppose you would have been one of those in 1980 suggesting that Latin America had fully escaped the crisis that afflicted the developed world in the mid 1970s, or in 1931 that France was the first major country to put 1929-31 behind it. We still have a long ways to go and the countries that have not resolved their domestic imbalances will do so.
Mannfm, one of the most puzzling aspects of finance is the widespread insistence that historical precedence, like the Texas real estate crisis of the 1980s, is irrelevant, in spite of the fact that we have well-documented evidence of the relationship between credit expansion, real estate bubbles and real estate corrections dating back to 33 AD. Its not just Texas – there are hundreds of major examples.
My dear professor Adler, I am glad to see your comments. Here is how I would answer your three questions:
1. We still don’t know the true debt to GDP ratio because there is so much hidden stuff, but government debt to GDP in my opinion is not less than 70% and could easily be 100%. This is under the current condition of very low interest rates (negative in real terms). I would argue that if you really want to know how much government debt there is you should raise interest rates to a “normal” level and then include all the uncollectible parts of NPLs as additional debt, since this is effectively what the household sector is cleaning up anyway (via very low deposit rates). You might also want to consider the PBoC balance sheet, because with nearly $3 trillion of foreign assets funded by an equal amount of local liabilities, any increase in domestic interest rates or in the RMB will cause net sovereign debt to grow.
2. No, because it is a presentation of his that he sent me and not something on the web but I will ask him if I can forward it to you.
3. See the end of my answer to your first question.
4. Yes I think it does. It also runs the risk of causing a surge in NPLs and financial distress. Unfortunately not raising interest rates allows the game to continue and make balance sheets even more vulnerable. Damned if you do and damned if you don’t.
RS, you ask: The readjustment process will mean thousands of state-supported manufacturer bankruptcies (In China) as most operate on razor-thin margins. This is inevitable is it not?
If it happens quickly, yes. The trick is to adjust quickly enough to force an improvement in the quality of growth and the allocation of capital, without causing a surge in financial distress. This isn’t easy, but of course the longer you postpone it the harder it becomes.
As for your second question, yes, if in order to generate export sales China invests in bonds of countries that later receive debt forgiveness, it will take a loss. Conceptually this isn’t much different from misallocating capital domestically. In either case you generate growth today but you reduce future growth (by reducing future consumption) by a greater amount.
Simon, I don’t think China will have a real estate “collapse”. I suspect it will simply slow real estate development significantly over the next decade as it grinds away at the current excesses. This will probably have a greater economic cost in the long run but at a lower social cost.
Martin, the PBoC probably isn’t running a negative carry yet, especially since it is able to push off the cost of a great deal of its funding onto commercial banks by raising minimum reserves, but it is probably running a very thin margin. As far as I am aware there are no theoretical limits to the size of the PBoC balance sheet. My model of financial instability, which I describe in my book Volatility Machine, just assumes that as balance sheets become less and less stable, it takes smaller and smaller exogenous shocks to cause them to unravel. The shocks of course are unpredictable.
Prof Pettis
I believe that a slowdown in China would have a devastating effect on the the financial markets around the world. China is seen as a Goldilocks economy engineered to perfection. If investors around the world suddenly become more risk averse the pullback in investment and related consumption would be devastating to capital markets, at least for the first few years. Is there any reason to believe otherwise?
Also I fail to see the positive outcomes for the US if china slows. Would not the US initially be hampered by the inability to borrow from China if say china were to begin running deficits?
Houhui,
Could you be more precise about “Amsterdam marijuana crime”? Using marijuana in Amsterdam is no crime and hence the sentence would be nonsense unless you meant that people would be wasting the stuff there..However the police have little to do with that.
Michael,
Many, many thanks for returning to China. Santa had become worried that your authorititative prose was about to put Spain into the Irish bin. Young and impetuous people do things like that, and then it takes years to put things right with Santa.
And, many ways to come to the same conclusion about medium term growth in China, this is one and pretty good. Nothing goes on forever. But maybe it can be stretched a little. The big question is, if more growth is needed, how to get it and at what price (or is there no price elasticity of growth in the Chinese political economy?)
Maybe we should turn this around and ask ourselves what it this that Mr Xi wants when it is his turn to govern. Maybe he inherited a few things of substance besides his status and wants to govern properly (an irrationality that occurs occasionally in Chinese history) .., But if there is not enough growth left for 2012, would not there be a bit of a contest to see what can be done about 2012?
There are two questions here: (1) how much is still in the tank of the current growth model? (2) what are the implications of the succession for the temporal distribution of growth (partially an admiinistrative decision as some suggest) of the political succession and maybe the “stretching” that bureaucratic gvts sometimes produce?
You’re a good guy, Michael Pettis, answering the questions of readers. You benefit all of us by your writing.
PS — regarding Levitra, I would delete my Feedburner feed, or, create a new Feedburner feed, and see if that doesn’t solve the problem. Not certain that either would work, but that is what I would try.
As often happens at this site, an excellent and informative article. I, too, wonder whether even a sharp decline in growth would cause that much pain for China. And the point that china’s contribution to world growth depends on its trade balance (at least, until we get out of this period of demand-determined output), should be pounded into the heads of the common pundits who fail to realize that just because China is growing, this does not mean it is contributing to growth outside of China.
What I do wonder, though, is whether a slowdown in China can be accomplished without a period of actual contraction. That is, instead of merely a decline in growth, the transition may require a temporary period of contraction, or at least stagnation. That could raise more problems than merely economic ones for China and the ROW.
I second David above. I just read your article and then tried to make sense of the first dozen questions myself before I was impressed by your own clear answers. What a tremendous economics seminar. Thanks for making it public.
Sorry Rien, that was an obscure reference. What i meant was that targetting inflation at 3% then failing, so simply raising the target (should note that they haven’t actually done this yet), is a little bit akin to legalizing crime in order to lower crime rates. ( or perhaps “misdemeanorizing” marijuana so that authorities can concentrate on problems they have a chance of succeeding on, as opposed to those which are too painful). Not a perfect analogy i accept, but i meant to highlight the trilemma issue with China’s macro policies.
Michael,
Regarding real estate prices, if there is a large change in the value of the RMB, would that not effect real estate values? Accounting for latencies, I cannot imagine that it would. Does external purchasing power not have any effect? I would imagine that that if it was not for a weakening USD, real estate prices would have fallen further. Falling vales, both currency and property, buffered the fall because foreign purchasers found a market that became much more attractive.
Glen
I wonder the same thing and for what its worth i believe that Pettis is correct in saying that the PRC will stoke demand for housing enough for the prices to fall slowly (versus crash) over the next few years. This will happen only if Housing construction slows dramatically. If the chinese continue to push for more new home construction then we could see large drops. The High end will get hurt the most as we saw in Japan in 90′s
Don
I think it is implied in Micheal’s piece that there will be quarters of stagnation. One does not grow 9% then decelerate to 3% without a quarter or two of zero growth. Even Japan at their stage of development in the 90′s was able to grow on avg 1-2% annually during the 90′s I believe.
Houhui,
I admire your rational choice explanation for Amsterdam police behaviour, but I guess they are not rational enough for that. Their polity honestly believe it is a waste of police time to harass one class of recreational drug user in preference to another (drunks, smokers, gamers, etc) noting to do with meeting targets etc, hence that is why they let people use recreational drugs, but not deal in them wholesale.
But I guessed what you meant in your earlier comments though, and as you see, no quarrel with your meaning at all. In fact you are probably right. What I wonder is how in a country with so much control in the hands of the government, why would the incoming government be content with a decline in growth in its first year and no prospect for improvement down the line. I know that Chinese governments are “benevolent” rather than “democratic” but that does not mean that one simply accepts a poisoned chalice like US ones do (look at this poor chap from Chicago, Obama), in a “rotation” This is no rotation, democracy-style, but simply passing the baton to someone on your own CCP team. So why not use the brakes in 20011 and the throttle in 2012. Do you have an explanation? I find this very odd, but maybe there is a simple explanation.
For instance, is the incoming team not part of the same team, or is the government not enough in control of the economy to produce auspicious numbers when mr Next comes in? I guess that the economy -and especially power- is too decentralized to make it easy to produce good or bad years with any degree of precision. But I am very interested in a proper explanation.
Rien,
I agree about the new Chinese leadership perhaps lacking the incentive to push reforms. That’s one aspect of Micheal’s outline that kind of wonder about: the adjustment won’t occur until it is purposefully initiated.
That’s definitely not what happened here. For instance, the completely absurd subprime loans didn’t dry up when regulators finally took action, but only after housing prices fell for over a year and the lenders themselves imploded. Did anyone try to reign in the leverage ratios of the investment banks? Nope. The Fed nudged up interest rates, but not enough to have much effect.
Or look at Europe. How could the EU not be aware Greece’s finances were a complete joke?
How many painful adjustments have been begun proactively in economic history? The only one I can think of was Britain’s return to the gold standard at the pre-war rate in the 1920s… and that was a mistake! Kind of ironic.
prof, here is the article I referenced and you could not find. If you enter the title into google it comes right up:
The ghost towns of China: Amazing satellite images show cities meant to be home to millions lying deserted
By Daily Mail Reporter
Last updated at 10:53 AM on 18th December 2010
Comments (33) Add to My Stories
These amazing satellite images show sprawling cities built in remote parts of China that have been left completely abandoned, sometimes years after their construction.
Elaborate public buildings and open spaces are completely unused, with the exception of a few government vehicles near communist authority offices.
Some estimates put the number of empty homes at as many as 64 million, with up to 20 new cities being built every year in the country’s vast swathes of free land.
The photographs have emerged as a Chinese government think tank warns that the country’s real estate bubble is getting worse, with property prices in major cities overvalued by as much as 70 per cent.
Ghost city: Kangbashi was meant to be the urban centre for wealthy coal-mining community Ordos and home to its one million workers, but its roads are eerily empty and the houses stand vacant
The mostly empty city of Bayannao¿er, which boasts a beautiful town hall and World Bank-sponsored water reclamation building
Of the 35 major cities surveyed, property prices in eleven including Beijing and Shanghai were between 30 and 50 per cent above their market value, the China Daily said, citing the Chinese Academy of Social Sciences.
Prices in Fuzhou, capital of the southeastern province of Fujian, had the worst property bubble with average house prices more than 70 per cent higher than their market value, according to the survey conducted in September.
The average price in the 35 cities surveyed was nearly 30 per cent above the market value, the report said.
Property prices have remained stubbornly high despite the government adopting a slew of measures since April including hiking minimum downpayments to at least 30 per cent and ordering banks not to provide loans for third home purchases.
Prices in 70 major cities were up 0.2 per cent in October from the previous month and 8.6 percent higher than a year ago, official data showed.
The increase came after prices gained 0.5 per cent month on month in September, which was the first increase since May.
Property to let: Zhengzhou New District is China’s biggest ghost city, complete with entire blocks of totally empty accommodation
Property bubble: Zhengzhou New District features vast public buildings that have never been used
Half of Erenhot is empty. The other half is unfinished
Now here’s Kangbashi, a new city with capacity for 300,000 — that houses 30,000
Massive stimulus measures taken since 2008 to fend off the financial crisis injected huge amounts of liquidity in the market and have been blamed for fuelling real estate prices.
‘The government target is not clear and policy is incoherent,’ CASS senior research Ni Pengfei was quoted saying.
According to research carried out by Time magazine, fixed-asset investment in the Asian country accounted for more than 90 per cent of its overall growth – with residential and commercial real estate investment making up nearly a quarter of that.
Regional governments across China have been building massive real estate projects, including Kangbashi in Inner Mongolia and Zhengzhou New District, which have remained empty, because of the high prices and interest in investment.
Kangbashi, which was built in just five years, was meant to be the urban centre for Ordos City – a wealthy coal-mining hub home to 1.5million people.
It was filled with office towers, administrative centres, museums, theatres and sports facilities as well as thousands of homes, but remains virtually deserted.
The ghost city of Dantu has been mostly empty for over a decade
The orange area to the north-east of the Xinyang has yet to be occupied
No cars in the city except for approximately 100 clustered around the government headquarters
Zhengzhou New District residential towers: Soaring property prices in China and high levels of investment has fuelled the construction of up several new cities. Experts fear a subsequent property crash could damage the global economy
Prices have continued to soar, investors have increasingly turned to property speculation fuelling the continued bubble.
The onset of the 2008 global recession was the bursting of the real estate bubble in the U.S. and experts fear a similar situation in China could prove catastrophic for still struggling economies and banking systems.
Beijing has introduced measures to cool ‘ridiculous’ property prices, but the risks of a crash mean the campaign is unlikely to ease up in the next year.
Public discontent has been fuelled by high prices in China’s cities and the measures, introduced in April, have made it more difficult for speculators and developers to hoard land and chase up prices as lending has been restricted.
Wang Shi, chairman of China Vanke – the country’s largest property developer – said: ‘Tightening measures will not loosen next year.
‘If we can control the pace of property price gains within a reasonable range, it’s already an achievement.’
In most neighbourhoods of Dantu, there are no cars, no signs of life
A giant empty hotel sits in the city of Erenhot
This city was built in the middle of a desert: Erenhot, Xilin Gol, Inner Mongolia
Property sales for Vanke already exceeded $15billion so far this year, but Mr Shi has insisted China will not end up in a worse place than Dubai – where a property price bubble imploded during the global financial crisis.
He said: ‘It could be really, really bad without the government stepping in.
‘If the bubble bursts, Japan’s past will be China’s present.’
But short-seller Jim Chanos has issued a more dire warning, and said he expected China’s economy to implode in a real estate bust.
He said the country was ‘on an economic treadmill to hell’ and the country’s bubble was ‘Dubai times 1,000′.
In the 1980s, Tokyo saw a massive rise in property prices and a subsequent crash. The Hong Kong property market experienced a similar phenomenon in the 1990s.
This $19 billion development is packed with blocks of empty houses
This giant new development doesn’t even have a name yet
Read more: http://www.dailymail.co.uk/news/article-1339536/Ghost-towns-China-Satellite-images-cities-lying-completely-deserted.html#ixzz18xZWbsnv
Dear Dr. Pettis-First, I would like to wish you and all your readers Happy Holidays and a healthy New Year.
Since you place such a great importance on Chinese loan quotas vis a vis how the economy will perform, would you comment on the potential economic effects on the Chinese economy from the nascent capital market?
Bloomberg had this interesting article today:
Dim Sum Bond Top Underwriters See Sales Doubling (http://noir.bloomberg.com/apps/news?pid=20601087&sid=aS8vZ0h5fhgI&pos=5).
Thanks for your insights.
Bob_in_MA,
The Chinese leadership (party+ gvt) is in a situation that is (a) very hard to analyse and (b) from analyses that look plausible (like Michael’s) one gets the impression that there is very little (at least in the West) to compare it with. It is a mixture of bureacratic and oligarchic gvt, combined with a very high degree of informal controls, running both downwards and upwards in the system, all in a very large economy with an enormous diversity in development achievement.
Reform in such a society tends to be incremental (like since Deng XP) or revolutionary and haphazard (like under Mao ZD). I think that the leadership wants prefers “order” over “efficiency” and knows that there is plenty resource mobilization potential left to support the regime for at least five more years.
My concern is that it is unusual that a lame duck gvt with Chinese characteristics is moving towards a dip (valley according to Michael) right at the start of a new leadership. That does not make sense and may show that the economies (and not the figures/numbers) has a life of its own. That should concern the CPC elders greatly…
Prof.,
Could I ask you to elaborate on: “How can they raise RMB interest rates without running a huge negative carry?”, are there any figures that you would point as the current status of this? I mean balance wise, is there any reliable figure for the current amount of carry they handle on their books? aren´t the chinese still in the gaining process of having long term not yet accrued T-notes? or is the recent and never ending balance of intervention that high that the diference of chinese short term rates and US longer terms maturities CB´s books typically hold?
I´m not sure we are on the same understanding, but if this carry is still positive, we may very well still be in the very begining of a much longer term process where yuan and dolar are kept at even more disbalanced levels, via higher inflation in china and deflation in us, increasing current account, trade unbalance and yet a higer bill in the future whenever they finally bring the exchange rate to more reasonable current account flows…
That old monetarist game of chicken is now at play between us and china, each lighting up the flame of inevitable higher dollar inflation in the future, comodities will rise up even way beyond their 2008 exuberance so easily that people will forget that oil $100 is a big deal now. Inflation might not yet be a problem in the developed world (though europe might disagree now @ 1.3), but as things come back into place in the global recovery I cannot imagine another scenario than that one of 2006-2008 where a bubble was just waiting for due time to be inflated.
I am saying that because I have been in China this summer, and been kind of emblezed by your colleague quality chinese commentator, S. Green´s optimism. Anyhow, sorry for so many questions and such a long post over vacation holidays, hope this find you well! enjoy the holidays and happy new year!
Eduardo Guelman
Prof Pettis
Have to say, a sense of deja vu is what really hits me when I look at the Chinese economy and the backdrop of the world economy, not too sure the next year is going to play out well for anyone. And if, against all expectations, China goes in for a hard landing whilst the reins are handed over to the next “generation”, then we all have to pray hard to whichever God we believe in or for aetheists, well, do whatever they think best. The string of asset bubbles MS’s Roach predicted in 2008 has coem to pass and frankly, I’m just waiting for the penny to drop and the soap suds to subside because, again, sustainability is always a question.
Anaemic demand is and will be a factor for some time to come but it really depends on whether the new “ling dao” have the will to take that step. And after some frankly weird “criticism” appearing of the present generation’s “liberality” and the moods that sweep the country, I have my reservations on the political will of the new “ling dao”.
Though this is kind of off topic, thought this provides a nice historical background to the whole issue, pretty sure though that Krugman would squawk reading this though, http://www.newsweek.com/2010/12/27/the-west-and-the-tyranny-of-public-debt.html. Have a great festive season everyone!
Could you comment on this article in China Daily? “Obsolete way of measuring trade inflates China’s trade surplus” (http://www.chinadaily.com.cn/bizchina/2011-01/03/content_11787862.htm) which includes this: “?…every time an iPod is imported to the US, the totality of its declared customs value ($150) is ascribed as if it were an import from China,” said Lamy, adding that “In fact, according to American researchers, less than 10 of the $150 actually come from China and all the rest is just reexportation. He said if trade statistics were adjusted to reflect the actual value contributed to a product by different countries, the size of the US trade deficit with China would be cut in half.” I’m curious, how much of China’s ‘growth’ is actually revenue for US (and other foreign) companies? If one removed US investment, would China’s GDP still be almost half the size of that of the US? For that matter, what percentage of US GDP is generated in China?
Your blog is a fascinating read, thanks for sharing your expertise.
@Tama Takahashi
I am similiarly interesetd in your questions,I hope professor Pettis would comment.Pl see the folowing NYT blog which offers some ideas.
http://economix.blogs.nytimes.com/2010/10/08/china-u-s-trade-a-big-outlier/
Do you worry that your projection of RMB 8.0 trillion this year for total new lending is less than the RMB 9.6 trillion for last year?
The reason I ask is because of this: http://www.debtdeflation.com/blogs/2010/11/30/competition-is-not-a-panacea-in-banking/
I don’t agree with everything he writes, but a lot of what he has written makes sense.
There is plenty more research on that website, I just thought that article was pretty representative.
Let me know when you get the RSS feed fixed?
My personal point of view is that more and more companies are putting the loans that they borrowed from the bank to chase “fast returns”,it could be anything manipulable, speculatable.
Fewer and fewer corporate leaders are interested in focusing on their “core business”, real estates,stock markets. raw materials…Go to the factories in WenZhou City in Zhejiang Province, how many of them are still functioning after 2008 “suspension”? Take a look at how many state owned companies got into Real Estate Business with Bank’s money?
Think one step more, the government has realized how bad things could be, that’s why they started to “control” the real estate market in 2010. What does that mean? They want real estate down and…stock market up. ( Future crash? That’s unavoidable. How soon? not very. So what to do now? Chase the bubble and hope not to be the last fool.)
What’s sign? Currency. When RMB has realized its target ( I personally predict 5) and those currency players will start cashing out their profit, that’s when the problem gets serious.)
What a very good article and certainly helped clear my brain somewhat