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ANALYST: China's economy just touched the government's chilling 'red line'
Linette Lopez Today at 10:20 AM
A participant in Liu Bolin’s recent project in Beijing waits for what’s next.
Hidden beneath the surface of China’s new, barely-passable manufacturing report on Tuesday was a worrisome indicator on employment. An indicator that touched Premier Li Keqiang’s “red line,” as Bloomberg economist Tom Orlik put it.
China’s manufacturing purchasing managers index (PMI) for March came in at 50.1, up from 49.9 the month before. It beat economists’ expectation for a decline to 49.7. Anything above 50 means this massive sector is expanding.
So, good news right?
Not necessarily.
March is a big year in China as factories get back to work after the Chinese New Year. So the fact that manufacturing numbers didn’t contract isn’t totally surprising. Plus, as Orlik pointed out, what Chinese officials are really worried about is the labour market, which is captured as a sub-index in the report.
“An important point to note in the PMI data is the employment indexes,” Orlik wrote in a recent note. “Premier Li Keqiang ended the National People’s Congress with a promise to act on growth if employment started to slide. The PMI data provides the only high-frequency reading on employment. It shows employment contracting in both the manufacturing and non-manufacturing sectors.”
According to the report, the employment sub-index was at 48.4, which means contraction.
China knows things are getting bad
On Sunday, the Chinese government openly admitted for the first time that things aren’t going so well. In order to transition the country’s economy from one based on foreign investment to one based on domestic consumption, the government’s allowed the economy to slow.
But it’s becoming increasingly clear the economy is slowing too fast. And the government is scrambling.
“The policy response to slower growth has already started,” Orlik continued. “The central bank has cut the down-payment requirement for second-home buyers. Open market operations have swung from drains to injections, bringing interbank rates down slightly.”
Many analysts, however, agree that this response doesn’t go far enough — not by a long shot.
The Chinese economy needs another response
China’s problem is that it needs cash. Corporate profit margins are thinning and the domestic population isn’t spending enough to keep the economy greased.
As Societe Generale analyst Wei Yao points out, statistically what really matters to the economy is the growth of cash and coins in circulation. That’s called “M0″ growth.
“If we agree that 5-6% M0 growth is needed to avoid sharp economic deceleration, the People’s Bank of China has to take more action,” she wrote in a recent note.
The government, however, is being (and has been) cautious. Right now the economy is highly levered — China’s debt-to-GDP ratio is already at 250%, and most of that debt is held (in banks) by state-owned companies [SOEs] and local governments. Both of those entities are supposedly being reformed by the Chinese government, but that process isn’t even close to over.
“Money growth shouldn’t be as fast as before,” said Wei Yao in a phone call with Business Insider. “They [SOEs and local governments] shouldn’t be able to access much credit, but they have and they’re the problem. Right now the Chinese government is doing several things at a time to contain their demand… So even if the PBoC does more it doesn’t mean credit allocation will be worse.”
Basically, if the PBoC can manage to funnel cash to citizens and private enterprises, they stand a slim, but fighting chance of getting through this challenging economic transition. They have to stick to their reforms like glue and make sure the companies that are teetering on the brink don’t fall.
There are already bad signs
The problem is that, especially in the ailing property sector, we’re already seeing dangerous signs that this could all fall apart. For example, in January massive Chinese real estate group Kaisa defaulted on $US500 million worth of debt to foreign investors and creditors are still slugging it out about how the matter will be settled.
Meanwhile, the economy is continuing to slide, and the government is running out of time.
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conbenho
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Nguyễn Hoài Trang
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Bloomberg View
Photo: Xi's celebrating his soft-power victory over the U.S. too soon.
Photographer: Feng Li-Pool/Getty Images
China
Debt Could Derail China's Ambitions
64 Comments
Mar 30, 2015 6:00 PM EDT
By William Pesek
China's Xi Jinping made a lot of grand promises over the weekend, pledging a new order where China and Chinese-led institutions such as the new Asian Infrastructure Investment Bank would promote prosperity across the region. But he was on shaky ground -- literally. The Boao Forum where Xi spoke took place in Haikou, capital of China's island province of in Hainan, whose local government, it seems, may not be able to pay its debt this year.
Much has been written about the $50 billion AIIB, which has won support from staunch U.S. allies Australia, South Korea and the U.K., among others. Xi is clearly relishing what looks like a soft-power victory over the U.S., gleefully touting China as a one-stop shop for "markets, growth, investment and cooperation opportunities." Before he starts writing checks, though, Xi should take a closer look at China's own books. Haikou's is just one of many local governments grappling with a $4 trillion-plus debt pile. If Chinese leaders are going to achieve their growing international aspirations, they're going to have to be far more ambitious about getting their financial house in order first.
At 282 percent of GDP, according to the McKinsey Global Institute, China's total debt now exceeds America's 269 percent and Germany's 258 percent. Even more worrying: If the credit buildup continues at its current pace, that ratio will explode to 400 percent by 2018. At those levels, China would be dangerously susceptible to a surge in long-term interest rates that triggers an accelerating series of defaults in economically-vital sectors like real estate. Even if China can avoid a South Korea-like crash, the resulting slowdown could precipitate a second wave of default risks and financial chaos from which Beijing would take years to recover. China would suddenly be an exporter of deflation, not development aid.
Yes, China is still growing 7.3 percent, its potential seems boundless and it's run by smart policy makers who are aware of where the cracks in the system lie. But then, the conventional wisdom said the same of Japan 25 years ago. To gain some semblance of control, Xi's government needs to do three things immediately: cap China's credit bubble, rein in state-owned enterprises and create a mechanism to begin disposing of bad debts. Trouble is, Xi's government isn't doing enough to address any of them.
Take credit growth. For all the rhetoric about tightening the money spigot, aggregate financing continued to accelerate in February to about $216 billion. New yuan loans totaled $164 billion, while M2 money supply rose 12.5 percent. That hardly looks like evidence of a serious crackdown. On Tuesday, the government even lowered the down payment requirement for some second-home buyers, hoping to revive a slumping property sector. Meanwhile, state companies continue to receive copious financing through a shadow-banking apparatus that the People's Bank of China and government regulators pledged to curtail back in 2013.
As for bad loans, no credible estimate exists thanks to the opacity inherent to China's political system. According to the well-regarded Chinese journal Caixin, commercial-bank non-performing loans have swelled for 12 quarters now. As of the beginning of December, Caixin estimated that about $136 billion worth of loans had gone sour. That's not a huge problem for a $9.2 trillion economy, but then the number is rising even before the sharp economic slowdown many observers expect is coming. China's recent move to let local governments convert maturing high-cost debt into lower-yielding municipal notes to be repaid at a future date is a step in the right direction. But it's too small and unfocused to defuse China's debt time bomb.
In order to steer China off its current trajectory, leaders are going to have to tolerate a bigger hit to GDP. They must also quickly build a transfer mechanism to allow banks, state-run enterprises and entire municipalities to dispose of bad loans. One way would be to emulate America's deleveraging strategy following the 1980s savings-and-loan crisis, establishing a series of Resolution Trust Corp.-like entities. "Given that local governments and state-owned enterprises are responsible for the majority of China’s bad debts, write-offs, funded by central-government bonds, will probably be necessary, and soon," writes Zhang Jun of Fudan University in Shanghai in a Project Syndicate op-ed.
If Japan taught the world anything these last two decades, it's that trying to delay the pain only courts deflation -- which already poses a threat to China -- and falling living standards. Last week, Standard & Poor’s downgraded Shenzhen developer Kaisa to default after it failed to make coupon payments on two of its dollar-denominated bonds. Once the defaults begin -- and places like Haikou run out of money -- there's no telling how wobbly China may become. If he really wants to challenge America abroad, Xi would be smart to emulate some of its boldness at home first.
To contact the author on this story:
William Pesek at wpesek@bloomberg.net
To contact the editor on this story:
Nisid Hajari at nhajari@bloomberg.net
64 COMMENTS
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Chân thành cám ơn Quý Anh Chị ghé thăm "conbenho Nguyễn Hoài Trang Blog".
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Kính chúc Sức Khỏe Quý Anh Chị .
conbenho
Tiểu Muội quantu
Nguyễn Hoài Trang
02042015
___________
Cộng sản Việt Nam là TỘI ÁC
Bao che, dung dưỡng TỘI ÁC là ĐỒNG LÕA với TỘI ÁC
Thestar.Com
Cost of Canada’s mission in Iraq, Syria will hit $528 million in coming year
Canada’s war in Iraq and Syria is expected to cost $528.5 million by this time next year, Defence Minister Jason Kenney says.
The parliamentary budget office estimated in a February report that one year of combat operations in Iraq would cost between $242 million and $351 million
By: Murray Brewster The Canadian Press,
Published on Wed Apr 01 2015
OTTAWA—Canada’s war in Iraq and Syria is expected to cost over $500 million by this time next year, Defence Minister Jason Kenney revealed Wednesday, one day after federal budget reports stamped the estimate as secret.
Of the total, $406 million is expected to be spent in the new budget year that began Wednesday, on top of the projected $122.5 million that was set aside in the fiscal year that just ended.
Those are the incremental costs — the amount of money the Department of National Defence spends over and above the routine expense of maintaining an army.
The federal Treasury Board’s plans and priorities report for the coming fiscal year, released Tuesday, showed the price tags for overseas operations in both the Middle East and eastern Europe were classified.
Both opposition parties complained, calling the decision to hide the dollar figures unacceptable, but Kenney said the information simply wasn’t available when the estimates were completed in early March.
The $528.5-million estimate is likely not the last word on the question of costs, because there will be tear-down expenses should the next federal government decide to end the combat mission next March.
“I offer a caveat. That number will obviously change,” Kenney said on the way into question period.
“If the past is any guide, it’ll change upward, but that’s our best estimate. And it’s on that basis that cabinet approved additional funding.”
Last month, the parliamentary budget office estimated in a February report that one year of combat operations would cost between $242 million and $351 million.
Both Kenney and Prime Minister Stephen Harper suggested there was no attempt to hide the figure, claiming it was released last week. A spokeswoman in Kenney’s office said the numbers were revealed during a conference call with ethnic media, which took place around the time the Commons was debating the motion to extend and expand the deployment.
The estimates also keep secret the cost of Canada’s contribution to NATO’s reassurance mission in the new budget year. Those figures were not released on Wednesday.
Dave Perry of the Canadian Defence and Foreign Affairs Institute said it’s the only time in nearly 20 years that cost estimates for an international operation was withheld because it was deemed classified.
Opposition NDP Leader Tom Mulcair said the government shouldn’t have to be dragged kicking and screaming toward accountability.
“The first thing Canadians are entitled to when we are in a war situation is truth, including the truth about the cost of that war,” Mulcair said.
At the same time, a close examination of the budget estimates also show the age of austerity is here to stay at National Defence, with baseline budget spending to expected to drop over the long term.
Spending on the military is forecast to be six per cent lower in 2017-18 than it was when the deficit fight began, Perry said.
The reports, which lay out projected spending over several years, show Defence will get a slightly bigger baseline budget in 2016-17 of $19.2 billion, but will be cut to $18.7 billion in 2017-18, which is lower than the current forecast of $18.9 billion.
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Chân thành cám ơn Quý Anh Chị ghé thăm "conbenho Nguyễn Hoài Trang Blog".
Xin được lắng nghe ý kiến chia sẻ của Quý Anh Chị trực tiếp tại Diễn Đàn Paltalk: 1Latdo Tapdoan Vietgian CSVN Phanquoc Bannuoc .
Kính chúc Sức Khỏe Quý Anh Chị .
conbenho
Tiểu Muội quantu
Nguyễn Hoài Trang
02042015
___________
Cộng sản Việt Nam là TỘI ÁC
Bao che, dung dưỡng TỘI ÁC là ĐỒNG LÕA với TỘI ÁC
