Chinese Economy is in Stormy Waters

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Heavily invested into US Dollar investments - many of which are of dubious value -- the Chinese have imported the US inflationary rate as a result of the tanking dollar. Look for the Chinese to continue to dump the dollar into commodities (e.g. precious metals), and to nationalize US interests in China in the days to come.


China's credit bubble on borrowed time as inflation bites

The Royal Bank of Scotland has advised clients to take out protection against the risk of a sovereign default by China as one of its top trade trades for 2011. This is a new twist.

05 Dec 2010
It warns that the Communist Party will have to puncture the credit bubble before inflation reaches levels that threaten social stability. This in turn may open a can of worms.

"Many see China’s monetary tightening as a pre-emptive tap on the brakes, a warning shot across the proverbial economic bows. We see it as a potentially more malevolent reactive day of reckoning," said Tim Ash, the bank’s emerging markets chief.

Officially, inflation was 4.4pc in October, and may reach 5pc in November, but it is to hard find anybody in China who believes it is that low. Vegetables have risen 20pc in a month.

The Communist Party learned from Tiananmen in 1989 how surging prices can seed dissent. "Inflation is a redistributive mechanism in favour of the few that can protect living standards, against the large majority who cannot. The political leadership cannot, will not, take risks in that regard," said Mr Ash.

RBS recommends credit default swaps on China’s five-year debt. This is not a forecast that China will default. It is insurance against the "fat tail risk" of a hard landing, with ramifications across Asia.

The Politburo said on Friday that China would move from "relatively loose" money to a "prudent" policy next year, a recognition that credit rationing, price controls, and other forms of Medieval restraint are not enough. The question is whether Beijing has already left it too late.
Diana Choyleva from Lombard Street Research said the money supply rose at a 40pc rate in 2009 and the first half of 2010 as Beijing stoked an epic credit boom to keep uber-growth alive, but the costs of this policy now outweigh the benefits.

The economy is entering the ugly quadrant of cycle – stagflation – where credit-pumping leaks into speculation and price spirals, even as growth slows. Citigroup’s Minggao Shen said it now takes a rise of ¥1.84 in the M2 money supply to generate just one yuan of GDP growth, up from ¥1.30 earlier this decade.

The froth is going into property. Experts argue heatedly over whether or not China has managed to outdo America’s subprime bubble, or even match the Tokyo frenzy of late 1980s. The IMF straddles the two.

It concluded in a report last week that there was no nationwide bubble but that home prices in Shenzen, Shanghai, Beijing, and Nanjing seem "increasingly disconnected from fundamentals".
Prices are 22 times disposable income in Beijing, and 18 times in Shenzen, compared to eight in Tokyo. The US bubble peaked at 6.4 and has since dropped 4.7. The price-to-rent ratio in China’s eastern cities has risen by over 200pc since 2004

The IMF said land sales make up 30pc of local government revenue in Beijing. This has echoes of Ireland where "fair weather" property taxes disguised the erosion of state finances.

Ms Choyleva said China drew a false conclusion from the global credit crisis that their top-down economy trumps the free market, failing to see that the events of 2008-2009 did equally great damage to them – though of a different kind. It closed the door on mercantilist export strategies that depend on cheap loans, a cheap currency, and the willingness of the West to tolerate predatory trade.

China is trying to keep the game going as if nothing has changed, but cannot do so. It dares not raise rates fast enough to let air out of the bubble because this would expose the bad debts of the banking system. The regime is stymied.’’”

See:
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8182605/Chinas-credit-bubble-on-borrowed-time-as-inflation-bites.html



Master Lock reassessing China

Milwaukee-based company finds it can compete better from U.S. soil

January 1, 2011
It all sounds depressingly familiar: Master Lock Co., in the throes of a restructuring and under shareholder pressure to control costs, has been shipping jobs halfway around the world.

"We're strategically going at it, when it makes sense, where it makes sense," said Master Lock senior vice president Bob Rice.

In a new twist, however, it's China where Master Lock's costs are rising disruptively. The company has responded by pulling production back to Milwaukee, where the manufacturer of iconic padlocks was founded in 1921.

Master Lock and other companies have begun to reassess China:

Labor unrest rippling across China is pushing wages higher in a nation with • a supposedly inexhaustible supply of cheap workers. Thirty provinces have raised their minimum wages in the past year, some more than 20%.

Further inflating prices of Chinese imports, Beijing engineered a 20% • weakening of the dollar against the yuan in the last five years, bending to pressure from Washington, which bristles at China's tight control over its exchange rate.

Shipping rates from Chinese ports spiked fourfold in the 12 months through • August to their highest levels in maritime history, according to Universal Cargo Management Inc. in Los Angeles.

Master Lock was bringing work back to Milwaukee during the recession, Rice said.
The company's flagship industrial campus, with nearly seven football fields of unionized factory floor space, is at capacity for the first time in 15 years.

"We're not done yet," said Rice, echoing economists and trade officials who expect Chinese wages to rise further as the dollar continues to fall.

Whether it's called near-sourcing, on-shoring or re-shoring, America's outsourcing infatuation with China has cooled a few degrees...”

See:
http://www.jsonline.com/business/112759524.html


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