The alarm bells begin to ring in China

[Sapiens]

http://business.timesonline.co.uk/to...cle2910188.ece

November 21, 2007

The alarm bells begin to ring in China

Who will buy all this stuff? Who will buy the plastic garden furniture, the fridges, the toys, the wall of household junk that is thundering out of shiny new factories in China?

Between January and October, China’s statistical bureau recorded $1.2 trillion (£580 billion) of industrial spending. During the same period, lenders in America were slamming the door on their customers, cancelling credit cards, demanding the keys to homes, apartments and trailers. The message from the banks is clear: the party is over. Still, China’s factory floorspace continues to grow. You have to ask the question: who will buy the stuff?

little slow...I know.

[jk]

Shanghai in free fall as oil giant plummets

Shanghai in free fall as oil giant plummets


By Ambrose Evans-Pritchard
Last Updated: 2:25am GMT 01/12/2007


The newly floated oil giant PetroChina has lost a third of a trillion dollars in nominal value in just three weeks, plummeting to a fresh low yesterday as angst gripped the Shanghai stock market.

	PetroChina briefly boasted a paper worth of a trillion dollars when it floated 2.2pc of its shares

The benchmark CSI 300 index of Chinese stocks has dropped 18pc in November, the worst one-month fall in more than a decade. The bourse has tumbled 22pc since peaking in mid-October after a wild speculative boom that saw prices triple in a year - much like the final phase of Japan's Nikkei frenzy in 1989. It now qualifies as an official "bear market".
What began as a bout of profit-taking in Shanghai now risks turning into a serious correction as the government steps up efforts to ration credit and drain liquidity. Beijing is alarmed by 6.5pc inflation and surging food prices, afraid it could set off political unrest amongst China's vast army of footloose urban migrants.
PetroChina briefly boasted a paper worth of a trillion dollars when it floated 2.2pc of its shares on November 5, vaulting ahead of Exxon to become the world's richest corporation by far - in theory.
But US investor Warren Buffett earlier cashed in his minority holding for a 600pc gain of $3.5bn (£1.7bn), warning that the Shanghai boom had become unstable. The Shanghai market still remains expensive with an average price to earnings ratio of 55.

PetroChina's trillion-dollar tag was widely viewed as absurd given the company's struggle to tap new oil reserves around the world.
The share price has since fallen 37pc. Shenhua Energy is down 32pc, a fate shared by a long list of resource, industrial, and trading companies deemed sensitive to the credit cycle.
Among the losers yesterday were: Cosco shipping (down 5.5pc on the day); Harbin Pharmaceutical (-5.65pc); Aluminium Corp of China (-4.9pc); Wuhan Iron & Steel (-4.27pc) and Baoshan Iron & Steel (-3.9pc).
The tumbling stock market may be a warning that the Chinese economy is headed for a sharper slowdown than expected after years of torrid growth, reaching an annual rate of 12pc this autumn.
The country is heavily reliant on exports, which make up 40pc of GDP. Most of the goods are low-margin consumer items shipped to the US and Europe.
A study this month by China's commerce ministry said the fall-out from America's sub-prime crisis posed a serious economic threat. "If demand in the US drops further, Chinese exporters will be devastated by a rapid and continuous fall in orders," it said.
Nouriel Roubini, an economist at New York University, said China lacks sufficient demand at home to withstand a serious US downturn.
China could now pay a heavy price for holding down its currency and relying for too long on a mercantilist export model. Investment is 43pc of GDP, and much of it has gone into factories and plant to produce goods that the world cannot easily absorb.

http://www.telegraph.co.uk/money/mai...cnchina101.xml

[GRG55]

Re: Shanghai in free fall as oil giant plummets

Shanghai in free fall as oil giant plummets


By Ambrose Evans-Pritchard
Last Updated: 2:25am GMT 01/12/2007


The newly floated oil giant PetroChina has lost a third of a trillion dollars in nominal value in just three weeks, plummeting to a fresh low yesterday as angst gripped the Shanghai stock market.
The benchmark CSI 300 index of Chinese stocks has dropped 18pc in November, the worst one-month fall in more than a decade. The bourse has tumbled 22pc since peaking in mid-October after a wild speculative boom that saw prices triple in a year - much like the final phase of Japan's Nikkei frenzy in 1989. It now qualifies as an official "bear market".
What began as a bout of profit-taking in Shanghai now risks turning into a serious correction as the government steps up efforts to ration credit and drain liquidity. Beijing is alarmed by 6.5pc inflation and surging food prices, afraid it could set off political unrest amongst China's vast army of footloose urban migrants.
PetroChina briefly boasted a paper worth of a trillion dollars when it floated 2.2pc of its shares on November 5, vaulting ahead of Exxon to become the world's richest corporation by far - in theory.
But US investor Warren Buffett earlier cashed in his minority holding for a 600pc gain of $3.5bn (£1.7bn), warning that the Shanghai boom had become unstable. The Shanghai market still remains expensive with an average price to earnings ratio of 55.PetroChina's trillion-dollar tag was widely viewed as absurd given the company's struggle to tap new oil reserves around the world.
The share price has since fallen 37pc. Shenhua Energy is down 32pc, a fate shared by a long list of resource, industrial, and trading companies deemed sensitive to the credit cycle.
Among the losers yesterday were: Cosco shipping (down 5.5pc on the day); Harbin Pharmaceutical (-5.65pc); Aluminium Corp of China (-4.9pc); Wuhan Iron & Steel (-4.27pc) and Baoshan Iron & Steel (-3.9pc).
The tumbling stock market may be a warning that the Chinese economy is headed for a sharper slowdown than expected after years of torrid growth, reaching an annual rate of 12pc this autumn.
The country is heavily reliant on exports, which make up 40pc of GDP. Most of the goods are low-margin consumer items shipped to the US and Europe.
A study this month by China's commerce ministry said the fall-out from America's sub-prime crisis posed a serious economic threat. "If demand in the US drops further, Chinese exporters will be devastated by a rapid and continuous fall in orders," it said.
Nouriel Roubini, an economist at New York University, said China lacks sufficient demand at home to withstand a serious US downturn.
China could now pay a heavy price for holding down its currency and relying for too long on a mercantilist export model. Investment is 43pc of GDP, and much of it has gone into factories and plant to produce goods that the world cannot easily absorb.

http://www.telegraph.co.uk/money/mai...cnchina101.xml

Isn't this, by definition, deflationary? At least in those sectors of the economy where there is far too much productive capacity compared to demand? Sounds like a replay of the global auto industry, which has suffered from chronic overcapacity for decades.

(...and an increasing number of housing markets including Spain, Ireland, Dubai and maybe, just maybe, Vancouver?)

[Spartacus]

Re: Shanghai in free fall as oil giant plummets

It could result in price reductions, (which is one definition of deflation)

but not in reductions in the number of circulating dollars/Yuan/Marks/Rupees or whatever, which is the definition of deflation most here adhere to

Isn't this, by definition, deflationary? At least in those sectors of the economy where there is far too much productive capacity compared to demand? Sounds like a replay of the global auto industry, which has suffered from chronic overcapacity for decades.

(...and an increasing number of housing markets including Spain, Ireland, Dubai and maybe, just maybe, Vancouver?)

[touchring]

Re: The alarm bells begin to ring in China

Real estate is having deflation of some sorts, Shenzhen is hit badly, Shanghai less severe. Most expect the cooling to be temporary, but I think this is the start of a severe housing and stock correction. If this slow down is sustained, building will slow, iron and copper prices will take a severe hit.

http://www.shanghaidaily.com/sp/arti...cle_340118.htm

Fall in Shanghai home prices
By Winny Wang 2007-12-1

SHANGHAI home prices dropped an average of seven percent last month from October, according to Shanghai Youwin Real Estate Information Service Co Ltd.

http://www.cctv.com/program/bizchina...1/103821.shtml

Shenzhen housing sales sluggish

Peak season for Shenzhen's property market is the autumn months of September and October. But this year, the number of transactions dropped sharply over that period, as banks tightened credit and local governments issued policies to curb rising prices.

Sales of new residential homes dropped 16 percent in September month-on-month to three million square meters, a record low for a single month of the year. That is nearly 30 percent lower than the amount sold last September. The situation was even worse in October, according to the local housing management authority.

Btw, look at the home sales a month -> 3 million square meters, that is 32 million sq ft, and just for 1 city.

[GRG55]

Re: Shanghai in free fall as oil giant plummets

It could result in price reductions, (which is one definition of deflation)

but not in reductions in the number of circulating dollars/Yuan/Marks/Rupees or whatever, which is the definition of deflation most here adhere to

Well I appreciate that some adhere to the view that the absolute change in the money supply determines whether we have "inflation" or "deflation". But the supply of currrency is only half the picture. For example, based on the above definition, Japan has seen inflation since 1989 (surely "the number of circulating" Yen is greater now than it was then). Yet inflation is not what the economic metrics of Japan's situation over most of the past two decades would lead one to conclude, is it?

My point was that in a situation where there is a substantial over-supply of productive capacity to provide any good or service, a currency's power to purchase that good or service generally increases - which is deflationary - the exact opposite of the more common and familiar situation we face wherein purchasing power of the currency declines due to oversupply of paper compared to the economy's productive capacity to provide goods and services in demand.

That's why I disagree with those that suggest that commodity inflation is due to money supply increase, and only money supply increase. If there is no underlying demand for the good or service (including any particular commodity), there will be no inflation in that sector of the economy, no matter how much confetti the CBs of the world dump from their helicopters.

Although the nominal price of an automobile has increased markedly, in real terms the price of an automobile is cheaper than it was 50 years ago (I'll bet bart has a chart that shows this). The main reason is that there continues to be more auto manufacturing capacity worldwide than there is demand for cars. For two decades, on and off, Ford/Chrysler/GM had to give cash incentives to move inventory. Not too difficult to recognize what that's been signalling for quite some time now.

As we are now discovering, in a globalized world the ability to efficiently create too much productive capacity across virtually every sector of the economy is much greater than yesterday's trade and capital flow restricted environment. Wait till the Chinese and Indians really get into the auto manufacturing game. Has anyone seen the ghosts of Reed Smoot and Willis Hawley wandering the Hill recently?

[touchring]

Re: Shanghai in free fall as oil giant plummets

That's why I disagree with those that suggest that commodity inflation is due to money supply increase, and only money supply increase. If there is no underlying demand for the good or service, there will be no inflation in that sector of the economy, no matter how much confetti the CBs of the world dump from their helicopters.

This is a dangerous belief, no lowering of interest rates, even to zero will prevent deflation if China and India stalls. Who is going to consume those oil, iron and copper?

[GRG55]

Re: Shanghai in free fall as oil giant plummets

This is a dangerous belief, no lowering of interest rates, even to zero will prevent deflation if China and India stalls. Who is going to consume those oil, iron and copper?

Theoretically yes. But so far it appears that the one area of global economic activity that has not (yet) been brought into gross oversupply is commodities. Twenty-five years of under-investment and other factors, including resource nationalization, stricter environmental scrutiny, lack of experienced personnel, and investor dis-belief in sustained demand, have conspired to limit new capacity additions. That the base metal mining companies are exploring for reserves on the NYSE and LSE (through M&A) is a good indicator of true opportunity constraint at a time of record free cash flow.

If (when) we see this same pattern repeat with the IOC's it will be another solid indication that petroleum supply growth is slowing. It will be rather difficult for Rex Tillerson (Exxon) or Tony Hayward (BP) to continue to argue they are not opportunity constrained (whether imposed politically or by resource geology) when they're using their cash to buy up the likes of Devon, Anadarko or Suncor.

Coupled with the global overcapacity in the supply of virtually every other good and service in the economy, these dynamics give me reasonable confidence that some substantial portion of the CB reflation effort will manifest as firm to higher prices in the commodity complex over time. Now that credit is getting tighter, funding for many marginal resource projects is likely to dry up, which will further constrain supply additions in my view. And then there is the wild card of the SWFs. Although they seem enamoured of crippled financials this week, one would reasonably expect they will take substantial positions in the geographically diversified resource producers, of which there are very few in this world.

[rzero]

Re: Shanghai in free fall as oil giant plummets

For example, based on the above definition, Japan has seen inflation since 1989 (surely "the number of circulating" Yen is greater now than it was then).

Are you sure?

[GRG55]

Re: Shanghai in free fall as oil giant plummets

Are you sure?

Then why has the one currency that has an apparently shrinking supply (the Yen) gone down in value even more than the rapidly depreciating US $???

NOBODY has abused their currency like the Japanese did early this decade. Their one serious attempt to contract the money supply was after they went off "quantitative easing" in early 2006. One look at the result in global markets will tell you how successful THAT was.

Uncertainty over Bank of Japan?s monetary policy

By David Pilling

Published: May 18 2006 01:20 | Last updated: May 18 2006 01:20

Two months ago Japan's central bank, which for years had been battling against deflation, finally flicked off the switch marked "free money".

Since then, the oceans of cash it had been pouring into the financial system have been dwindling. In just nine weeks, liquidity has halved to about Y15,000bn ($135bn, ?106bn, ?72bn). At this rate, by early June, the Bank of Japan?s measure of liquidity ? current account balances kept at the bank ? will have dropped to about Y8,000bn. Below this level, overnight interest rates will start flickering above zero as demand for overnight money outstrips supply.

In spite of warnings from the bank against reading too much into this milestone, markets have concluded that, once reached, the BoJ will swiftly increase its official interest rate. The problem for those trying to figure out the bank?s intentions is that monetary policy has entered a nether world between two regimes.

In the past lies the bank?s highly unorthodox policy of quantitative easing through which it flooded the markets with excess liquidity in the hope of stimulating the broader economy. In future, there is the prospect of a well signposted, orthodox policy of targeting rates according to transparent criteria.

But in the interim, flexibility, the terrible twin of transparency, has the upper hand.

Toshihiko Fukui, the bank?s governor who chairs a two-day meeting of the policy board from today, acknowledged the new state of uncertainty this week.

?We have shifted from a commitment regime in which policy was linked to the consumer price index (CPI) to a more flexible policy,? he told a seminar. ?There is still some hesitation among market participants who have become accustomed to an abnormal [situation] for a long period of five years.?

Quantitative easing, though unprecedented, was easy to understand. It contained an explicit commitment to stay put until inflation, as measured by the core CPI, stabilised above zero. Now the bank has no specific commitments, other than to set interest rates in line with the board?s understanding of price stability ? somewhere between zero and 2 per cent.

Ben Eldred, senior economist at Daiwa Securities SMBC Europe, says the bank needs to address market uncertainty. ?Right now, no one is really sure where to look for guidance as to the bank?s intentions ? is it Fukui?s speeches, the forecasts in the [six-monthly] outlook report, the language in the monthly report??

Many market participants expect the BoJ to move quickly, partly because it ended quantitative easing earlier than expected on the basis of just one month of 0.5 per cent inflation.

Those who expect the bank to move early also expect it to move fast. Interest rate futures suggest the market has priced in a second rate rise this year, bringing the composite increase to 0.5 percentage points. They expect three or four 0.25 point increases next year.

Yet Mr Fukui cautioned against jumping to conclusions. Reaching normal levels of liquidity in June would not automatically lead to a rate rise, he said. ?These are different issues.? Interest rate policy would not be mechanically determined but set in response to ?the bank?s assessment of economic activity and price developments?.

The problem for markets, as Mr Eldred suggests, is that it is not clear which criteria are being used. On the economy, the bank has expressed its view that, after four years of steady expansion, Japan is likely to continue growing above its potential rate for two more years. That would appear to give the bank every justification to move swiftly.

But there are factors that could stay its hand. One is an expected lower rate of headline growth when provisional numbers for first-quarter growth are released tomorrow. That number will almost certainly suffer by comparison with the 5.3 per cent annualised growth registered in the final quarter of last year. This could make it harder for the bank to raise rates soon.

Another factor is the yen. Yesterday the Japanese currency rose to an 11-month high against the dollar, briefly hitting Y109.02. The appreciation from a range of Y115-Y120 for much of last year has been enough to knock the stock market off its stride because of the fear, possibly overdone, of the impact on exporters.

On prices, the picture is equally cloudy. The headline rise in CPI has been 0.5 per cent for two months. But the rate of increase could stall ? or even go into reverse ? as some special factors begin to drop out of the numbers.

The basis on which the CPI is calculated will also change in August. The new methodology could shave 0.3 points off the headline CPI, again making a swift rate increase problematic.

Markets appear convinced the BoJ is preparing to move as early as next month.

Copyright The Financial Times Limited

AND...

Japan's monetary policy

Jun 8th 2006
From The Economist print edition

WHAT a difference a few days make. In mid-May over half of those economists surveyed by Bloomberg said that the Bank of Japan (BoJ) would soon raise interest rates—zero since 1999 but for one brief and disastrous episode—perhaps at its policy board's next meeting, on June 14th-15th. After all, they reasoned, Japan's economic recovery was gaining a firm footing, inflation (negative for so long) was on the rise, and central bankers were known to be worried that speculative bubbles might form in financial markets. And the BoJ seemed to some to be preparing for an early rate rise.

Since declaring the end to its policy of quantitative easing—flooding the banking system with free money—in early March, it had been draining the system rapidly. Yet now a rate increase at next week's meeting would come as a shock, even though the inflation gauge most watched, core consumer prices (that is, not counting fresh food), rose by 0.5% in the 12 months to April, the sixth month running in positive territory. Little has happened that might throw Japan's recovery in doubt: for example, first-quarter GDP grew at a rate of 3.1%, year-on-year, and that figure may later be revised upwards.

[GRG55]

Re: Shanghai in free fall as oil giant plummets

OK bart. What's the real answer? More Yen floating around out there compared to 1989, or fewer?

[Spartacus]

Re: Shanghai in free fall as oil giant plummets

OK bart. What's the real answer? More Yen floating around out there compared to 1989, or fewer?

IMHO Japan never had serious deflaton of either kind

Except for very short time periods they almost never shrunk the money supply in the 90s

And in supposedly the worst years, the 90s, they had shrinking prices, for only one year (eyeballing where the line goes below zero, the several times together look like 1, maybe 1.5 years.

look for "Inflation" on page 31 here

http://research.stlouisfed.org/publi...apan/japan.pdf

when you read some people you get the idea Japan had 30% deflation for all of the 90s, so called "Japan's lost decade" (lost due to deflation)

I don't know how they're doing the calculations

[grapejelly]

Re: Shanghai in free fall as oil giant plummets

IMHO Japan never had serious deflaton of either kind

Except for very short time periods they almost never shrunk the money supply in the 90s

And in supposedly the worst years, the 90s, they had shrinking prices, for only one year (eyeballing where the line goes below zero, the several times together look like 1, maybe 1.5 years.

look for "Inflation" on page 31 here

http://research.stlouisfed.org/publi...apan/japan.pdf

when you read some people you get the idea Japan had 30% deflation for all of the 90s, so called "Japan's lost decade" (lost due to deflation)

I don't know how they're doing the calculations

i think they mistake falling prices of many goods and services for money supply shrinking.

Japan had falling prices on many things especially highly leverage real estate, but the money supply was not allowed to shrink except as you noted. I think the mistake is symptoms vs. disease confusion.

[bart]

Re: Shanghai in free fall as oil giant plummets

OK bart. What's the real answer? More Yen floating around out there compared to 1989, or fewer?

As usual, it depends.

There are more yen floating around and there is more population too. But the real question is how one defines inflation & deflation.

If one measures it via CPI, then Japan has had mild deflation since 1990 or so. If its measured via CPI plus total assets (including things like real estate & stocks), then they've had significant deflation. There's also a huge wild card in Japan that's seldom discussed in this context, and that's the awful position of Japanese banks in the '90s - they were basically bankrupt & insolvent, and much of the money created since 1990 has gone into balance sheet repair.



On a broad view, the best definition of inflation in my opinion remains "more money than goods". But it gets twisted up something fierce when getting into defining money and goods, and adding in things like velocity, time lags, etc. too.
And the simplicities are also masked by comments like "if there's so much money that was created, why hasn't 'x' gone up in price" (and the other side applies too when money is destroyed). Where the created money goes is separate from it being created, and gets into sentiment and cycles and many other things like supply & demand.

The bottom line though is that inflation is very highly correlated with growth in money supply, as this chart unquestionably shows. Note that credit follows a very similar curve to M3.






One can also see the huge difference in money creation rates by the BoJ before and after 1990 here. The huge pump in 2001-2 can also been seen (with a time lag) in CPI & GDP in 2003-4.

[Spartacus]

Re: Shanghai in free fall as oil giant plummets

i think they mistake falling prices of many goods and services for money supply shrinking.

Japan had falling prices on many things especially highly leverage real estate,

yes, that's the point of the chart - it's a CPI chart.

Some prices fell And other prices rose, and the net effect was rising prices (rising CPI) and no "general deflation" of either definition - money supply or overall prices.