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K. Palonka: „EQUILIBRIUM” AT LAST?

February 2012 was a striking month for China and its monitoring institutions. For the  first time in decades  foreign trade balance showed significant predominance of import over export.(see chart). The balance have shifted back next months but the unusual feeling remains. Export dominance regain , however the dynamics of growth is on import side. This was partly because  of rising prices of major import items  ( oil, row materials) but partly because there is still healthy demand for Chinese products abroad. Export to USA grew by 12,8% in March 2012 that was still smaller rate than a year before but overall   US trade deficit with China rose 8% during 2011 and reached $295bn according to US Senate data (quote after Bloomberg ) that raised growing concern and disputes in US.

On the other hand export to EU , major trade partner until recently has dropped significantly (in March 2012  by 3,1% comparing to last year March data d ue to financial crisis. Chinese imports grew 6.9 per cent in the first three months of the year, compared with 20.2 per cent in the last quarter of 2011 . Country’s exports are expected to grow by less than 10 per cent this year, compared with 20.3 per cent annual growth in 2011. As predicted the country’s imports will grow  faster than exports this year and analysts say they expect a trade surplus of $100bn this year, down from $155bn last year, $183bn in 2010 and $296bn in 2008. (Data according to Chinese Ministry of Commerce )[1]

 The recent data indicate  important change that would ,quite predictably, characterize economic policy in China. According to official statements internal development will absorb majority of authority’s decisions. The official target for GDP growth published recently is “merely” 7,5% for 2012.( First quarter of 2012 is 8,2%).  Some of the most important tasks is to increase the internal demand to make banking reform and solve the currency valuation problem.

Last but not least the currency valuation ,that was a constant case of international disputes (namely undervaluation of  Yuan towards US$ and other currencies, although there was official revaluation of 40% between 2005-2011) is looking now as “solving by itself”. Decreasing foreign trade surplus makes it easy to devaluate the currency or keep it within reasonable borders. IMF announced recently that it does not see the necessity to monitor China trade balance in so called  “alert” terms. Prime minister Wen Jiabao announced  that the government sees the prospect of “ equilibrium” in this area that will allow Chinese currency to fluctuate freely in international financial system in the future . The first movement being  broadening the band of Yuan fluctuation within (+/- 1%).

. The  complex issue of creating internal demand  includes  important component –  property market, that includes house and apartments supply and demand. Property market in China showed spectacular boom during recent years .Prices of apartments and houses grew dramatically and reached enormous heights in big cities in particular. Private developers eagerly acquired any available land to start new constructions. Local governments found easy source of financial incomes  via selling land  (often obtained through expropriation of farming land) to greedy developers. According to a Chinese central government study, provincial administrations, which had to borrow heavily to finance their part of 2009 stimulus spending , depend on land sales for 40 percent of their revenues. Land sales in 13 major cities  ( $10.5 billion in January and February),came down 47.5 percent from the first two months of 2011, according to Hong Kong-based real estate firm Centaline Group.

The value of land sales In Beijing fell by 30 percent in 2011, and is expected to be repeated this year.

Untill 2011 developers were obtaining money from any possible sources: small banks ( the bigger ones prefer to lend to state owned companies ), private wealth and illegal gray-zone financial institutions that were charging extraordinary interest rates. With its potential to grow in the double digits, real estate seemed the perfect place to invest savings, partly because deposit interest rate in national banks was unusually low and could not  cover growing inflation and there were hardly any other options offered  by financial system. Home prices in first-tier cities including Beijing, soared by more than 200 percent between 2000 and 2009.  Apparently speculative phenomenon was partly a result of insufficient and inadequate offer for placing peoples savings. 2010 survey found that 18 percent of Beijing homeowners owned two or more properties. [2]A separate survey of all cities determined that 40 percent of home purchases were for investment, not residency by the buyer.[3]

Thus the property bubble burst was awaited as a natural  consequence and its impact influences many sectors. (However one has to remember that mortgage loans are estimated as only 50% property of market value whereas in USA it is over 100%. )

Since the prices were so high, majority of affluent middle class citizens restrain themselves from buying flats. (Price of a 1,100-square-foot apartment in Shanghai is equivalent to about 30 years of disposable income for a middle-income Chinese family in cities such as Chengdu,  in western China, homes may require 20 times annual wages. In Beijing’s price-to-rent ratio is  as high as 1,200 to 1.

 In February 2012, prices of new homes fell in 45 of the 70 Chinese cities monitored by the official National Bureau of Statistics. Average property prices dropped 8.1 percent year-on-year in the first two months of 2012, compared with a 6.9 percent rise for all of 2011, (data obtained by  Shanghai E-house China Research Development Institute). Inventories are growing rapidly: There were 46 percent more homes listed for sale in China at the end of last year than in 2010, according to annual reports of 48 real estate companies that issue „A” shares.

Government-financed  project named “ affordable housing” created  also significant competition for private supply of apartments in midland China .

For trading real-estate companies the average ratio of debt to assets (for publicly traded property-development companies) rose to 72.3 percent, the highest level in 10 years.[4] Total debt for these companies hit 521.6 billion yuan ($82.7 billion) in 2011, up 37.8 percent from the previous year. Nearly half of this debt load must be repaid in 2012, and that could cause even more rapid price declines, if developers are forced to sell inventory to cover their repayments

The consequence is a serious threat for banks and other financial institutions, informal lenders among them  . According to the International Monetary Fund, real estate accounts for about 18 percent of Chinese banks’ lending portfolios. Even more importantly, as credit demand boomed during the property market’s rapid expansion, an unsupervised, unprotected black market banking system contributed to fulfill it. So the Chinese financial system as a whole may be much more vulnerable than data on conventional banking may suggest.

This was probably the good timing for Premier Wen Jiabao to release information calling for banking reform.  If the financial system is not able to fully play its role of building a bridge between savings and companies needing the funding, money cannot be fully utilized and thus cannot promote economic growth. The government wants to break the monopoly in the banking sector and approve some loan companies or private banks, such as small banks, regional banks and community banks Economic slowdown is another factor behind the timing of the reform. The monopoly in the banking industry results in high profits due to unfair competition.

 Official announcement of bankruptcy of some small banks raised big concern that appeared to be in accordance to proposals of banking system reforms. The most significant and radical is, as usually in China, applied as an experiment in one of most affluent and entrepreneurial provinces of South-East China- Zhejiang in Shanghai vicinity . The dynamic city of Wenzhou was named  “special financial zone” with two pilot projects. First ;informal money-lenders will be encouraged to register as  official private financial institutions. Second ;the private citizens will be allowed to invest abroad in non- bank entities up to $3m without seeking official permit and thus having a chance to obtain bigger return on their savings than in country banking system.[5] The thing looks attractive also because of PBOC ( Peoples Bank of China –state central bank ) announced that it does not intend to raise official interest rates in nearest future. The project, if successful,  promises to stimulate  economic growth and is in accordance to other significant task, namely farther internationalization of Chinese currency.

 Real estate is influencing consumption and government spending as the two main drivers of the Chinese economy. Over the past decade, though, household purchases — accounting for over 70 percent of U.S. GDP — amounted to only about 35 percent of China’s total .However real estate troubles are also weakening other parts of the economy. For example, in the steel industry, return on sales plunged from 6.25 percent in 2005 to 2.42 percent in 2011.

Some economists though believe  the current slowdown is to a large extent government- induced, the result of measures meant to halt inflationary pressures. They’re encouraged by forecasts that China’s urban population will grow by about 160 million in eight years and keep expanding until at least 2039.Thus the demand for housing will remain healthy within some time.


[1] China reported a trade surplus of just $670m in the first three months of the year, justifying Beijing’s insistence that the Yuan is approaching equilibrium after of about 40 per cent increase over the past seven years.

In contrast to its trade with Europe, Chinese trade with other developing countries grew rapidly in the first three months. In the first quarter, of 2012, Chinese exports to Russia increased 14.6 per cent while imports rose 49.2 per cent. Chinese exports to Brazil increased 19.2 per cent while imports rose 7.0 per cent.(Financial Times;April 10, 2012)

 

[2] The government imposed strict rules to stop residents of major cities from buying second or third homes; raise the down payment on mortgages; and impose property taxes in Chongqing and Shanghai.

[3] China Real Estate: Bubble’s Burst Could Propel A Hard Landing; By MORAN ZHANG: RSS feed; April 11, 2012 http://www.ibtimes.com

[4] Generally, a debt-to-asset ratio above 50 percent indicates liquidity problems.

[5] The Wenzhou experiment. The Economist, April 7th 2012.

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K. Palonka: „EQUILIBRIUM” AT LAST? Reviewed by on 17 kwietnia 2012 .

February 2012 was a striking month for China and its monitoring institutions. For the  first time in decades  foreign trade balance showed significant predominance of import over export.(see chart). The balance have shifted back next months but the unusual feeling remains. Export dominance regain , however the dynamics of growth is on import side. This

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