China-2013China’s central bank withdrew an all-time weekly record high of $145 billion from their banking system this week.  China often increases liquidity in early February prior to their Chinese New Year and then decreases liquidity after the holiday.  But the extent of the reduction dwarfed the $106 billion added this New Year.  The People’s Bank of China has now drained a net $87 billion from the banking system since December 31st, compared with a net injection of $230 billion last year.  Economists refer to this activity as “Taking the punch bowl away just when the party is getting good.”  What this generally indicates is the Chinese government is being forced to strangle new lending because inflation is exploding.  Given that the United States is on the verge of a recession, it appears this Year of the Snake may be about to bite China’s economy.

Outgoing Chinese Premier Wen Jiabao called for local governments to impose restrictions to “decisively” curb housing market speculation.  He described house appreciation as “excessively fast” and ordered municipalities to publish annual price control targets.  Concern of the Chinese federal government include:

  • Local governments are turning to      property sales to boost their revenue.       As the majority land owner, local governments are incentivized to      sell property at inflated prices to developers financed by state owned      banks.
  • China’s total credit is now a      speculative 190% of the entire economy.
  • Andy Xie of      Morgan Stanley points out that at the end of 2012, there were 95.4 billion      square feet of property under construction, half residential and the rest      office/commercial.  This equates to 1.5      times the entire China GDP.

Mainstream economists assume the Chinese government’s actions are “prudent” to continue their high economic growth.  But China’s economic statistics are not credible.  The nation reported that January exports were up 25% over last year.  But China’s biggest trading partner, Europe, is in shambles.  If China had huge growth, it did not come from exports.

What did happen in China is total “social lending”, the broadest measure of economic liquidity, increased in January to $399 billion from $260 billion in December.  I believe the “recovery” is being driven by local government pushing real estate speculation.

China appears to be repeating the same strategy they followed during the 2008 to 2010 financial crisis.  The country implemented a spectacular $640 billion stimulus package to ward off an economic slump when their export markets in the developed economies imploded.  With China’s deficit-spending stimulus focused on massive infrastructure and property-related capital investments, the economy stabilized, but real estate prices exploded.  When property prices leveled off in 2011, bad debts at banks skyrocketed.

Premier Wen Jiabao has stated funding this activity had been a mistake, but China’s leadership allowed it to happen again after the economy slowed in the 2nd quarter of last year.  The central government officially unveiled another $160 billion infrastructure package in September, but unofficially local governments launched a similar package estimated to total up to $2.1 trillion.  Total credit for January showed a sharp increase from the first half of last year.  For 2012, credit financing grew 20%, trust loans were up 80%, foreign exchange loans up 27% and other financing increased by 45%.

The unbalanced Chinese export-driven economy was fragile before 2012.  Now according to hedge fund mega-short expert, Jim Chanos: “They’re on a treadmill to hell.  Either they try to keep blowing the bubble to maintain economic growth or they risk an immediate economic crash.”

China may have a savings rate of 53% of GDP, and $3.3 trillion in foreign exchange reserves, but the majority of these reserves are tied up in U.S. government bonds.  If China sells 10% of these bonds to bail out their own economy, U.S. interest rates will spike and the U.S. economy would tank.  Such an event would cause a worldwide recession and hammer China’s exports.

China’s export-reliant economy is based on expanding worldwide trade.  In Chinese “symbology”, snakes are regarded as intelligent, but with a tendency to be somewhat unscrupulous.  With the United States already on the verge recession, China’s economy may get bit in the Year of the Snake.


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