Posted on 05/16/2004 5:56:22 AM PDT by truthandlife
Financial and political analysts have been predicting the demise of China's economic miracle for months now, but the latest policy shift by the Federal Reserve toward a more restrictive interest-rate posture has caused the alarm bells to ring from Hong Kong to Wall Street.
The rebound of the dollar that began in February has taken the pressure off other central banks, particularly the Bank of Japan, to sop up the fiat greenbacks printed by the Fed, thus placing added upward pressure on U.S. interest rates. By no accident, April was the worst month for emerging market debt in years.
More expensive dollar credit means the end of speculative booms in markets such as China, whose economy has grown to account for 10 percent of global trade. Wen Jiabao, China's prime minister, promised "resolute" measures to rein in excessive economic growth, while assuring investors that Beijing would seek to orchestrate a "soft landing," the Financial Times reports.
Like Alan Greenspan at the Fed, China's communist bureaucrats have used excessive credit and investment to boost short-term economic activity, but at a dire cost in terms of future inflation. Indeed, there is great debate whether China's economy is growing or is just pumped up with cheap dollars - money proffered by the latest generation of credulous gringos.
Many Bush administration officials remind Insight that China is a corrupt, chaotic country where the central government has only a tenuous grip on events, especially in the interior of the country. Local Communist Party officials loot private companies and banks with impunity, leaving all investors - foreign and domestic - at terrible risk. Foreign banks and investors, meanwhile, are providing a critical source of foreign exchange to bolster China's authoritarian rulers, who use fantastic claims of economic performance to entice new financial and direct investment from abroad.
This reporter always keeps in mind a comment of liberal economist Lester Thurow to an investment conference in Hong Kong a few years back when the MIT sage observed that China's economic statistics were so remarkable as to be unbelievable.
Few of the investment-banking types in the audience appreciated the full import of Thurow's remarks, but the bottom line is that economic data from China is even less reliable than the politically biased economic and labor statistics that emanate from Washington.
For example, China's National Bureau of Statistics reports annualized growth of 9.7 percent for the first quarter of 2004, a problem the Bush administration wishes it had. China claims to have expanded its economy at a brisk pace; 9.1 percent growth for all of 2003 and a 9.7 percent annualized growth rate for first quarter of 2004. The good news is that these numbers may indeed reflect the increase in economic activity caused by foreign dollar inflows, but the bad news is that these levels cannot be maintained, experts tell Insight.
China's statistics agency reports that investment in fixed assets in the first quarter ran 43 percent ahead of the previous year's levels. "The scale of investment in fixed assets is too large and growth is too fast," a National Bureau of Statistics spokesman told Pacific News Service.
Officially, consumer prices rose 2.8 percent in the quarter, but observers in Hong Kong tell Insight that the actual rate of inflation in the major Chinese cities is running at 20 to 30 percent above annual rates. Indeed, even the International Monetary Fund said last week that China's economy is "overheating."
"By definition, a shock is something that catches us by surprise," wrote Walter Molano of BCP Securities in a missive to his clients, mostly investors who follow his research on Latin American economies.
"We expect a shock from Asia, but we do not know how, when and why," he said.
Molano warns that the Chinese economy is badly overheated and that the rise in the inflation rate well into double digits is creating factors that will decelerate the pace of Chinese economic growth.
Nevertheless, he argues, "the rampant corruption and the weakness in the banking sector suggest that the controlled adjustment could manifest itself into a hard landing."
Such a scenario, Molano writes, "would ricochet immediately into Latin America."
A drop in the much noted Chinese demand for commodity products, he continues, "would coincide with a large increase in production" to accommodate the market's expectations that China's voracious appetite for everything from U.S. grain to steel is insatiable.
"The result would be downward gap in commodity prices, thus affecting the balance of payments for most of the region. Unfortunately, this could coincide with a rise in U.S. interest rates, creating a more worrisome situation for Latin America."
The torrid growth rates observed in China during the last several years have been a bonanza for investors and exporters, but the prospect of a sudden drop in China's demand for everything foreign implies that the Chinese central bank may need to allow the country's currency to fall. The restrictive measures put in place so far by China's authoritarian government have not yet reduced the economic surge, but there are indications that the vast speculative boom in China is nearing an end.
In Hong Kong, the South China Morning Post reports that prices for just about every local asset class began heading south simultaneously. Commodities, currencies, H shares on the Hong Kong Stock Exchange and even every equity bear's safe haven - gold - are tumbling, while the U.S. dollar has experienced a sudden rejuvenation. Meanwhile, there is growing evidence that the economic constraints felt by millions of Chinese, which caused the central government to embrace a "great leap forward" via hyper economic expansion in the first place, are causing social instability, the dark menace that has followed China's history.
Keith Bradsher of the New York Times describes how a flotilla of Chinese warships sailed slowly down the length of Victoria Harbor in early May "in a rare show of force that comes as democracy advocates here say they face growing intimidation by Beijing."
He continues: "Two guided-missile destroyers, four guided-missile frigates and two submarines displayed China's military strength for the first time since the territory was handed over by Britain in 1997. It marked a distinct change of tactics by Beijing. The Chinese military has been a nearly invisible presence here for the last seven years. Soldiers are required to wear civilian clothing when they leave their bases, and the main base is tucked away on an island at the harbor's western end. But today, residents here watched as a submarine sailed past the downtown Bank of China tower, designed by I.M. Pei. Sailors in dress whites lined the sides of the destroyers and frigates, and some gave friendly waves to workers on a passing tugboat."
If astute financial observers are correct and China's economy experiences another sudden "adjustment," particularly via a currency devaluation, the political ramifications may be even more important than the financial fallout.
While China has hundreds of billions of dollars in foreign reserves, the imbalances in its economy, surging imports and losses hidden within corrupt banks and state-owned companies could easily wipe out these assets several times over. But then again, it is impossible to say for sure whether the financial statements of China's central bank are any more truthful than the other statistics produced by the nation's communist government.
So far, the Bush administration has been too distracted by the Iraq mess to notice that the world's largest nation is on a collision course with the wall of financial reality. The White House refused, for example, to confront China over its manipulation of its currency (thus fueling the present boom) and suppression of worker's wages (thus artificially suppressing visible inflation), in essence encouraging Beijing's self-destructive economic course.
While the Bush administration likes to kid itself into thinking that China can be coaxed into embracing market norms via a policy of "engagement with leverage," say savvy China watchers, if recent history is any guide China's financial implosion is likely to confirm the market's worst fears.
No mention of Taiwan in the article. What if economic difficulties prompt the Chinese leadership to resort to nationalistic warmongering over Taiwan?
amazing article, thanks for posting this
He who lives by the command economy, dies by the command economy.
"Interesting times" ping.
A convenient distraction to foist blame on...
Several months ago I detected that China was about 6-7 months from devaluated their currency by about 20-25% to satisfy Western currency concerns. Nothing was stated conceretly but indications did not rule out devaluation. China will never submit to outside influence, but will appear outwardly to be in control when meeting obligations to the World community. The article sends caution to those for the mid-term to reallocate their investments less heavily in China - my guess is not later than second week of August.
Taiwanese Preident Chen is re-innagurated on May 20th. Investors may start jumping ship on both sides of the strait if he says something "provocative".
Then why did they grant Most Favored Nation status to them?
Booming India's stock market just took a plunge because the Congress Party just won the elections and an Italian Socialist is now Prime minister. Not a very good enviornment for investors there. Combined with possible financial uncertainty in China now, where do investment dollars go now?
Hey! Look over here, too! Somebody else is watching India tank, but the media is avoiding the horrid news brought on by political shifts against PRIVATIZATION, capitalism and Free Enterprise in the two biggest population centers on the planet!!!
Who would have ever guessed that the buyers who work at WalMart would be responsible for the collapse of communism in China?
To speed up the collapse of the Chinese economy and communism. Might not have been the intent, but it will certainly be the result.
Sounds like "Debt of Honor", a Tom Clancy novel.
To speed up the collapse of the Chinese economy and communism. Might not have been the intent, but it will certainly be the result.
Strategery at its finest.
If you want on or off my offshoring ping list, please FReepmail me!
If that was their intention then I am all for it. However, I don't think it was. Bush was trying, if I recall, to appease the Chinese after the "spy plane" incident.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.