Fears of a China crash are unfounded

I am sharing an article on China economic, which from an insider.

Fears of a China crash are unfounded

The market is always in search of a story, and investors, it seems, think they have found a new one this year in China. The country’s growth slowdown and mounting financial risks have spurred a growing wave of pessimism, with economists worldwide warning of an impending crash.

But dire predictions for China have abounded for the past 30 years and not one has materialised. Are today’s really so different?

The short answer is no. Like the predictions of the past, today’s warnings are based on historical precedents and universal indicators against which China, with its unique economic features, simply cannot be judged accurately.

The bottom line is that the complexity and distinctiveness of China’s economy mean that assessing its current state and performance requires a detail-oriented analysis that accounts for as many offsetting factors as possible. Predictions are largely pointless, given that the assumptions underpinning them will invariably change.

Consider China’s high leverage ratio, which many argue will be a key factor in causing a crisis. After all, they contend, developing countries that have experienced a large-scale credit boom have all ended up facing a credit crisis and a hard economic landing.

But several specific factors must be accounted for in assessing whether this is China’s fate. While China’s debt/gross domestic product ratio is very high, the same is true in many successful East Asian economies, such as Taiwan, Singapore, South Korea, Thailand and Malaysia. And China’s saving rate is much higher. Ceteris paribus, the higher the saving rate, the less likely it is that a high debt/GDP ratio will trigger a financial crisis.

In fact, China’s high debt/GDP ratio is, to a large extent, a result of its simultaneously high saving and investment rates. And, while the inability to repay loans can contribute to a high debt burden, the non-performing-loan (NPL) ratio for China’s major banks stands at less than 1 per cent.

If, based on these considerations, one concludes that China’s debt/GDP ratio does constitute a substantial threat to its financial stability, there remains the question of whether a crisis is likely to occur. Only when all of the specific linkages between a high debt burden and the onset of a financial crisis have been identified can one draw even a tentative conclusion about that.

PROPERTY BUBBLE?

China’s real-estate price bubble is often named as a likely catalyst for a crisis. But how such a downturn would unfold is far from certain.

Let us assume that the real-estate bubble has burst. In China, there are no sub-prime mortgages and the down payment on the purchase price required to qualify for financing can exceed 50 per cent.

Given that property prices are unlikely to fall by such a large margin, the bubble’s collapse would not bring down China’s banks. Even if real-estate prices fell by more than 50 per cent, commercial banks could survive — not least because mortgages account for only about 20 per cent of banks’ total assets.

At the same time, plummeting prices would attract new homebuyers in major cities, causing the market to stabilise. And China’s recently announced urbanisation strategy should ensure that cities’ demographic structure supports intrinsic demand. If that were not enough to ward off disaster, the government could purchase unsold properties and use them for social housing.

Moreover, if necessary, banks could recover funds by selling collateral. As a last resort, the government could step in, as it did in the late 1990s and early 2000s, to remove NPLs from banks’ balance sheets. Indeed, China has a massive war chest of foreign-exchange reserves that it would not hesitate to use to inject capital into commercial banks.

That remains a highly unlikely scenario. China’s banking system does face risks stemming from a maturity mismatch between loans and deposits. But the mismatch is less severe than some observers believe.

In fact, the average term of deposits in China’s banks is about nine months, while medium- and long-term loans account for only over half of the total outstanding credit.

A more salient threat would arise if the government pursued too much capital-account liberalisation too fast. If China eases restrictions on cross-border capital flows, an unexpected shock could trigger large-scale capital flight, bringing down the entire financial system. Given this, it is vital that China maintains controls over short-term cross-border capital flows in the foreseeable future.

Likewise, the Chinese government must address a fundamental contradiction. Monetary interest rates have increased steadily, owing to rampant regulatory arbitrage (whereby banks find loopholes that enable them to avoid unfavourable rules) and the fragmentation of the credit market, while return on capital has fallen rapidly because of overcapacity.

If the Chinese government fails to reverse this trend, a financial crisis — in one form or another — will become inevitable. But, given the authorities’ broad scope for policy intervention, the crash will not come anytime soon — if it comes at all.

ABOUT THE AUTHOR:

Yu Yongding is former President of the China Society of World Economics and Director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, and has also served on the Monetary Policy Committee of the People’s Bank of China.
http://www.todayonline.com/chinaindia/ch...epage=true

Western countries always pray for the collapse of China, good try anyway. They are really fearful of the awakening giant.

boom and bust are part of nature.......when there is a bust, the country rids itself of excesses.........

When there is a continuous boom without bust, then the building up of excesses might be too big for one to handle when the day comes....

although many would argue no it would not happen for THIS TIME IT IS DIFFERENT.

(17-04-2014, 11:41 AM)cfa Wrote: Western countries always pray for the collapse of China, good try anyway. They are really fearful of the awakening giant.

In many ways I find China frightening as well. One example, their insecurity has resulted in a very aggressive attitude whenever they disagree with a foreign entity ( be it Japan or a foreign company like Apple ) or when they think they are slighted.

Peaceful rise? I hope but I have some doubts. Hopefully they would have changed before they become a superpower.

I do not subscribe to the view that China is immune to a hard landing or financial crisis. If you realize what is happening behind closed doors, you wouldn't be so sanguine as well. Nothing can be trusted, not the GDP figures, not the food, the medicine and even baby milk powder is not spared, I rest my case

All countries that grow political and military muscle tend to become self righteous big bullies, so China is not alone in this area. Look at how the US marched into Afghanistan and Iraq after 9/11 in search of the chemical weapon that was never found. Or look at how Russia just decided to annex Crimea and now drooling to march into the rest of Ukraine at the slightest provocation. Same same, bro. Sigh, universal problem with humanity, not just China.

In short, my views are the same, no one knows for sure when or what will happen in the future. As a value investor, one should not completely miss out on the value opportunities in China right now, nor should we be overly vested in it.

No worries ! Says the author.

China economy will not see hard landing

By Wu Jiangang (chinadaily.com.cn)Updated: 2014-04-17 11:23

There is no worry of a hard landing in China. Economist Paul Krugman in a recent post ("How Much Should We Worry About a China Shock?" The New York Times, July 20, 2013) says he is very worried about the indirect and unanticipated effects of a Chinese hard landing. Michael Pettis, an important China observer who lives in Beijing, has in his new
book, "Avoiding the Fall: China's Economic Restructuring", predicts that China's GDP growth will slow down to 4 to 5 percent in the next 10 years.

All these concerns have gained currency only recently. China's first quarter GDP growth rate fell from 7.7 percent in the fourth quarter of last year to 7.4 percent, which is the lowest level since September 2012. There are also other clues that may make expert economists worried, such as a quick devaluation of yuan, rare drop in exports, volume contraction of real estate transaction, historically first defaults in trusts and bonds, etc., all of which presents a picture that we are headed toward economic hard landing.

But we may not need to worry about it either in the short run or in the long term.

In 2014, China can achieve the economic growth rate of 7.5 percent. Though the GDP growth for the first quarter is lower than the expected economic growth target of 7.5 percent, thanks to fiscal and monetary policies, the next quarters may see higher growth rate. Although Premier Li Keqiang has said that the government will not use massive fiscal stimulus program, the government has plans of "micro-stimulus", such as tax incentives for small and micro enterprises, shantytowns transformation and railway construction. We can also expect relatively loose monetary policy, too, since the M2 growth rate of slowdown from February's 13.3 percent to 12.1 percent and a comparatively low CPI of 2.4 percent in March have given enough space for the adjustment of interest rate or deposit reserve rate. In fact, 50.30 of PMI in March indicates that the economy as a whole is expanding.

We also should not worry about import and export. Though there has been a decrease of 3.4 percent in imports and a decline of 1.6 percent in exports in the first quarter and, more importantly, a fall of 9 percent in imports and a drop of 11.3 in exports in March, this is mainly because of one-off factors, such as last year's inflated data due to special circumstances and slowdown of cross-border arbitrage of RMB between Hong Kong and Chinese mainland. The truth is that except for a significant drop of 33 percent in exports to Hong Kong, there has been an increase in exports of 6.3 percent to EU, an increase of 0.9 percent to US, an increase of 2 percent to ASEAN and an increase of 2.6 percent to Japan. With the US economy getting stronger and EU's economy becoming more stable, exports will pick up further.

Even in the long term, China will not experience a hard landing.

Take real estate for instance. People worry that China, like Japan, might fall into decades of economic stagnation if the real estate bubble bursts. But the real reason behind Japan's stagnation is its aging population and zero growth. Moreover, inconvenience of renting, lack of investment channels and fear of inflation make people more willing to buy houses, which creates strong demand of houses not only for residences but also for investment. A down payment of at least 30 percent to buy a house makes an important buffer even if there is a significant decline in housing prices.

As far as local government debts are concerned, since the government owns a lot of companies, all of land, most of minerals and the rights to issue currency, these debts will not create the crises we are witnessing in the EU.

As to the possible crisis emerging from stronger dollar, hot money outflows and devaluation of RMB, since China implemented the capital control under securities entry, this will not have an unmanageable impact on China's capital market or the real estate.

Sometimes economy crisis can be defined as a sharp slowdown of economic growth. But this kind of economy crisis too will be not happen. In fact, the truth of Japan's stagnation is that Japan's GDP per capita is still a high of $50,000, which is a great achievement, considering its consistent problem of aging population.

But China's GDP per capita is only 10th of Japan's and its urbanization level is only 50 percent. China's economic growth potential has for a long time been hampered by inefficient institutional environment and therefore market-oriented reform will free it up and increase the speed of growth as China is a nation of industrious and studious people. And I believe this government is on the right track of improving the institutional environment and carrying out market-oriented reform.

The author is a lecturer at the Management School of Shanghai University and a research fellow at the China Europe International Business School Lujiazui International Finance Research Center.

http://www.chinadaily.com.cn/business/20...0849_2.htm

Shiller: What We Can Learn from Past Crises
http://english.caixin.com/2014-04-18/100667344.html

MACRO VIEW
Fears over China's slowdown may be overblown
Published on Apr 28, 2014 1:02 AM



By Fiona Chan, Senior Economics Correspondent

IN THE relative absence of major disruptions in the global economy recently, investors in Asia are increasingly zooming in on China's slowing growth and the ripple effect that will have on the region's economic performance.

Last Friday, the Chinese yuan fell to a 16-month low, on increasing signs that the country's economy may be weakening more rapidly than expected.

One of these worrying indicators was that China's factory activity shrank for the fourth month in a row in April, according to the HSBC Purchasing Managers' Index released last Wednesday. This comes on top of data last month showing a broad weakening of activity across sectors including manufacturing, property deals and retail sales.

While China's first-quarter growth of 7.4 per cent topped forecasts when the figure was published earlier this month, it also marked the smallest expansion in the world's No. 2 economy in 18 months.

Of all the risks on the horizon this year, a rockier-than-expected slowdown in China has been the biggest drag on growth expectations for Asian economies, many of which rely on China as a key export market.

A poll of over 200 economists across the region by Reuters, released last Friday, showed that they expect growth in emerging Asian economies to be lacklustre this year. Their main fear is that China, which is in the midst of rebalancing its economy towards greater reliance on domestic consumption, will be unable to avoid a hard landing.

The economists surveyed by Reuters forecast China's economy to grow by 7.3 per cent this year - the slowest pace since 1990 - and ease further to a 7.2 per cent expansion next year.

"Hard-landing fears are escalating again even though estimates for GDP growth do not reflect such pessimism," said DBS chief economist David Carbon in a recent report quoted by Reuters.

But how much of an impact will China's slowdown really have on Asia's economies?

Economists at London-based research consultancy Capital Economics last week offered an optimistic view: that Asian exports will still pick up pace regardless of China's softening growth.

One reason is that the combined demand of the United States and Europe, which are both recovering steadily, still matters more to Asia than that of China, said economist Krystal Tan.

At face value, figures show that emerging Asian economies export about 20 per cent of their goods to the US and European Union combined - roughly the same amount as they ship to China alone.

But this is somewhat misleading as the US and EU account for more of the final demand for Asia's exports, whereas over 70 per cent of Asia's shipments to China are intermediate goods that end up elsewhere - not least the US and EU, Ms Tan noted.

In addition, China's slowdown is expected to be largely driven by a fall in investment growth, which will mostly hurt commodities demand.

But within Asia, only Malaysia and Indonesia are major commodity producers. And for Malaysia at least, most of its exports to China are intermediate goods, added Ms Tan. "Manufacturing goods dominate the export baskets of most other economies, and they should benefit to the extent that they can tap into rising Chinese consumer spending," she said.

So far, Asian exports this year have turned in a performance too patchy to draw firm conclusions. But going by Ms Tan's analysis, it would be fair to say that the ongoing recovery in the developed world is at least as important a macro story to Asia's exporters as China's slowdown.

fiochan@sph.com.sg