Friday, May 6, 2016

Beijing's economic challenge summarized

From the FT, on the property market in major cities which is frothing again,
On average, it would take 25 years, 33 years, 36 years and 19 years of household income in Beijing, Shanghai, Shenzhen and Guangzhou respectively for a family to buy a 90 sq m apartment, according to calculations by Mizuho Securities in Hong Kong. By contrast, London house prices are 9.2 times average earnings for first-time buyers, according to Nationwide data.
From Bloomberg on the extraordinary levels of speculation in commodity futures, given the tepid equity markets,
Even eggs have been a better investment in China in 2016, with futures climbing 27 percent. That’s as the cost of a dozen eggs in the U.S. slumped 24 percent in the first quarter. The epicenter of the commodities boom, however, has been steel reinforcement bars, which have surged 38 percent... The equivalent of 41 million bales of cotton traded in a single day on the Zhengzhou Commodity Exchange last month, the most in more than five years and enough to make almost 9 billion pairs of jeans, or at least one for every person on the planet.
This graphic of the velocity of transactions is scary,
And driving all this is a re-opening of the credit tap, something which the Chinese authorities have so far been unable to resist, 
But the motivation to keep credit flowing may be the looming threat of largescale corporate bankruptcies. Corporates face a record 3.7 trillion yuan ($571 bn) bond repayments this year. They are concentrated in metals and mining, power generation, industrials, coal, and transportation, all of which formed the bed-rock of the country's quarter century of spectacular expansion.
The challenge is immense. Large scale bankruptcies can threaten social and political stability, besides freezing up the credit markets. But treating them as a liquidity problem and rescheduling these loans overlook the reality that a significant share of these companies may no longer be competitive, their capacity unsustainable, and even their solvency doubtful. Loan roll-overs may be akin to pouring money down the drain. This would require calling the bluff and forcing haircuts, bankruptcies, and consolidation. But doing this in a phased manner may be very difficult, even for a Chinese government adept at "crossing the river by feeling the stones".

Further, such credit expansion at a time when factories are floating on excess capacity, corporate debt burden is soaring, and global export markets weak, is most likely to create resource misallocation incentives which end up inflating bubbles without doing anything constructive to repair balance sheets or stoke consumption. Worse still, the pain that follows can be excruciating and prolonged. 

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