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The End of China's Easy Growth
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The End of China's Easy Growth

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The End of China's Easy Growth

Caixin magazine reports - with disbelief - that the wish-list for industrial parks and mega-projects unveiled by all echelons of the Chinese system has reached 15 trillion yuan by some estimates.

This is over $2.3 trillion or nearly four times the blitz of extra spending after the Lehman crisis in 2008, a policy that pushed investment to a world record 49pc of GDP and is now deemed to have been a mistake.
But as Caixin also reports, the authorities are running out of easy money. Land transfer fees for the 300 largest cities have fallen 38pc over the last year.

The central government’s tax revenues have grown 8pc, but spending has risen 37pc. "The good days of overflowing government coffers are over," it said.

Mark Williams from Capital Economics said the fiscal blitz is a mirage. Most of the road and urban rail plans were already in the pipeline. Spending will be spread over years. "We can see no sign of a fresh stimulus. The project approvals are interesting solely because the government chose to publicise them," he said.

China may have to muddle through the downturn after all with less extra juice than hoped. This will be sobering. The country’s cost advantage over America - and others - has vanished.

A new report by PricewaterhouseCoopers entitled "A Homecoming for US Manufacturing" claims it is now cheaper for whole clusters of US industry to produce at home, close to their markets. Firms are "re-shoring" -- to use the vogue term -- to cut transport and inventory costs and take advantage of cheap shale gas. The weaker dollar has iced the cake.

PwC said the US has clawed back a cost advantage of 2pc in steel output against China, at least for the North American market. Its "heat map" gives the US the edge in chemicals, primary metals, electrical products, machinery, paper, transport equipment, and wood, in that order.

This did not stop Republican candidate Mitt Romney accusing China of job "theft" and "currency manipulation" on Sunday. He needs to keep up with the literature. The yuan is no longer undervalued in any meaningful sense. Nomura thinks China will have a current account deficit by 2014.

Google is building its Nexus Q Music and video player in the US. General Electric and Ford are switching to plants at home. So is Caterpillar, which is interesting since its chief Chinese rival Sany Heavy Industry is in trouble. It has just asked creditors to waive a $510m financial covenant.

Boston Consulting Group has been banging on this homecoming drum for some time, arguing that wage inflation of 16pc annually for a decade has eroded China’s lead. The gap in "productivity-adjusted wages" was 22pc of US levels in 2005. It will be 43pc (61pc for the US South) by 2015.

It issued a fresh report last week -- "The End of Easy Growth" -- warning that the profit margin of China’s leading companies has been slipping behind since 2009. It fell to 11pc last year compared to 18pc for global peers.
The group studied 50 fast-growing companies -- among them Sany, as it happens -- concluding that they are at an "historical turning point". Either they make the changes needed to break through in the global big league as Brazil’s Vale, Mexico’s Cemex, or India’s Wipro have all done, or they risk languishing as also-rans.

The World Bank made much the same argument for the country as a whole earlier this year in a joint report with Beijing’s Development Research Centre. It said the export-led growth model launched by Deng Xiaoping over thirty years ago is obsolete. China risks a drift into the "middle income trap" unless it abandons its top-down strategies and grasps the nettle of free-market reform.

"Innovation at the technology frontier is quite different in nature from catching-up technologically. It is not something that can be achieved through government planning," it said.

Premier Wen Jiabao agrees, but there are others at the top of the Communist Party who think the 2008-2009 crisis vindicated tight party control of industry and the banking system. It did no such thing.
You could argue that East-West rebalancing in labour costs is just what the world needs. The question is whether China can tolerate the shock.

I missed the World Economic Forum in Tianjin last week but Jamil Anderlini from the Financial Times reported a pervasive tone of "despondency and cynicism" from Chinese officials and economists, in marked contrast to the bullish certainties -- or naïveté? -- of foreigners at the event.

"I believe China is going to experience a very serious economic downturn and I think it has already started," said one leading economists. "The government is trying now to stabilize the economy but the instruments they have are very limited. If it can’t turn things around then I expect huge and widespread social unrest."

There are degrees of bearishness on China. My own view as a "soft bear" -- based more on anthropology than economics -- is that the country will ultimately pull through and reclaim its rightful place as a global superpower. The dynamism is unstoppable, much like the US in the Roaring Twenties.

But that is the sweep of history. The ups and downs of economic cycles are another matter. The Politburo clearly misjudged the difficulty of deflating a property bubble after letting loans grow by almost 100pc of GDP in five years (IMF data), almost double the rate in Japan over the five years before the Nikkei bubble burst or in US before the sub-prime peak.

Albert Edwards from Societe Generale -- an Ice-Age bear -- thinks China’s downturn has reached an inflexion point. The balance of payments were in deficit in the second quarter. Capital outflows trumped the trade surplus. Foreign reserves fell.
Let us not forget that reserve accumulation -- the side-effect of holding down the yuan to pursue export share -- was the prime cause of China’s credit bubble in the first place.

It automatically forced China to import a US monetary policy that was far too loose for the needs of a fast-growing, over-heating economy, as Alan Greenspan warned at the time. It seemed to work marvellously, but Faustian Pacts come due.
This powerful process is now going into reverse. Lombard Street Research estimates that capital flight has reached $320bn over the last year. Monetary policy is tightening by default.

"It is a massive shift down through the gears for the monetary printing press. And if the capital outflows accelerate, the next gear may yet be reverse," said Mr Edwards.

China’s $3.2 trillion reserves may be large at 22pc of the M2 money supply, but they were even larger -- 35pc -- for the Asian Tigers just before their currencies buckled in 1997. The reserves prove nothing either way. The issue that matters is whether they are enough to overwhelm the actions of China’s own elites, should they continue to squirrel money abroad as fast as they can.

This capital flight appears to be `tail-risk’ insurance by well-informed Chinese, a hedge in case the 10-year power transition in October goes badly wrong or in case the pressures of a secular downturn cause another of China’s sudden political pivots, as in 1898, or at the onset of the Cultural Revolution, or indeed in case a "war" engulfs the Pacific region -- as US Defence Secretary Leon Panetta warned over the weekend.

What is clear is that the deeper effects of the global crisis and the Long Slump have at last caught up with China. The headwinds will be greater from now on. A President Xi Jinping -- if it be he -- will face an entirely different landscape.

The End of China's Easy Growth - Telegraph

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Ghost warehouse stocks haunt China's steel sector

SHANGHAI (Reuters) - Chinese banks and companies looking to seize steel pledged as collateral by firms that have defaulted on loans are making an uncomfortable discovery: the metal was never in the warehouses in the first place.

China's demand has faltered with the slowing economy, pushing steel prices to a three-year low and making it tough for mills and traders to keep up with payments on the $400 billion of debt they racked up during years of double-digit growth.
As defaults have risen in the world's largest steel consumer, lenders have found that warehouse receipts for metal pledged as collateral do not always lead them to stacks of stored metal.

Chinese authorities are investigating a number of cases in which steel documented in receipts was either not there, belonged to another company or had been pledged as collateral to multiple lenders, industry sources said.

Ghost inventories are exacerbating the wider ailments of the sector in China, which produces around 45 percent of the world's steel and has over 200 million metric tons (220.5 million tons) of excess production capacity. Steel is another drag on a financial system struggling with bad loans from the property sector and local governments.

"What we have seen so far is just the tip of the iceberg," said a trader from a steel firm in Shanghai who declined to be identified as he was not authorized to speak to the media. "The situation will get worse as poor demand, slumping prices and tight credit from banks create a domino effect on the industry."

The Shanghai government's asset regulator said that it had sent a note to state-owned firms in August asking them to verify receipts for stored metal on financing deals they had with steel traders.

Police have arrested an employee from Baoyang Warehouse in Shanghai and are investigating documentation for steel stocks that the employee issued to a trading firm, said an official with the surname Ou at Baoyang. Baoyang is owned by China Railway Materials Shanghai Company Limited.
Reuters was unable to contact a member of the police force that could comment on the investigation.

The trade firm used the stocks more than once as collateral to obtain loans, said an executive at Shanghai Minlurin, another trading firm that had steel stocks in the warehouse. The receipts used were for steel worth around 380 million yuan ($59.96 million), the executive said.

Similar cases have prompted some trading houses to temporarily halt transactions related to warehouse receipts, disrupting China's steel business, traders said.

"We have suspended business for days as we are afraid we won't be able to get any stocks from the warehouses if we get a fake receipt," said one Shanghai-based trader.

Banks, too, are giving less credit against warehouse receipts.
"Fake warehouse receipts have become a problem for some banks and because of this, many banks have boosted monitoring of existing stocks at warehouses and temporarily stopped accepting steel stocks as collateral for loans," said a Shanghai-based branch manager from a Chinese bank who declined to be identified as he was not authorized to speak to the media.

Steel mills and end users rely heavily on trading firms to keep steel flowing from producers to consumers. Steel traders often buy consignments with full payment, ensuring cash flow to the mills. End users can buy small volumes from the traders, more convenient for them than the big volumes the mills sell.

Industry sources estimated cases that have already come to light account for about 5 billion yuan ($787.50 million) of bad debt in Shanghai, one of China's biggest steel trading centers.

At another warehouse, a logistics unit of giant steelmaker Baosteel rented a small office to a company called Shanghai Yiye Steel Trade Market Management Co Ltd. Documents were forged stating Yiye was the owner of some of the steel stored in the warehouse, said Wang Xueying, the spokeswoman for the unit called Shanghai Baosteel Logistics Co Ltd.

Yiye used the documents in dealings with two companies, China Railway Harbin Logistics and Wuhan Iron Yitong, the spokeswoman said.
The two companies came to the warehouse to collect the stocks only to find that Yiye did not own the materials, she said. The case is still under investigation, she added.

Nobody answered telephone calls to Yiye made by Reuters to request comment for this story. Both China Railway Harbin Logistics and Wuhan Iron Yitong declined to comment when contacted.

Exclusive: Ghost warehouse stocks haunt China's steel sector - Yahoo! Finance

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