China

New regulations on money flows-
For a couple of weeks now there have been rumors and reports about new foreign exchange regulations being put into place, partly to limit hot money inflows and partly, once these begin to reverse, to make it more difficult for money to leave. Yesterday SAFE announced a new set of measures. Today’s South China Morning Post says the following about the announcement:
Will China Development Bank buy Dresdner?-
Falling oil prices in the international markets haven’t helped local stock markets as much as they had in the recent past. Oil fell earlier today to below $120 a barrel for the first time in three months, but the SSE Composite nonetheless dropped 51 points, or 1.9%, to close at 2690. As in the recent past, the decline was led by property developers and brokers, which is particularly striking since we received confirmation today of last week’s rumor that the PBoC would relax the lending caps by 5% for national commercial banks and by 10% for local commercial banks (who are presumed to be more likely to lend to the struggling SME sector). This means they can lend up to 105% or 110% of

The stock markets had a bad day, with the SSE Composite dropping 2.1% to close at 2741.7. Part of the reason for the decline was concern that a roughly $1 billion upcoming share sale by China South Locomotive and Rolling Stock Corp. will draw a lot of liquidity from the market (stock sales tend to be vastly oversubscribed, with investors required to put up 100% of the bid amount in cash in their stock accounts), but the decline was hastened late in the day when reports came in of a terrible attack on a police station in Xinjiang province that left 16 policemen dead.

A better rating, but more derivative losses-

Standard & Poor’s have just raised China’s long-tem sovereign credit rating to A+, based on its strengthening external position. In part this reflects China’s strong fiscal position – in June according to a release today by Credit Suisse, China’s consolidated fiscal surplus for the previous twelve months reached RMB 443.5 billion, equal to about 1.5% of GDP (although needless to say I am worried about hidden expenditures that may one day show up as contingent liabilities). But the upgrade mainly means, I think, that China has accumulated so much in the way of foreign currency reserves that it will have little difficulty in repaying its very limited foreign-currency external obligations.

Export rebates, relaxed lending caps, and a new department at the PBoC-

The stock market started out badly today, dropping 1.8% during the first two hours of the trading day, before a press conference by Hu Jintao, stressing the need for growth, brought back optimism over government-engineered policies to boost growth. From its low the market surged 2.8%, to close at 2802, up 0.9% for the day. According to an article in today’s Financial Times:

China’s Environmental Degradation: Socio-Economic Grounds for Concern-

China is the world’s most populous country and ranks fourth largest in terms of area. The economy, which is already huge, is also growing at a blistering rate. According to the International Monetary Fund, China’s economy is the second largest in the world in terms of Purchasing Power Parity, fourth largest in the world in terms of GDP, and the fastest growing economy with growth rates hovering around 10%. Unfortunately, all this prosperity comes at an immense price. China’s environmental problems are among the worst in the world, and are likely to only get worse. These environmental issues are a big problem for China because they have real socio-economic implications for the Chinese people and China’s economy. The goal of this article is to bring light to these environmental problems, display their socio-economic ramifications, and provide suggestions that will help China cope with these problems so that its economy can continue to prosper throughout this next century.

Companies need stable capital-

There is an interesting article in yesterday’s Xinhua headlined “Capital shortages top risk for China's SOEs.” This seems at first counterintuitive given China’s rapid reserve accumulation, but the explanation may be in the article itself. According to the article:

New Guestbook Entry by jerry- Thanks for your reports on China macroeconomics. I have invested a third of my retirement funds in the renmimbi with the understanding that a currency peg cannot be sustained with a large China reserve buildup (with resulting pressures on internal money supply) and the US offsetting large current account deficit. My question is: how would a substantial increase in China PPI over the next 12-24 months change the macro dynamics of the renmimbi (ie. what does macro theory tell us about inflationary impact on the need to allow renmimbi appreciation)? Thank you for your insights.

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PBoC falls into line-

After Friday’s Politburo meeting it seems that the perception that there has been a shift in policy-making is nearly unanimous. The meeting’s focus on “stability” and “continuity” included as a major objective the maintenance of “sustained, stable, and relatively fast growth.” And although “preventing prices from rising too fast” continues to be described as an important policy goal, gone are the references to preventing overheating and maintaining the tightening bias in monetary policy.

New Guestbook Entry by Lei Zhang- Hi Professor Pettis,

I have a question about the relationship between GDP growth and equity market growth in the longer term. If you look at 5-yr and 10-yr stock market performance vs GDP growth, you will find that China has really lagged behind the Russia and Brazil although the latters are “energy play”. I guess there is a strong correlation between GDP and stock market growth. But I have not been able to run the regression to prove it. Do you know if there is a proven theory on that? If so, I think it’s a good time to allocate the assets to China instead of the other big emerging markets. Thanks for your time.

P.S. Your blog is insightful.

Lei

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RMB appreciation is going to slow temporarily-

The very authoritative People’s Daily had a widely discussed front-page article yesterday calling for policy-makers to do the necessary to prevent the economy from slowing down. It implicitly criticized the anti-inflation policies of the PBoC by arguing that “The current performance of the economy is sending us a warning signal: when we fight inflation, we should prevent stagflation and an economic hard landing. Curbing inflation should not be at the expense of economic development.”

Hot money and inflation risks are still being downplayed-

In the first half of 2008, according to a Ministry of Commerce release today, investment flows from Hong Kong to the mainland rose by 95% over the same period last year, to $23.4 billion. Interestingly enough, the number of projects declined by 8.2%, to 6,900. I suppose it is possible that the average size of each project has more than doubled, but given the large number of projects, I think this is extremely unlikely. So why the discrepancy? According to an article in today’s Xinhua:

American-style crises versus Latin-American-style crises-

This news is four days old, but it is still worth noting that according to a Xinhuareport, the NDRC released a circular Friday to announce that, in an attempt to slow hot money, it will institute new controls to manage foreign investment inflows.

Housing is still up, but rationing is spreading-

A report in today’s China Daily says:

Second-quarter housing prices in 70 large and medium-sized Chinese cities rose 9.2 percent year-on-year, said the National Development and Reform Commission and the National Bureau of Statistics on Monday. The rise was 1.8 percentage points less than in the first quarter.

Tightness in the money market?-

The stock market raced up today, with the SSE Composite closing at 2778, 3.49% higher than yesterday’s close. Since investors are still digesting yesterday’s mix of good news and bad news – GDP slowing, fixed asset investment soaring, CPI down, PPI up – I suspect the main cause of the decline may have been the decline in oil prices to $130 a barrel.

June CPI suggests inflation is moderating, but PPI tells a different story-

As expected, the National Bureau of Statistics of China released a new set of economic numbers today. According to the release, CPI inflation year on year for June was 7.1%, its lowest level since January. It was 7.7% in May, 8.5% in April and 8.3% in March. On a month-on-month basis CPI declined by a little under 0.2% (following a 0.4% decline last month). This is more or less in line with expectations. The information is presented a little differently than it has been in the past, and I cannot back out the food and non-food components. I am hoping some cleverer analyst will be able to do so, but so far I haven’t seen anyone else provide a breakdown.

Waiting for the man-

The stock market had another bad day today, with the SSE Composite trading more or less straight down to 2657, before rallying in the last 30 minutes to close at 2706, down 2.65% for the day. According to Bloomberg, China has overtaken Vietnam to become the world’s worst performing stock market year to date.

The US and China: How Similar Are They?-

That’s a broad title that can lead in so many directions.

The world today looks like we’re heading towards another two super-power situation. Consider economic and political influence, voting on the UN security council, acquisition of oil, the space race, and even the medal count at the coming Olympics … there are a lot of themes that demonstrate the power of China, even relative to the US, and perhaps that’s one of several reasons why China is attracting plenty of foreign investment.

Financial system risks can grow-

After a decent day Monday (up 0.7%) the market today took a beating today, with the SSE Composite closing at 2779, down 3.4% for the day. The decline was probably partly caused by mortgage fears in the US (insurance companies and banks, who may be big holders of Freddie Mac and Fanny Mae, led the declines), but worries about a slowing domestic economy were likely to be the biggest concern.

June headline reserve growth was $11.9 billion, but real growth was actually muc-

The PBoC announced this morning that total reserves at the end of June reached $1.809 trillion (around 45-50% of annual GDP). This breaks down to $153.9 billion growth in the first quarter of 2008 and a $126.6 billion growth in the second. The PBoC do not release monthly figures officially, but we get pretty good unofficial leaks and, according to today’s Xinhua, this implies that reserve increases in the month of June were $11.9 billion.

Lower export growth = higher chance of policy mistake-

g=EN-US style="font-size:10pt">The stock market rally finally stopped today. After trading up most of the day, by over 1%, the SSE Composite lost its legs in the last hour of the day to close at 2876, down 1.54% for the day. I guess the main reason for the fall was the release of trade numbers, which suggest that export growth is slowing sharply. The trade surplus for the month of June was $21.3 billion, compared with $20.2 billion in May and $26.9 billion in June 2007. I suspect the real trade surplus would be even lower if there were some way to strip out speculative inflows hidden in the invoicing of trade transactions. Here is what today’s Bloomberg

Money is way too loose, not too tight-

The Shanghai stock market capped yesterday’s 1.5% decline with a further decline today of 0.7%. It’s still been a great week, up nearly 8%, but the party, at least for a while, seems to have ended.

At least one government official is, alarmingly enough, wondering if there are ways to manage the process better. According to an article in today’s China Daily:

What is money growth in China?-

After I posted yesterday’s entry, one reader (RebelEconomist) asked the following question:

You often say China's money supply is growing fast because of its currency policy. Surely, if this was the case, base money growth would be strong. In fact, it appears to be very weak (growing about the same rate - 11%ish - as REAL not nominal GDP). It appears that sterilisation is completely successful. What indicator do you look at that makes you worry?

A-Power Energy Generation (APWR) Up 15% on Announcement of Completion of Largest Wind Turbine Plant in China- Ok we're having a good day... another of our names is flying - that's 3 of them @ 15%+. Again iz.yahoo.com/bw/080709/20080709005415.html?.v=1">this is not NEW news to blog readers and this stock was beaten to a pulp in this panic - I actually added a touch first thing this morning to take A-Power Energy Generation (APWR) to a 3.1% stake. This is a good company WITHOUT the wind business, but with the birth of this new line, it's going to be a lot more than good in my opinion. [Jun 27: New Position in A-Power Energy Generation Systems to Create Alternative Energy Mini Basket]

The stock market is feeling happy again-

This is turning out to be a great week for the Chinese stock markets. After pausing for breath – it rose a mere 0.8% yesterday – the SSE Composite continued Monday’s 4.6% rally to gain another 3.8%, all of which rise came in the morning.

Shanghai seems to discount the fight against inflation-

Today was a very good day for the Chinese stock markets and a wonderful start to the week. The SSE Composite rose 4.6% to close at 2792, after reaching a high in the later morning of 2802. Of course it is worth noting that in the last month we’ve seen other very good days – the market was up 5.3% on June 18, another 3.0% on June 20, and again 3.6% on June 25 – but these were always followed by sharp declines the next day that took away all of the gains. As has often been the case in the past few weeks today’s rising prices were led by banking stocks, after two of the best Chinese banks – large but not among the Big Four – said that first half earnings were likely to more than double from the previous year.

New Guestbook Entry by Denis Suslov- This rss feed is read by more than 500 readers in Google reader, so it seems as best way to reach people dealing with banking and finance in China, so:
My e-mail is denissuslov@gmail.com - please contact me if you are working in bkg or fin industry in this promising country - I would be glad to have discussion with you.

Actually my question is -I am 18, and it is no-return point to choose university - which faculty in which university is considered to be the best for getting education and then job in before mentioned areas of business? (I want to be taught in chinese language) Please feel free to write to me, it is so important!

Dear Michael Pettis, it would be great if you write an entry on economic/financial education in China! Thank you for great blog anyway.

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Internal debate intensifies-

=EN-US style="font-size:10pt">Just a very quick post today, largely consisting of two news articles. The first comes from Xinhua.

The PBoC battles hot money-

Sorry for posting two longish entries on the same day, but I wasn't able to post yesterday's entry until this morning, and both days have had some important events worth writing about.

Last night SAFE came out with an announcement that I think many of us were openly expecting and secretly dreading. According to today’s Xinhua (“China toughens forex receipts and export settlements”),

Hot weather, cold market-

For the past few weeks Beijing weather has been either hot and drizzly or, even worse, ferociously hot. Today we got a little bit of variation by interspersing ferociously-hot with the occasional tropical downpour. I really hope things get better before the Olympics or else soon enough we are going to have a lot of very bad-tempered out-of-towners running around the city monopolizing all the taxis.

Futures Trading Volume Up In China- As reported at the People's Daily in China, futures trading volume is up 148% in the first half of 2008 as trading in farm products rose. Volume was up 36% at the Shanghai Futures Exchange, where gold, copper, and zinc trade. At the Zhengzhou Commodity Exchange, where wheat, cotton, and sugar are traded, volume was up 450%. The Dalian Commodity Exchange, which trades corn and soybeans, saw trading volume increase 381%. Compared with other developed world exchanges, the Chinese futures markets are still weaker, but futures trading in pork, steel, crude oil, silver, and lead are expected to be traded on the various Chinese futures exchanges in the near future, and volume in existing products is expected to continue to increase as well.

Hot money and informal banking-

Sorry. My blog site was down so this Wednesday entry was posted Thursday, one day late.

I was too busy to post anything Tuesday, but there wasn’t a whole lot new to say except to bemoan the stock market’s performance, again. The SSE Composite dropped 3.1%. Today after a rocky start it seemed to find its legs, trading up 1.8% by lunch, before giving it all up to end the day almost perfectly flat at 2701. It is now trading almost exactly 10% below 3000, which as recently as three weeks ago was the market’s imagined government-intervention level.

Some anecdotal evidence of risks in the Chinese banking system-

Before I talk about the banking system I just want to mention a quick story. After the 18% hike in fuel prices last week I wondered how taxi cabs in the major cities would fare – obviously fuel is a major component of their running costs. My understanding was that they had not been permitted to raise their prices in consequence of the price hike, and in Beijing I notice that I have been paying exactly the same prices for cab rides as I had before the price hike.

Markets worry about another interest rate hike in China-

Ouch! Just as the stock markets seemed to be gaining some short-term confidence, the knock-out combination of bad markets in the rest of the world and more fears of domestic interest-rate hikes (especially the latter) slammed China’s stock market rally today. Yesterday’s sudden drop in bond prices had, I think, the biggest impact on sentiment today – there are rumors running around that the PBoC will raise interest rates as early as this weekend.

New Guestbook Entry by Guilhem Jaubert- Hello Mr Pettis,

I am a student in a French business school preparing my masters. This year I did a one year internship at JPMorgan Private Bank in Geneva and I am more and more interested in finance. I have a paper to write for my schoolwork, the subject for which is 'How to develop the Shanghai stock exchange ?'.

I would like to thank you for your blog as I find that it is a true source of information and also one of the few reliable ones a part from the official chinese websites. Would you be able to direct me towards other sources of information or recommend any books or papers that have been written on this subject ? I am particularly interested in understanding the high volatility of the Shanghai stock exchange, the main critical differences with the Hong Kong stock exchange and how the Chinese government should act to make the Shanghai stock exchange become a mature one ?

Thank you very much for your help and for your blog.

Best Rgds
Guilhem

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China’s reserves grew $40.3 billion in May-

I just got back from my one-week trip having taken a very early morning flight, so I am a little too tired to write much for today’s entry, but I couldn’t let pass a media report earlier this afternoon that claims that China’s foreign currency reserves at the end of May reached $1.797 trillion.. Although these media reports are unofficial, they have in every case that I can think of been subsequently confirmed by the PBoC, and these are very likely to be accurate numbers.

Inflation? Or stagnation?-

For most of us the purpose of traveling to a developing country is to get the frisson of authenticity that we can’t get at home, and it annoys us no end when locals don’t play their roles correctly. Last week at my friend’s wedding in Koh Samui I had to listen to a long diatribe by a very nice Australian lady involved in the arts who was furious that Westerners were apparently forcing Thai people to live Western life-styles rather than leaving them to enjoy their own culture. In Koh Samui, I guess, there are too many refrigerators and motorcycles and not enough buffalo carts. I was going to argue that the Thai might themselves prefer the modern urban conveniences, and were perhaps indifferent about helping us foreigners achieve our much-desired authenticity, but I didn’t want to be thought a cold-blooded imperialist by the many nice people at the wedding.

New Negotiated Iron Ore Prices For Rio Tinto- Rio Tinto has completed successful negotiations with Baosteel to hike iron ore prices. Baosteel represents Chinese steel mills. The price increases averaged 85% and were argued in part due to increased freight premiums that are necessary to reflect rising transportation costs driven by higher oil prices. China imported 383 million tons of iron ore in 2007, up 17.4 percent from 2006. Analysts are looking for another 1.5 years or so of additional price increases. A CNBC International video discusses the recent price hikes and their effects on the industry. Given that iron ore is cheaper to ship from Australia as compared to Brazil (from Vale), and market prices are continuing to rise, Baosteel really had no other choice.

Fuel prices rise-

I was going to write today about speculative inflows and their impact on Chinese monetary policy, but a lot has been happening – and just in the middle of my week-long trip out of China – so I will postpone that discussion for Monday. On Thursday, as almost everyone knows by now, just after the market closed Chinese authorities announced that were allowing fuel and energy prices to rise – fuel by nearly 18%.

More terrible trading-

After trading up exuberantly by 5.24% yesterday the Shanghai market was hit pretty hard with panic selling, to drop 6.55%. Once again smart investors used the strength in the market to unload their positions, overwhelming a rally early in the morning.

It is not completely clear why the panic selling took place today. PBoC Governor Zhou said yesterday that "tackling inflation remains the most important task", and the fear that the government would rather squeeze the economy than let inflation rise further could have hurt sentiment. There are also rumors raging about a new investigation into illegal behavior among some major players in the market, nervousness about global conditions, and the inevitable worry about whether or not the government has any tricks left up its sleeve to halt the decline. My student Shang Ning tells me that the internet is buzzing with angry denunciations of the government for not doing anything to help the market, but I don't think there is a whole lot left they can do. We are now well under the 3000 level, below which, as everyone knew, the government would never let it fall.

Is the economy slowing?-

Much of the focus in China continues to be on the performance of the stock markets. Yesterday the market bounced around both above and below Friday’s close, before ending the day at 2874, up slightly less than 0.2%. That was the first positive day for the SSE Composite in nearly two weeks (after last week’s 14% decline), but a quick look at the trading patterns and trading volume didn’t seem to indicate much conviction.

Muddling along-

The CPI numbers released Thursday have created a wide variety of responses among analysts and economists, both inside and outside China. Some are hailing the reduction in CPI as an indication that China may have turned the corner on inflation, whereas others see this as a temporary reduction that will soon reverse as inflation spreads into non-food goods and services, and may even return quickly to the food component of CPI as more bad weather in China puts pressure once again on food supplies. I would add that there is some evidence that the authorities have been aggressively selling food from their reserve stockpiles, in part to keep prices down, and, aside from the fact that at some point these reserves have to be replenished and so will once again put upward pressure on food prices, this means that the impact of any more supply interruptions will be more severe than they have been in the past.

As expected May CPI is 7.7%- CPI inflation came in at 7.7% for May, confirming last week’s “leak”, down sharply from 8.5% in April. Both the food and non-food components saw a reduction in inflation with, most importantly, non-food inflation declining from 1.8% in April to 1.7% last month.

This should definitely be good news, but the numbers are not terribly consistent with other information. PPI, of course was up again in May and there are increasing worries and stories about fuel shortages and long lines at gasoline stations. There has been aggressive selling on the part of the government of food reserves and fuel stocks, and many reports of increased scrutiny of price control mechanisms, even with sharp increases in global commodity prices. In addition the earthquake in Sichuan not only interrupted food production (Sichuan is a largely agricultural province) but, more importantly, it interfered with transportation lines though the country. All of this suggests that price increases should continue to be a problem, and a worsening problem, not an improving one.

New Guestbook Entry by Amb Dr Anton Smitsendonk- Dear Prof Pettis.
I have been following over a couple of months your work on internet.
I have great respect for the probing way of your dealing with China's economy and capital markets. Even the sheer volume and frequency of your production is a cause for amazement to me.
I am a longtime occasional observer of the Chinese capital markets, In the eighties' when I was Ambassador of the Netherlands in Chine I amused myself (and perhaps raised a few eyebros among ambassador colleagues by speaking in Beijing and Shanghai on the function and pre-conditions of any effective stock exchange.
I did that on a long term interest (and short term experience in the Amsterdamsche Bank NV and the Amsterdam stock exchange) As you know Amsterdam had the first stock market in the world.

Recently I contributed an article to Jamestown Foundation China Brief on the structural peculiarities of the Chinese stock market (tradable vs non tradable etcetera) and the general typical Chinese experimental and groping ways of policy making.

PPI for May is 8.2%-

PPI numbers were released today and producer prices are up year on year by 8.2%, which is higher than April’s 8.1% and March’s 8.0%. Coal, steel, and energy price increases drove the jump in PPI. Although everyone expects May’s CPI inflation number, which will be released tomorrow, to be 7.7%, much lower than April’s 8.5%, I suspect that the continued acceleration of PPI is going to overshadow the good news on CPI, as it should. The fear, and a very plausible one, is that factories are going to pass on their cost increases to consumers, so spreading inflation out of food and into non-food prices. The reduction in CPI prices is likely to be very temporary, and we will probably see prices resume their upward climb by July or August.

Awful stock market and qualified good news on inflation-

On my Sunday blog entry, after Saturday evening’s surprise hike in the minimum reserve requirements, I said I expected the market to drop this week, but I had no idea that it would drop as much as it did. The SSE Composite closed Friday at 3300 (yesterday was a holiday). Today, in the first 30 minutes of trading, the market plunged 159 points (4.8%), and then spent the rest of the day giving up another 99 points to close at 3072, or 7.7% down for the day. Banks, securities firms, real estate companies and auto manufacturers – all institutions that are likely to be hurt by lending constraints – led the fall, joined by China’s oil companies, who were hurt because of the continued rise in global oil prices (the price at which they sell in China is capped, so rising prices means greater losses).

Why price controls won't help Chinese inflation-

Today is a holiday in China, although for the poor kids spending the last of three days taking the dreaded gaokao, China’s college entrance exam, I am sure it feels like anything but a holiday. Of around 18-20 million kids born in the same year, about 10.5 million will be sitting for the exam, and just under 6 million of them will go on to attend 2-year or 4-year college. For the past three years – and for an especially grueling final year, during which time kids spend almost no time at all doing anything besides studying – their whole educational system has prepared them for this three day period.

Another 1% hike in minimum reserves-

Saturday evening, less than one month after its last hike (May 12), the PBoC surprised everyone (or at least me) by announcing another hike in the minimum reserve requirements. This is one day after the biggest one-day jump in the value of the RMB (0.34%, after two days of decline) in several months, which left the RMB at its all-time high this decade of 6.9230). It is also two days after SAFE announced that it will strengthen its monitoring of capital flows and of foreign currency borrowings by domestic banks.

Administrative measures trump market measures (for now)-

In a sign of how worried the authorities are about rising speculative inflows, in a report released yesterday SAFE said it would step up the monitoring of foreign capital inflows. Yesterday I wrote about the policy paralysis that seems to be occurring as different groups within the government have some fairly radically different ideas on what are the biggest problems facing China. Under the circumstances, I argued, it is very hard for those who are worried about inflation, overheating, stock market excesses, and speculative inflows to organize the consensus needed to take the rather more dramatic steps China needs to take.

More on speculation and Chinese monetary policy-

I try not to do two consecutive blog entries on the same topic, but Kheng very kindly went through the Caijing article on the hot money survey by Deutsche Bank’s Jun Ma, which I wrote about yesterday, and translated a large part of it. This additional information reinforces what I discussed yesterday, suggesting, among other things, that there is a fairly institutionalized process for speculative inflows (and, one must assume, outflows).

Chinese savings and US deficits-

I was just sent a very interesting paper by German economist Jorg Bibow of the Levy Economics Institute of Bard College (The International Monetary (Non-)Order and the “Global Capital Flows Paradox”). In it the author considers the “paradox” of high and rising capital flows from developing to developed countries during the past decade. This is a paradox because most economic theory (and history) suggests that developing countries are net recipients of investment, not net providers.

Policy paralysis-

According to today’s 21 Century Business Herald, Chen Donqi, vice president of the Academy of Macroeconomic Research (research arm of the NDRC), has warned that China needs to take steps to avert the risk of a sharp economic slowdown, including “pro-active” fiscal policies such as reductions in corporate and personal taxes. On the other hand two days ago China Daily reported a release by the PBoC’s Institute of Finance Research that rejected warnings that a sharp decline in exports are likely to lead to a hard landing for the Chinese economy. The research institute also said that although the recent earthquake would add to inflationary pressure, its effect was likely to be temporary.CSRC to mutual funds: Stop selling!-

g=EN-US style="font-size:9.5pt">CSRC to mutual funds: Stop selling!

I am not sure what impact this is likely to have in the market, but on Friday and over the weekend there was a lot of discussion about reports surfacing that the CSRC is trying to put pressure on Chinese fund managers to support share prices by restraining their selling activity. According to Saturday’s South China Morning Post:

Chinese monetary policy is driven primarily by RMB speculation-

There is an article in this week’s Caijing that summarizes a survey by Deutsche Bank’s Jun Ma (here, for those who can read Chinese). I haven’t managed to get it translated yet but blog participant Kar Kheng Giam summarized it for me as:

Sputtering along-

g=EN-US style="font-size:9.5pt">The stock markets here are being buffeted around by rumors of futures trading on local stock indices. Yesterday Fan Fuchun, Vice President of the CSRC, gave a speech at a forum in Shanghai in which he seemed to imply that everything was ready for a launch of a futures market on the main Shanghai index. That set off rumors about an imminent approval.

Inflation won't peak yet-

According to today’s Credit Suisse Emerging Markets Economics Daily, a government official for the first time suggested that we are not going to see inflation peak this year. Earlier this year most commentators and nearly all government officials suggested that inflation would peak in the second quarter before coming down over the rest of 2008. More recently, as my student Shang Ning pointed out to me last week, the same commentators have shifted their forecast and have suggested that inflation would peak around August or September before starting to decline.

What? $74.5 billion? Is this a mistake?-

Note: I have made a change in this piece from yesterday. I forgot that there was an increase in the minimum reserve requirement in April, which means that foreign exchange inflows were actually around $22 billion higher than the ridiculously high number I discussed.

An article just came out on Reuters claiming that inside sources have revealed that China’s foreign currency reserves at the end of April were $1.7567 trillion. If this is true that means that reserves grew in the month of April by $74.5 billion, the biggest one-month reserve jump in China’s history (and probably in the history of the world).

Lower inflation in May?-

According to today’s China Daily Morgan Stanley is predicting that year on year inflation for May is likely to decline dramatically from 8.5% in April to 7-6-8.0% in May. I haven’t seen the Morgan Stanley report but the article says “vegetable prices in the third week of May dropped 5.6 percent week-on-week, meat was down 0.3 percent, and eggs were up 1.7 percent.”

Morgan Stanley said inflation in China should gradually ease over the rest of this year as domestic supply improves and international prices stabilize. But it warned that the devastating earthquake in Sichuan province earlier this month could fuel more upward pressure on prices in the short-term.

China's relative economic growth during the past 80 year-

Although China’s growth has been pretty spectacular during the past few decades, I have often heard it argued that a significant source of growth has simply been the unwinding of many decades of economic mismanagement. In order to test this I went onto Angus Maddison’s magnificent website where he tries to calculate real GDP (on a PPP basis), population and per capita GDP for every country over the past 2000 years until the year 2003. Obviously this is an immensely difficult thing to do, and there are large gaps in his data, but his is the most complete data set I know.

Green on the PBoC Q1 report-

On Friday Stephen Green of Standard Chartered delighted his fans in the market by putting out a piece called “We strike gold in the Q1 PBoC report” in which he highlights 14 “gold nuggets” he found hidden away in the PBoC report. There was a lot of interesting stuff in his report and I recommend that people who are interested ask Standard Chartered to send them a copy.

The effect of the earthquake is increasing uncertainty-

The stock market seems to be getting increasingly worried about the economic impact of the earthquake, even though Sichuan province comprises just 4% of China’s GDP production and most of Sichuan’s most developed areas, including its capital Chengdu, were left relatively unscathed. Still, it seems that uncertainty has increased in a variety of areas and investors don’t know how to respond.

Lots of speculation on oil price hikes-

I don’t normally write so much about the stock market but today, like yesterday, the stock market seems to be at the center of events. Not unexpectedly the SSE Composite started the day badly after yesterday’s awful 4.5% drop to 3443. By midmorning it was down a whopping 2.6%, to 3355. Later in the morning, however, it partly recovered and then quickly gave it back again, until early afternoon, when it suddenly shot up in less than two hours to 3544, which is 5.6% off its lows for the day and 2.9% above yesterday’s close.

The informal banking sector is growing-

After yesterday’s stock market excitement, the government “quashed” rumors today that they were going to relax prices on refined oil products. According to China Daily, “the National Development and Reform Commission (NDRC), China's economic planning agency, said rumors that the authorities plan to relax domestic oil and gas price controls are baseless.”The Shanghai Securities News, the official paper of the stock exchange, quoted an unidentified government official as saying that relaxing the pricing regime would hinder earthquake relief and reconstruction.

No but this time really is different-

Today is relatively quiet on the China-financial-news front (the SSE Composite was down 36 bps, but not much else happened), so rather than discuss the most recent numbers and events and their possible implications for financial policy, I want to write about something a tad more theoretical. For the past two months there has been a big buzz about a paperby Carmen Reinhart and Kenneth Rogoff (which I will refer to as R/R) called “This Time is Different: A Panoramic View of Eight Centuries of Financial Crises.” As the title implies, the authors examine the historical evidence of financial crises over a long time frame in an effort to develop an understandin

New Guestbook Entry by Judy Yeo- Hopped over on a link. Finally someone willing to even mention the NPL situation. The one -off solution would be a ruthless write-off of NPL and recapitalisation of the major banks whilst the times are still relatively good. How much dust that will throw up is anyone's guess but who has the guts to really carry out this plan? The other problem is how to ensure the moral hazard side of this does not fudge i.e. that blind lending practices don't work. Please do correct any erroneous statements on my part and expound on the situation.

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Chinese Yuan Carry Trade Currency Basket – Nine Months Later and 43% Greater-

Back on March 20, 2007, TheFinancialWhiz.Com started an experiment of combining a basket of nine currencies versus the Chinese Yuan. The goal of the basket was to generate positive interest payments from the long currency holdings, with a secondary goal of generating capital appreciation.

Commodities and Short ETFs Tell the First-Quarter Tale-

The challenging first quarter has come to a close, and by taking a look at the top performing exchange traded funds (ETFs) for the period, one can get a sense of what the story was. Short ETFs and commodities were the strongest performers, signaling that the markets were tough for investors and they turned to shorts to capitalize, or commodities to hedge rising costs. Meanwhile, many investors shied away from stock ETFs as the market continued its attempt to right itself.

United States Natural Gas (UNG): It's up 33.8% year-to-date, no surprise given that the cost of energy has skyrocketed. It settled at $10.101 per 1,000 cubic feet. Natural gas isn't the same as gasoline used to power cars; it's used residentially, commercially and industrially to heat homes, heat boilers and generate electricity.

Is Baidu worthwhile buying now?- Reader's Question: Baidu (Nasdaq: BIDU) set an all-time record high of $359 (intra-day) on Thursday, before plummeting 14% on news of an analyst's reduced revenue forecast. Despite the sharp price swing, the stock closed on Friday at $323, essentially unchanged for the week. Is the stock now a buy? What do you think about future prospects?

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