Fixed asset investment -- investment in such things as factories, power plants, roads, and new buildings -- was 26.1% higher at the end of July 2007 than it was at the end of July 2006. This is good news relative to June's 28.4% rise, but all the caveats we discussed in the rise in investment output (see entry for August 14) apply here too. The July number is barely below the too-high 26.7% achieved in the first half of the year.
By the way, even if the numbers do come down dramatically, it seems to me that, like credit expansion and money expnasion, FAI is both a stock and a flow problem. Previous bouts of exess investment pile up unnecessary production facilities, inventory, and so on, and in order for the economy to adjust fully, it is not enough to slow down to some theoretically reasonable pace commensurate with sustainable growth. I would argue that FAI would have to grow below this "reasonable" pace in order to allow the economy to absorb the previous excess production (or write it off).
There is an article by Gilian Tett in today's Financial Times ("Fearful banks make liquidity grab") that discusses the sudden recent drying up of liquidity that occurred in the midst of what seemed like a world of endless liquidity:
When a panic hits a population – say, bird flu or flooding – they are apt to hoard baked beans or bottles of water. So too, in the supposedly sophisticated arena of high finance. For as the markets have embarked on their recent roller-coaster ride, one reason for the swing is that investment funds have suffered painful losses that are forcing asset sales.
But another crucial factor – indeed the key issue now – is a massive, old-fashioned grab for liquidity. For just as households might stockpile baked beans, banks are currently trying to stockpile funds, either because they have to meet repayment demands from investment vehicles or, most perniciously, because they fear these demands are looming soon...
...And, just as a frenetic stockpiling of baked beans tends to fuel panic, the very fact that banks are grabbing for cash is making investors even more nervous, particularly in the dollar market where many investment vehicles have raised funding in recent years, even if they are based in Europe (ironically, because the dollar market was supposed to be ultra-liquid.)
Why would I refer to an article about how suddenly and unexpectedly liquidity can collapse in a blog dedicated to China, where we have so much liquidity that the insolvency of the banking system can be largely ignored? No reason. I'm just being perverse.
But I have to say that references to sudden panics like "say, bird flu or flooding" hit a little close to home. Could a health, weather, or environmental panic ever lead to a financial panic in China by, say, undermining credibility in the authorities? After all the only thing holding up the banking system is generally confidence that the goverment wouldn't let anything bad ever happen.
As an aside, on August 9 David Barboza of the New York Times did have an unsettling little article ("Virus spreading alarm and pig disease in China") on the spread of this new disease. He says:
A highly infectious swine virus is sweeping China’s pig population, driving up pork prices and creating fears of a global pandemic among domesticated pigs. Animal virus experts say Chinese authorities are playing down the gravity and spread of the disease.
So far, the mysterious virus — believed to cause an unusually deadly form of an infection known as blue-ear pig disease — has spread to 25 of this country’s 33 provinces and regions, prompting a pork shortage and the strongest inflation in China in a decade. More than that, China’s past lack of transparency — particularly over what became the SARS epidemic — has created global concern.
An editorial in today's South China Morning Post says:
Another big unknown is whether countries in the region will, despite a slowing US economy, benefit from China's rise as a growth engine. After almost 30 years of largely uninterrupted growth, the mainland has become a powerful economic force in its own right. Much of its growth still depends on exports, particularly to the US, but such dependency has decreased.
Likewise an article in today's New York Times makes the argument that:
"We’re no longer in a world where the United States sneezes and the rest of the world catches a cold,” said Nariman Behravesh, chief economist with Global Insight, an economics research firm in Waltham, Mass. “You’ve got strong growth overseas, and it’s been kind of like a lifeline to the United States from the rest of the world.”
But in Asia, where growth has been strongest in recent years, many countries are still worried that American troubles could drag them down as well. Experts say those nations are less interested in extending a lifeline to the United States than in discovering whether they have reduced their ties to the American consumer.
Countries in Asia, particularly China, have started chafing at their dependence on the thirst of Americans for imported goods, on the sway of the American dollar around the world and on American financial institutions.
It is true, Asian business executives and economists say, that fundamental economic changes have limited Asia’s need for American consumers and financial markets. But it is still not clear, they say, how much effect the current financial turmoil is likely to have outside the United States.
"Definitely the reliance on the U.S. economy, particularly from the Asian economies, has lessened a bit over the last five to seven years,” said Sanjay Mehta, the chief executive of Essar Shipping of India. “There will be an impact — I don’t see that there will be no impact — but less of an impact than we saw in 2001 and 2002, when the Internet bubble crashed.”
I think the idea that the rest of the world has become less reliant on US growth is based on looking at individual numbers, not aggregate numbers. For most countries, exports to the US have declined as a share of total exports over the past ten years, and most analysts have interpreted this to mean that their economies are less sensitive to US demand.
But it could also mean simply that globalization has made trade spread out more. If China, for example, shifts from exporting shoes directly to the US, to exporting shoes to Italy, which then exports them to the US after some processing, it may look like China's dependency on the US consumer has diminished, but of course very little has changed.
Perhaps it makes more sense to look at US imports as a share of world GDP to gauge the world's ssensitivity to the US. This has risen over the past ten years, suggesting that the world is more, not less, senstive to changes in US demand.
My market-following assistant Shang Ning writes today:
I understand that on Aug 16th, RMB 100 Billion ($12B) of new central bank notes have been issued. Eleven major commmercial banks and city commmercial banks have been ordered to buy the notes because of their too-rapid loan growth. The coupon is 3.69% (which is below the market rate) and maturity is 3 yrs.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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January, 2008
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