My Blog

January 16, 2008

WED 16 JAN

PBoC raises reserve requirements to 15% By Michael Pettis

In another wholly unsurprising move the PBoC announced a few hours after the markets closed today that it is raising minimum reserve requirements by 50 bps to 15%.  This is part of its very determined policy to reduce bank lending and so help constrain overinvestment and overheating.  Will it matter?  The only thing that matters, I think, is the extent of trade-related and capital inflows.  As long as they remain high China will have excessive monetary expansion and all the ills that come with that.  Raising minimum reserves will hurt banking profitability while hastening the process of bank disintermediation – no bad thing in the medium term, but not much help in addressing China’s out-of-control monetary policy.

 

On a related note I am no tea-leaf reader but I was intrigued by an article in today’s China Daily headlined “Yuan's rise less good, more bad for people.”  Unlike a spate of earlier articles telling us why it made sense for China to hasten appreciation, this article discusses how difficult it is for Chinese businesses with assets abroad to maintain the value of their assets given the rapid pace of appreciation in the RMB.  It also describes some of the problems faced by businesses that rely on dollar income.

 

In an effort to be fair, the article does say towards its middle that “Every coin has two sides, however. People traveling abroad spend much less now. Young people eager to study abroad would save money, too, for they have to pay less in yuan.  Also, Chinese investors would feel happy because they have to spend less money on the same overseas projects.  Some people back home stand to gain too because of the rising yuan. Car buyers, for example, can get an imported vehicle at a lower price.”

 

But the authors quickly return to the matter at hand by saying “But a rising yuan is a nightmare for Chinese exporters, especially the smaller ones. Tens of thousands of small- and medium-sized exporters face closure because of the rising yuan and scrapped or reduced export tax rebates.”  It goes on the present a pretty heavy case that the rising RMB is causing havoc among small businesses, who are unable to protect themselves.  Undoubtedly true, and perhaps an indication that we are beginning to see growing resistance to further appreciation.

 

WED 16 JAN

No surprise – QDIIs are a bust in China By Michael Pettis

A few months ago there was a lot of excitement among financial experts and monetary guys about a spate of very successful QDII public offerings in the Shanghai markets.  Until recently there have been restrictions on the ability of Chinese to invest abroad.  QDIIs allow Chinese investors to buy funds that only invest abroad, and it was hoped that via this mechanism Chinese wealth could be diversified and China could increase its capital outflows enough to help make domestic monetary policy a little more manageable.  The extent to which the initial offerings of QDII funds generated huge investor excitement and heavy oversubscriptions gave a lot of people hope that they would soon become a significant force in the market, and analysts seemed to settle on the number of $90 billion (I am not sure why) as the best estimate of the amount of QDII-related outflows to expect in 2008.

 

My own reading was that the QDII excitement said more about the frenzies associated with the domestic stock market bubble than about real understanding of investment abroad.  As someone who has been eagerly trying to bring money into China so as to capture the very safe and easy high dollar returns the RMB appreciation process had to generate, I had a hard time believing that there really could be significant interest in investing abroad.  You would have to make anywhere from 12% to 15% in dollars just to match expected RMB appreciation plus the bank deposit rate.  It never seemed likely to me that there would be significant outflows, and I expected that once QDIIs found themselves struggling to beat, or even match, the rate of RMB appreciation (which they needed to do just to break even), interest would quickly fall off.

 

According to a report today by Credit Suisse, China’s first four QDIIs have seen the prices of their mutual funds decline by about 12% since their launches.  Credit Suisse also claims that “poor investment performance has substantially slowed subscriptions for newly launched mutual funds.”  I can’t say I am surprised, and  I very strongly doubt interest will pick up much later this year.  The only serious foreign investment is likely to be strategic or state-directed.  Excluding the desire to hide ill-gotten gains, why else would anyone want to take money out of China right now?  I am trying to bring as much as I can in.