My Blog

January 18, 2008

FRI 18 JAN

Chinese provinces will help with price controls By Michael Pettis

As we race towards the Spring Festival holidays there is normally a dearth of news and new measures to report.  This is somewhat still the case in 2008, but financial authorities have been a little more active than they usually are at this time of year.  Two days after the NDRC announced national price controls on grain, food made of grain, edible oil, meat, milk, eggs and liquefied petroleum gas, they sent a circular requesting that local governments formulate their own price control plans in accordance with the new rules. 

 

I am not sure how much leeway local governments will actually be giving in the fight against inflation, but I would hope that it is not too much. Local governments often go to excesses to show Beijing whatever they think Beijing wants to see, and I am afraid a not-very-good plan, price controls, can become a lot worse if enforced too eagerly and too aggressively.  Local government officials are likely to be far more eager to prove to Beijing that nominal prices have not risen much than to ensure that local residents are protected from the consequences of inflation.

 

We are still waiting to see what the CPI numbers for December will look like and I guess we will get them around the middle of next week.

 

FRI 18 JAN

Chinese banks aren't yet home free By Michael Pettis

I have been told that the CBRC posted on its website today (it is not yet on the English website) a piece stating that in 2007 they had discovered RMB 860 billion is “irregularities”, without specifying what those irregularities are.  I am very curious to know if that means false accounting of new loans – for example to get around restrictions on certain types of real estate and stock-related lending.  Separately, according to the China Daily, the CBRC has urged commercial banks to be more circumspect in granting car loans.  For years there have stories about problems in car-loan portfolios and, according to the article, in 2004, the last year for which there is information, banks registered over RMB 100 billion of non-performing car loans (the market more or less really got going in 2001).  The new CBRC circular suggests, I guess, that non-performing car loans continue to be a problem.

 

Interestingly enough I had dinner with a group of institutional investors last night who were completing an investor tour of China.  I asked them if on this trip they had discovered anything new worth noting.  One of them responded that the most important thing for him was a series of meeting culminating in a meeting with a large electronics manufacturer, in Shanghai I think I remember his saying, whose facilities were enormous but whose profit margin was about 1%.  He told me that these meetings convinced him that there was a lot of overcapacity in the industrial sector, which suggested that in the case of a demand slowdown we might see a sharp cut back in production.

 

It also suggests that these companies don’t have much room either for higher interest rates or a reduction in revenues.  From there the conversation turned to the health of the banking system and its ability to withstand an economic contraction.  With annual loan growth of 15-20% (and sometimes higher) over the past few years, there is a lot of uneasiness about how vulnerable loan portfolios are to a turndown, and whether we would see a sharp rise in non-performing loans under the circumstances.  I think it is all but inevitable that we will.  The question is how bank lending and SOE borrowing would respond to a sharp rise in non-performers.  On the one hand the government could simply force banks to maintain credit lines instead of hoarding liquidity, which is the normal response to a sharp rise in bad loans.  On the other, this might have a negative impact on government credibility.

 

Although in the case of a slowdown there are likely to be lots of little worries, such as high default rates on car loans (not to mention student loans), the biggest thing to worry about, as in many other banking systems, is what happens to property prices and real estate developers.  Chinese banks have officially a great deal of exposure to property developers and property, and there is a lot of anecdotal evidence that there official exposure significantly understates the real exposure.  Property prices have been up year to date by about 10.5% nationwide, but according to a research piece by Credit Suisse,

 

Property prices in China have started to decline on a monthly basis. Under the cumulative effect of credit tightening and administrative measures against property speculation, China’s property prices stared to show signs of moderation in December.  Not only major cities like Guangzhou (-2.8%) and Shenzhen (-0.2%) recorded monthly declines in the prices of their newly constructed residential units, 17 other smaller cities also recorded monthly losses. Jilin, Xian, and Beihai, for example, recorded a 1.5%, 3.7%, and 4.1% monthly drop in prices in December, respectively. Prices in major cities such as Beijing and Shanghai remained on the rise month-on-month, but have moderated from the pace seen in previous months. Across the nation, prices of new residential units rose by merely 0.3% in December, while prices of second-hand residences stayed flat. 

 

Credit Suisse (who have been pretty good on predicting prices in China) conclude by claiming that they expect a “sharper price correction” in January but do not yet anticipate a collapse of property prices.