Lower export growth = higher chance of policy mistake
By Michael Pettis
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 Bloombergsays:
Overseas shipments grew 17.6 percent from a year earlier, the slowest pace in four months, after gaining 28.1 percent in May, the customs bureau said on its Web site today. That was less than the lowest estimate of 23 economists surveyed by Bloomberg News.
Predictably, this has caused renewed calls for a slowing down of RMB appreciation and a loosening of (what they still call) “tight” monetary conditions.I won’t do the broken record routine and explain why I think this is a mistaken interpretation of the causes of the export slowdown (which has far more to do with a slowing global economy and rising wages in China, neither of which will be positively affected by looser monetary conditions) and is a potentially costly mistake, but I will say that it is going to be harder than ever for the monetary alarmists to maintain their already-weakening grip on policy.My favorite source on the politics of Chinese finance is Victor Shih, a professor at Northwestern, and he has this to say on his blog:
What we see today is nothing new, and as my book points out, has occurred repeatedly in the past 20 years. Even Li Yining's call for "acceptable inflation" is not new. He made exactly the same argument in 1988 when inflation was nearly 30%. The problem is that Hu Jintao now has many followers serving as provincial party secretaries, and they are lobbying Hu not to squeeze money supply so hard. Thus, unlike a few years ago, when Hu supported Wen's inflation fighting effort, Wen now fights inflation alone. I think this is a very dangerous situation for future inflation trends in China.
two most interesting posts today. Thanks for linking to Victor Shih. There is a stunning analysis about India. By changing a few words it would mirror your stand on China’s troubles that a brewing. http://www.rgemonitor.com/emergingmarkets-monitor/252918/turnaround_in_sentiment_about_india
Made me think about the fair RMB valuation.
By Gregor Neumann - 7/9/2008 7:31 PM
Mr Pettis
Your comment on party/factional followers urging the relaxation of the money supply squeeze; could it be due to the purported (one can never be too sure of news/figures coming out of China, news or not) fact that companies (with little or no ability to get loans from the banks ) are having difficulty getting loans from the informal banking system, even at ridiculous rates, imagine 80%
Judy, there is defintely pressure from exporters to lighten up because of difficulties in getting low-cost loans. When someone is handing out free money (or negative real interest rate money), it's not easy not to want more.
Gregor, thanks for the link. Definitely worth reading. For those too lazy, here is the start: "A few months ago, nothing could go wrong with the India story. Growth was high, inflation was low, foreign capital was flowing into India, the rupee was strong. Suddenly, everything has turned around. Industrial growth is down to single digits. Inflation is up to double digits. Interest rates are rising. Stock markets have seen a sharp fall. The rupee has weakened and foreign investors have turned away from India."
If nearly 20 years in emerging market finance has taught me one thing, it is that the shift from insane optimism to equally-insane pessimism is common, always dramatic, and always wholly unexpected. It is, however, always very hard to explain this during the period of insane optimism.
By Michael Pettis - 7/9/2008 10:52 PM
Judy, Michael,
I am confused now. Is the lending situation actually that bad? I was under the impression that most of the informal banking replaces bridge loans from the official banks. But Viktor Shih says: “Currently, the Wenzhou curb market in which exporters are lending export receipts to desperate real estate developers is paying anywhere from 30% to 100+% in annual interest rates. What is the rational course of action for exporters who obtain easy credit from the official banks? Yes, they would turn around and lend to real estate developers.” (see link above)
So we clearly have an overinvestment in the property market. That bubble seems to burst right now. And we probably have an overinvestment in other fixed assets and commodities. But what is the credit situation like for the average company? Are they enjoying easy money to boost exports? Or is the credit well dry?
By Gregor Neumann - 7/9/2008 11:31 PM
Dear Professor,
I may have found something that is eerily similar to what you see in China, this time in Central Europe. I have been looking at the appreciation of Central European currencies. SKK, CZK and PLN all appreciated about 25% against the Euro since 2004. The main reason behind this is probably the Maastricht convergence of their fiscal and monetary policies. However there is a difference. While SK and CZ have both apprecieated sustaing a healthy CA surplus, CA deficit in Poland started deteriorating rapidly last year. See this from the Polish Central Bank http://www.nbp.pl/en/statystyka/Bilans_platniczy/bop_kw_2000_2008a.xls
But what is really interesting is that together with the runaway growth of the polish CA deficit, there has been runaway reserve accumulation as well!
It can be seen in the line - Other investment - Monetary authorities. Dont know what this means, but surely a lot of money came into Poland in Q407 and Q108.
Maybe we are iwitnessing the same phenomena? Hot money looking for "granted" appreciation? In case of Poland it may come from the adoption of the euro, in case of Chine from revaluation.
By Gabor - 7/10/2008 4:04 AM
Gregor, the credit situation is a little confusing. Commercial banks have reasonably strict loan caps, and one consequence is that they are directing much of their credit to the large SOEs that are their most important clients. Everyone else is being frozen out. This seems partially to be mitigated by the explosion in policy bank lending and dollar loans, neither of which are affected by loan caps (see my May 18 post). There is anecdotal evidence that all of this is not enough to satisfy the country's growing credit needs, so many borrowers are turning to the informal banks and to other corporations (corporate lending has also grown quickly).
Gabor, thanks for the link. It is not at all surprising that so many developing countries seem to be following the same process. Much of the world has been fighting the threat of external debt crises, all the while replacing it with domestic monetary expansion.
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