My Blog

August 18, 2008

Today’s unexpected withdrawal by hurdler Liu Xiang from participation in the Olympics – because of a leg injury – has been a real emotional blow to many of my friends and students in China.  Condolences to all.  It is a disappointment to see such a great athlete unable to defend his title in his own country.   Sad as his withdrawal has been for many of us here, there is still a lot to be excited about as the Olympics wind down.  Tomorrow I will see Brazil play Argentina in the soccer quarterfinals, thanks to the generosity of my former Tsinghua student Richard Zhang, now a rising star at McKinsey, and on Wednesday one of my favorite Beijing musicians, Shouwang, is taking me to see track and field events at the Bird’s Nest (finally I get to see the magnificent stadium from the inside!).

But not all the news is Olympic-related.  Xinhua reports today that the first half of 2008 saw a slowdown in the growth rate of loans to real estate developers and buyers.  According to the article:

Chinese bankers held loans totaling 5.2 trillion yuan (about 580 billion U.S. dollars) to real estate developers and housing buyers by the end of June, up 22.5 percent year-on-year, the People's Bank of China (PBOC) said Friday.

The central bank said the growth rate was two percentage points lower than the same period last year, representing a decline for seven consecutive months since last December.  Loans to real estate development stood at 1.9 trillion yuan by June, up 17.7 percent year on year. The growth rate was eight percentage points lower than the same period last year.

The country's lenders granted 3.3 trillion yuan to housing buyers buy June, representing an increase of 25.6 percent year on year. The growth rate was 1.8 percentage points higher than the same period last year.  Real estate developers and housing buyers received 398.84 billion yuan in loans between January and June, which was 170.66 billion yuan less than the same period last year, said the PBOC.

China's real estate investment grew fast in the first half, but the housing price decline in some cities has strengthened a wait-and-see attitude among housing buyers, which retarded housing sales.  The country's real estate developers sold out about 260 millions quare meters houses in the first six months, and the sales value totaled one trillion yuan, representing an decrease of 7.2 percent and 3.0 percent over the same period last year, respectively.

The PBoC had been warning banks to control their exposure to real estate.  Obviously the banks are responding, although 22.5% growth year on year is nothing to sneer at, and it should be pointed out that the growth rate in real estate loans still exceeds total loan growth, so as a proportion of total loans real-estate-related loans have not declined at all.  Still, with real estate exposure in the banks (formally recognized as such or, in many cases, not) creating probably the biggest worry for the PBoC in case of a slowdown in economic growth, this is relatively good news.

It is clearly a good thing that the PBoC is worried about and monitoring real estate exposure.  Among the many problems faced by the banking system, a sharp decline in real estate prices is probably the biggest single risk.  The still unanswered and vitally important question for me, I think, is about real-estate-related loans in the informal banking sector.  There is a lot if anecdotal evidence of developers turning to the informal banking sector – in spite of short maturities and high interest rates – as a replacement for the restricted funding provided in the past by the formal banking sector. 

I don’t know whether or not there is a similar moderation in the rate of new lending among informal banks, but the worrier in me thinks probably not.  At first glance this might seem not to matter.  If informal banks go bust because of excess exposure to bad real estate loans, it might not seem to matter to the formal banking and payments system, and so might have limited impact on the loan portfolios of the large banks and, via the banks, on the underlying economy.  Without knowing the links between the informal and formal banking systems, however, this optimism might be unwarranted.  I can think of at least three ways in which problems in the informal banks can spread:

1.        A decline in real estate prices can be exacerbated by forced liquidation of real estate loans extended by the informal banks.

2.        Formal banks may find themselves unexpectedly in a junior credit position if assets owned by a company turn out to have been used to collateralize loans from informal banks.

3.        Informal banks may have directly or indirectly obtained funding from the formal banking sector.

On a related note I got an interesting email today from one of my former Peking University students.  He says (with some editing on my part):

I just talked to a friend in a city in the south.  Interestingly, he tried to pay back his mortgage loan last week, and get another 3 year loan again (many entrepreneur there rely heavily on this kind of financing as working capital, sometimes, from informal banks of course).  However, he was told that the term of next loan had to be just 1 year instead of the usual 3 yrs, and he has to go through the application process again every year.

Collapsing property and other assets prices in some cities like Shenzhen seem to have made banks cautious of a probable rise in default risk, and the tightening will hurt these small enterprises further.

I don’t know how widespread this shortening of maturities is, but a common problem in banking is that when risks are perceived to have risen, lenders often respond (rationally, in the case of each individual bank or investor) by readjusting their portfolios in ways that increase overall riskiness in the system.  

For example as lenders became increasingly worried about the risks in Mexico in 1994, one of the consequences was a surge in short-term borrowing by the Mexican government as creditors became increasingly reluctant to extend long-term loans.  This of course increased the risks of a liquidity contraction to the Mexican government, and when that contraction happened, the Mexican government came close to defaulting.

This happens all the time as the perception of risk rises.  I wouldn’t be surprised – if there were an effective way to measure loan maturities for all loans in the system, including those extended by the informal banking sector – to see that average loan maturities in China have declined substantially in the past several quarters.  This, of course, increases the overall liquidity risk in the system.

Meanwhile the stock market continues to plunge.  On Friday the market experienced its first and only up date since the Olympics started, rising 0.9% to close at 2451.  Today it changed direction dramatically and dropped 5.3% to close at 2321 (this in spite of a 58% first-day jump – which is pretty mild by Chinese standards – in share price for the $1.5 billion IPO for South Locomotive and Rolling Stock). 

The Thursday before the Olympics started, the market closed at 2728, so we have seen a total decline of 14.9% during the past eleven Olympic days (seven trading days).  I wrote in an August 11 entry that before the Olympics end we might see the market test 2300, the level below which their have been rumors that the government will intervene.  We are now less than 1% away from that level and we still have the rest of this week to go.

It is not completely clear why the markets have behaved so poorly in the last week, although the answer is probably multiple.  A lot of analysts are worried about a slowdown in economic growth, the possibility of an increase in inflation still scares many (as it should), and there is a lot of concern about dilution effect of a possible upcoming sale of non-tradable shares as these become tradable.  There is also worry that hot money inflows may have already begun to reverse themselves (for example see this ChinaStakes.com article).  This perception comes from the widespread belief that the increase in foreign exchange reserves in June was substantially less than the combination of FDI, trade surplus, and other identified inflows.

Actually this perception is incorrect, and represents mistakes in the way most analysts count the rise in PBoC reserves.  I discuss why true growth in June’s foreign exchange reserves actually exceeded the identifiable inflows in a July 14 entry.  I don’t think hot money outflows are likely to be the main culprit behind the declining stock market, but I don’t discount the possibility that, as the perception of China’s riskiness increases, and as concern grows about the imposition of further restrictions on short-term inflows and outflows, we may begin to see at least some hot money reverse direction and leave the country.

On a related topic, today to a large fund manager asked me whether or not it made sense to buy Chinese stocks at these levels.  From a short-term trading point of view I am not sure I would be in a hurry to buy because I still think we are going to face a post-Olympic hangover that may affect the markets.  I think at least part of the surge in consumer spending last month and this month will have been Olympic related (new TV sets and entertainment units, Olympic souvenirs, sports equipment and clothing, flags, traveling to Beijing, and the kind of spending that comes from exuberance at China’s sporting triumphs), and this is likely to be reversed in the September and October numbers.  That should keep downward pressure on the market.

On the other hand over the medium term a number of Chinese stocks probably represent good value.  I haven’t looked at the discount between A-shares (which only Chinese nationals can buy) and B-shares (which foreigners are permitted to buy) in several months because I closed out all my positions much earlier this year (thank the gods!), but because of lower liquidity B-shares have typically traded at a 30-40% discount to A-shares.  If this continues to be the case, I think a very strong case can be made for the selective and gradual acquisition of a diversified portfolio of B-shares, especially in the more defensive industries and less leveraged companies.

Comments (15) for "Real estate loan growth may ...

Glad you mentioned Liu Xiang. His was a case of being mistakenly trotted out to further the goals of a government bent on proving itself before the world court of public perception, to be, once and for all, number one. This would have worked well. Except, Liu Xiang was not up to the task this time of fulfilling his motherland's requirements. He probably realized that he would not be able to duplicate his gold medal performance which he accomplished in Greece, especially before so many voracious and demanding fickle “fans” that again demanded a gold, and nothing short of gold. Silver, now way. We will never know whether or not he was half faking it because he was afraid to run, as most of us would be. Any caring person would have nothing but pure and sincere empathy for this young man. One can only imagine living in a motherland which only respects total success, and does not also hold out a hand to those that try their best, but fail to perform at exactly the 100% level, when State prestige is at stake. Some say that the Olympic games, the way they have been held for many years, are a farce because they denigrate the true and pure spirit of sport. How can they be wrong? Others, leaders in authoritarian countries, believe that these sports are just one more ticket to glorify their supreme regime. How can they be more wrong? How can one know what really went on behind the scenes with Liu Xiang just before his qualifying trials race? He came out, made a few grimaces, did a first trial test start by himself, bent over, made many shows of messaging his leg, then did another start with fellow racers when one of the racers jumped the gun. Probably unthinkable, but were people thinking that after all the build up, that he might just race, and not even place? And so asked him to put on this show? Who would know? Right or wrong? Liu Xiang should never have been let on the field to humiliate himself. He was forced on by the demands of an unforgiving government and a people who are unforgiving of any perceived slight to the State, another vestigial hangover from the Cultural Revolution. So, what will happen to Liu Xiang? Hopefully, he will leave China, sign a contract with a major publication to provide a tell-all story, and get a million bucks, at least. Certainly this amount of compensation is not even enough to cover what has been done to him. Too bad. Too bad. By Wenxiang - 8/18/2008 7:27 PM

That is, again, a manifestion of the weakness of a culture based on shame. A culutre like this can not accept failure easily. It is a problem that exist in east Asia, heavily influened by long out-of-dated confucian way of stable society. Look no further, just look at Japan, Korea, etc. The concept of face, shame based culture does help in some way, such as, crime reducing. "shame on you" is a very strong word. however, this culture does not work well in sport, or in any competition game, maybe that is why China's sport has to take this kind of system to get those gold medal. For me, those numbers really does not mean much to me. Well, what is the stake there? Try to tell people you are always No. 1. If there is the case, why even bother to prove it. If you are always No.1, there will not be the game at the first place. I have a theory that a society built on the shame based culture is inheritally more volatily than a society built on guilt based culture if the society is subject to a lot of outside shocks. However, if there is not much happening from outside, the shame based society could be more stable. look at chinese long history of relative stability. somehow, this can related to the fact that why young , adventurous people tend to like the western way of living. when they get older, then retired to or back to Asia. is Beijing telling us that the whole world is getting old and we all need "He", at the year of 2008? By Middle Guy - 8/18/2008 9:19 PM

First, off topic, where were the two above commentors living all these years? On Mars or in the last century? Watching the news and discussion in China, it seems to me that most people have moved on to 21st century, while someone still lives in the past, at least the mindsets are still in the old trauma. On the topic, Mike, I think your arguments contradicts itself somehow. Risks are rising. It justifies that investors' perceptions change. In the past few weeks, EU released some worse than expected economic data, now investors find out that rest of the world is catching on the recession. Then, USD is appreciating agaisnt EUD. For RMB, people have seen that China slows, and will slow further. Isn't it the legitimate reason for RMB to depreciate? When expectation for RMB's exchange rate falls, hot money (betting on RMB's rising) should flow out accordingly. By fatbrick - 8/18/2008 9:56 PM

Regarding Liu Xiang, They do shoot horses, don't they? Pollack could sympathise with the tragedy of defeat in Liu Xiang's case. His ongoing tragedy was born under an unforgiving totalitarian government that could sacrifice its youth for a shot at tainted gold. The futility of having his government select kids too young to even know what grueling life styles were to be foisted on them, without choice, for the rest of their lives. Liu Xiang, caught in the web of the state, when he never had a choice to chose otherwise, enacted his choreographed drama for the world olympic stage, among a birds nest of his countrymen who swooned , drooled, and dripped tears, while he hobbled around, watched by billions. The only question is, if they shoot horses for a game leg, will the State cast him aside as they typically do most gold medal winners? Of course they won't shoot him like they do horses. The State will not be that kind. And the pure pathos we feel for this young man, selected by the State at such an early age for a job he had not imagined, can not save him, either. Maybe Liu Xiang is a really good, warm hearted, and kind person. We do not know. But, whether he is or not, maybe it would have been much better to make a statement for all those other young kids who are forced at a very early age into extremely rigorous training for the glory of the motherland, to just have Liu Xiang drop his shorts and take a big crap on the starting blocks! At least, this would send a message to the powers that be that the athletes, who are wonderful, are no longer willing to take any crap from their respective governments. If one were to send a message to Liu Xiang, these days, maybe it would be to stop thinking about these bogus games. Rather, keep in mind that he is a great athlete, as can be seen by watching the Greece games. One suggestion, Mr. Liu, “You could start training to climb K2. You have the lung capacity and determination to get to the top of K2 without oxygen. Why don't to climb up to the summit. THEN PLANT YOUR OWN FLAG. Not the flag of the people who are still stuck in Cultural Revolution mind thought, and not the people that suck your strength to bolster their own weaknesses. But, your own flag. Stick your own flag on K2. And stick it to those Commies that don't care a whit about you, not whether you live or die. Wish you well. By Ms. Goldwinger - 8/18/2008 10:00 PM

Mr Pettis, Obviously you are not a person to shun being renowned. So, the question is, why don't you not just set up a small camera in the middle of your classroom to let everyone see what you do? It will be great for people who like to follow your blog. And your students can make these classroom videos easily available for downloading/streaming from one of the free server sites, to people around the world. It would be very instructive to see, first hand, just what it is like to sit in a class at a Chinese university. Of course, Columbia, already does this, and has been doing this for quite many years. So, why don't you? The cost of bandwidth would not be a factor. Because you are not so famous that you have to worry about having thousands of people watch your classroom. Not yet. However, I think that you might be the first to do this in Beijing. And, so, you just might find that many people would like to sit in on the first video streaming from a major university Beijing graduate classroom. Probably the best way is to have the camera situated at the back of the classroom so that the students' faces are not shown. You are sure to know how this is done since you have seen it done, so many times before, at Columbia, by the likes of Jeffrey Sachs. The main thing to keep in mind is there will be censors to watch your webcast from your Beijing classroom. How to keep them occupied and not have them continually cutting off your webcast is not a problem. Here is a foolproof idea for the spies in your classroom: What you need to do is issue all your students with a 4 inch long piece of masking tape which each student must plaster across their mouths before each lecture. Then you, yourself, should start each lecture with the mantra, “Long Live The Communist Party, The East is Red.” followed by, everlasting bombasts of pure love for the people who have designated you as a “friend” of China. The main point, is that it does not matter the content of your lecture. It only matters to present a good face to the world. Probably, your streaming internet content will be the first of its kind from a Beijing University. Later, then it might be possible to have a student voice a sentence. Such as, “teacher, might I clean your chalk board?” Next, new horizons in free speech will seem so natural. But, the main thing to keep in mind is that you need to have a 10 second time lag with a kill button for the censors to make sure that no one student says something, such as “F” our government. (Which the students would never do anyway. Because they just so much love their government, and they don't want to have their loved ones sent to the netherlands, I mean, the netherworld. The above are just a few suggestions. The main thing is to get going with it so that we can see the result. Everyone is looking forward to watching your first streaming video. So that we can compare it to what we recall from Columbia! TKS! PS: Pls keep in mind. There must be no sentiment, such as F the Fing Government. These sentiments will kill your everlasting streaming project. By Po Luntai - 8/19/2008 12:11 AM

A bit more on point to today's blog, which is 70 percent about Real Estate, and another bit about Liu Xiang. One question is: Does anyone know where to access a reliable database which can provide accurate info concerning the percentage of commercial office space which is actually being used/or vacant? In Shanghai? In Beijing? For example, if one purchased a commercial office space in Pudong as an investment. And could not rent it out. Because the commercial offices spaces were over produced. Is there any way to know when the demand for such spaces will make it easier either to sell it or rent it out? Where could one find a reliable database to measure, accurately, on an ongoing basis, the percentage of commercial office space which is being used and generating income, in relation to the percentage of available office space which is already purchased and on the market, but EMPTY, sitting vacant? Ready for sale or lease. And not producing income. Where can this info be found? Or, is this an unknowable unknown? By Man Datory - 8/19/2008 2:17 AM

I do not know what get to the nerd of fatbrick. I do spend a substantial of time outside china these days. that is one reason I can have a good prospective from various standing point to look at the story of liu xiang. I do not understand what exactly fatbrick's meaning for 21 century. well, maybe he means skyscrapers, some post modern building in china right now. does it change people's mentality? how culture can evolve as quickly as the building of skyscrapers, railroads? interestingly, once i attended a seminar and observed that those young students from china said that confucian's influence in modern chinese is negligible. gee, that is from the mouth of people just came out of China. maybe cultural revoluation did do something to some chinese, they forgot where they were in history. haha, i find that was very very funny, as the same time, disturbed. well, maybe they are computer major students, they only see coding day and night. now i know that some so-called social science background people also think culture is something that can be changed so quickly. liu's story, again, is something about east Asia culture, it has very little to do with what kind of government. those people who try to connect everything bad to Chinese government really do not know a thing, nothing more than trash. in term of east asia culture, japanese do it in the most dramatical way, they kill themselve as an honor to the society or people (again, not necessarily government). or, see, in taiwan, the most respectful person is that guy who won a nobel prize. and people believe that he can be a good politician too. lol. that is something about this culture, people tend to regard someone who was successful at certain point at certain field as God like. when that particular people disappoint them, they lost themselve. when it happen to those god make believer, they feel like they disppoint other and rather die. of course, that is the extreme case of japanese. see, again, when Mao fail the nation in some ways, so many people still want to hold on to him, because what? mao was their god, see how many people cry like they lost their own parents when mao was gone. because to them, god was gone and they need to find a substitute. unfortunately, they can not find such a big one after Mao. so they go from one to the other, movie star, sport star, money, social statue, etc. Liu was someone who can do something most common people can not, and he was, for a while fill in the position as people's hero in their way to some uncharted territory. so much high expectation on him. well, maybe here we can go a little further, trying to do this in a so-called scientific way. single out liu as the body we want to do analysis and see what factor has influence on him. sure, training, good nuituion all help. now that we keep those factor equal and change only one. the expectation from society. do we believe, the expectation from society affect his performance? if your answer is no, read no further. Isn't that how economist do in analysis? keep all other equal and change one factor. now that, i propose that this factor has negative effect on liu's final performance. i think you tend to agree with me on this. next, we want to do analysis on how individual's expectation transfrom to society's aggregated expectation. we will do it in this way. think numerically, given a scale of society's aggregated expectation on liu, from 0 to 10. and individual expectation for liu, again a scale of 0 to 10, and the number of individual in this analysis. my research proposal is that the east Asia culture can easily multiply individual's expectation to social's aggregated expection and there is a positive feedback loop within the transfer of individual's expectation. Take heed that one can not simly sum up individual's expectation to get the aggregated one. The key is how individual's opinion is aggregated. my conjection is that shame based culture provide catalysm for aggregation which easily push the society's aggregated expectation to as high as it can get, again, with other things equal, such as how diverse the society is, how free information flow around, etc. now that, given the same expectation, let us look at the outcome of liu's action, suppose he did defend his title, the society is gonna to go HIGH, extremely HIGH. what about the other outcome? he fail/quit? see, so many people are so emotional, in tears. that is a huge contrast? we are not here to propose that one should be indifferent to the outcomes, but, look, that dramatically difference? the outcome of one event can cause so huge a different reaction from society. does this resemble something in economy? i will call it the expected volatility. well, certainly that the society do not do a good job in hedge it and that lead to my second point. a society build on shame based culture is inheritally more volatile in this kind of event. however, this is not to say that a society built on this ground is always inferior or superior than a society built on guilt based culture, such as today's west. the resilience of this kind society can be seen in a lot of other cases. there are way too too many in chinese history, most recent one, we can see is the earthquake in sichuan. it is what it is. nobody is perfect, same for social systems, none is perfect. the important thing for me is what kind of behaviour can we expect from what kind of system under different situations. east asia culture was cultivated through the great agriculture based economy and work very well with it. maybe the usa has build a certain culture that make industrial production work very well, at least until now. as an old beidar, i am glad to see today's young man are still on this subject. keep it going. we have a long long way to go. By the middle guy - 8/19/2008 3:07 AM

After all these tedious many months of harping on the same old thing, hot money, GDP growth, inflation, now it seems that this blog is finally taking a turn for the better, at least in the comments section. The POINT is, what does GDP growth of 10 percent actually mean, year on year, for the next 10 years, multiplied by 1.3 billion people? Well, it means meat rather than dofu. It means steel. It means copper. And it means soybeans. Which also means devastation of much of the Amazon to plant soybeans. It means the need for significantly ever increasing energy consumption, which means, a new coal based power plant, one per week in China, and who knows how many in India. The magic number, which Pettis will not talk about when he blogs, on and on, and continues to blog again, about hot money, GDP growth, and inflation, is the number 385. This is the number we are now at as far as parts per million of CO2 in our atmosphere. The main thing which Pettis does not understand, just like so many other like minded Wall Street Jerks, is that the market can not predict catastrophe. People like Pettis, just go through life with a feeling of great bonhomie, like a dog wagging his tail with not a care in the world, just wishing everyone well, and never a thought to bite anyone. But the problem with people like Pettis, is, that they use their blogs to unintentionally put out misinformation. What they should really be doing, with their limited blogs, is to take time to read up on the literature which is readily available, regarding the mechanics of having another 1 billion people in China and India suddenly rise to a middle class status. This blog is fun. But, it is not serious. If one wants to think about serious, then best to take a tip from Richard Smalley, the Nobel winner from Akron Ohio who is most famous for his Buckey Balls. Smalley is dead now. Died from Cancer. But, during the last couple of years of his life, he spent most of his time preaching about energy issues. Economists and Financial gurus are a strange bunch. They are not scientists, neither are they witch doctors. Economists have their math formulas. But, it is very rare for them to ever be able to reproduce an experiment to test their hypotheses. So, Neither are they true scientists. They are very cold hearted, 90% of them, Greenspan for example, and all, together with most lawyers, should be banished to PNG to have their heads eaten. Not that any boars over there would even touch them. The point is that reading this blog, day after day, with no real meat, becomes too suspenseful, just waiting for something new to be said. What we need is some meat from this Beijing professor. Give us some analysis, please. Not that we all don't already know what you are going to say. Where is the meat, my man? By A Minoacid - 8/19/2008 4:36 AM

There are more than 1 billion Chinese. You talked to a handful of young students then you can claim that you know Chinese culture and current Chinese society? What kind of researcher are you, the middle guy? Geez, you read some historic events on the books and visit some places occasionally. Then suddenly you are the expert in the field. It is certainly a joke. By fatbrick - 8/19/2008 5:34 AM

"I don't understand why people don't care about the 60% decline in stock market. Ekonomix " The reason they do not care, is because you are reading a blog written by smart people who all sold their shares around October 2007. Either that or, as you know, these economists will never admit to a loss. They think they are HS gods. So, when they lose money in the market, like the good gamblers they are, they keep a stiff upper lip. This is why. But, be sure, some of those tight wads lost a grand amount of money. Does this make you feel better? By who me - 8/19/2008 7:09 AM

maybe this fatbrick really do not have much to say? no logic, no nothing. how does he come to the idea that i talked to handful of young students and how he made the conclusion that it was my way of doing research? no fact, not a single reliable fact, all conjections. think like high school student, emotional, all accusation, non alleged, look at those words "Then suddenly you are the expert in the field", what field? what expert? no expert, no right to speak up? i hope fatbrick is not your student, Michael, or else, someone think like that will be a real disgrace for beida. i know in my days, beidar were not like that. By middle guy - 8/19/2008 12:32 PM

Minoacid, Accusing someone of the great sin of writing the blog he wants to write (and one which is widely followed and appreciated), rather than the one you want him to write, seems remarkably dumb. Why don't YOU write the blog you insist Pettis should write? Maybe someone will even read it. professor Pettis, keep talking about the boring subjects of monetary policy, financial systems, GDP growth inflation, and all the rest. This is why I read your blog every day. By TR - 8/19/2008 2:49 PM

I agree. Its weird to think that there are people stupid enough to think that a blog titled "China Financial Markets" should be criticized for focusing on China's financial markets. Now if the title of this blog were "China's environmental problem is the only thing anyone should be allowed to talk about", then the criticism would be deserved. By Jack R. - 8/19/2008 6:09 PM

Fatbrick, I am not sure the discussion of whether hot money outflows exceed inflows should be a theoretical one. I disagree with both arguments, that China should see outflows, or that its currency should depreciate. In fact I think the currency is clearly undervalued and is causing monetary imbalances in China that won't get resolved until the currency moves back into balance, and I also think there continue to be very good reasons to bring money into China. But in the end this must be an empirical debate. Until June, the last PBoC numbers we have, the evidence continues to be of large unexplained capital inflows, and unless we see a dramatic turnaround in July's numbers, the conclusion will have to remain, I think, that China has a hot money inflow problem. I expect we'll get July reserve, trade and FDI numbers next week. Where we seem to agree is in both saying that risks are rising, and for me this suggests that when hot money flows do reverse, the reversal may be very sharp. Unfortunately this is the problem with waiting so long to fix the currency: the monetary imbalances increase weakness in the banking sector, which exacerbates the impact of capital flows. By Michael Pettis - 8/19/2008 6:19 PM

Minoacid the meat man says: "The magic number, which Pettis will not talk about when he blogs, on and on, and continues to blog again, about hot money, GDP growth, and inflation, is the number 385." 385 is the magic number? That is so funny. They say a man with a little bit of knowledge is a bigger fool than a man with no knowledge. By Gao - 8/19/2008 6:33 PM