Friday 25 March 2011

Who will feed China?

Lester Brown has an interesting article over at Sustainablog.

The ability of China to feed itself has important social and political aspects and recent history puts food production at the top of China's priorities.

China is coming to realise that being self sufficient in food may not be possible.

The article can be clicked on to get the full story. I show only a couple of highlights as a taster.

Can the United States Feed China? [Sustainablog]


As party leaders assessed the situation, they decided to launch an all-out effort to maintain grain self-sufficiency. The government quickly adopted several key production-boosting measures, including a 40 percent rise in the grain support price paid to farmers, an increase in agricultural credit, and heavy investment in developing higher-yielding strains of wheat, rice, and corn, their leading crops.

They offset cropland losses in the fast-industrializing coastal provinces by plowing grasslands in the northwestern provinces, a measure that contributed to the emergence of the country’s massive dust bowl. In addition to overplowing, they expanded irrigation by overpumping aquifers.

Lastly, the Party made a conscious decision to abandon self-sufficiency in soybeans and concentrate their agricultural resources on remaining self-sufficient in grain. The effect of neglecting the soybean in the country where it originated was dramatic. In 1995 China produced and consumed nearly 14 million tons of soybeans. In 2010 it was still producing only 14 million tons—but it consumed nearly 70 million tons, most of it to supplement grain in livestock and poultry rations. China now imports four-fifths of its soybeans.


Despite China’s herculean efforts to expand grain output, several trends are now converging that make it harder to do so. Some, like soil erosion, are longstanding. The pumping capacity to deplete aquifers has emerged only in recent decades. The extraordinary growth in China’s automobile fleet and the associated paving of land have come only in the last several years.

Overplowing and overgrazing are creating a huge dust bowl in northern and western China. The numerous dust storms originating in the region each year in late winter and early spring are now regularly recorded on satellite images. For instance, on March 20, 2010, a suffocating dust storm enveloped Beijing, prompting the city’s weather bureau to warn that air quality was hazardous, urging people to stay inside or to cover their faces when outdoors. Visibility was low, forcing motorists to drive with lights on in daytime.


China is now at war. It is not invading armies that are claiming its territory, but expanding deserts. Old deserts are advancing and new ones are forming like guerrilla forces striking unexpectedly, forcing Beijing to fight on several fronts. And in this war with the deserts, China is losing.


Overpumping, like overplowing, is also taking a toll. As the demand for food in China has soared, millions of Chinese farmers have drilled irrigation wells to expand their harvests. As a result, water tables are falling and wells are starting to go dry under the North China Plain, which produces half of China’s wheat and a third of its corn. The overpumping of aquifers for irrigation temporarily inflates food production, creating a food production bubble that eventually bursts when the aquifer is depleted. Earth Policy Institute estimates that some 130 million Chinese are being fed with grain produced by overpumping—by definition, a short term phenomenon.



Monday 14 March 2011

Are House Prices Rising Too Fast in China?

This is a good question and it is fortunate that a group of respected economists have looked carefully at the question.  My own instinct is to say "yes" they are and that a housing price collapse could have serious implications both economically and more importantly politically.

The authors suggest we do not have to worry just yet.

Ashvin Ahuja
International Monetary Fund (IMF)

Lillian Cheung
Hong Kong Monetary Authority

Gaofeng Han
Hong Kong Monetary Authority; University of California, Santa Cruz - Department of Economics

Nathan Porter
International Monetary Fund (IMF)

Wenlang Zhang
affiliation not provided to SSRN

December 2010

IMF Working Paper No. 10/274

Sharp increase in house prices combined with the extraordinary Chinese lending growth during 2009 has led to concerns of an emerging real estate bubble. We find that, for China as a whole, the current levels of house prices do not seem significantly higher than would be justified by underlying fundamentals. However, there are signs of overvaluation in some cities’ mass-market and luxury segments. Unlike advanced economies before 2007-8, prices have tended to correct frequently in China. Given persistently low real interest rates, lack of alternative investment and mortgage-to-GDP trend, rapid property price growth in China has, and will continue to have, a structural driver. 


WTO sides with China to kicks the US in the antisubsidies

In a surprise ruling the WTO ruled that the US had introduced illegal antidumping and antisubsidy duties on some Chinese exports.

What is interesting is that China has spent vast sums on experts and lobby groups to fight the US and Europe on their terms. If you cannot beat them, hire them. This strategy is already showing signs of working well.

Trade Body Rules in Beijing's Favor [WSJ]

BRUSSELS—The World Trade Organization handed an important victory to China, ruling that the U.S. illegally imposed both antidumping and antisubsidy duties on some Chinese exports in 2007.

The trade body's surprise decision sets a precedent in limiting the ability of China's trading partners to impose punitive duties on its exports.

China, the world's biggest exporter and its second biggest economy, faces its biggest wave of trade disputes at the WTO since it joined the Geneva-based organization in 2001.

Led by the U.S. and the European Union, China's trading partners are fighting what they say is an export machine often lubricated by state subsidies and aggressive dumping of goods below cost on foreign markets. And they complain it's a one-way street: China had $1.6 trillion of exports in 2010, with a trade surplus of $184.5 billion.

China has reacted to the trade legal war by hiring teams of consultants and expert counsel in Geneva, Brussels and Washington. It has become difficult for a reporter covering trade to find a lawyer not retained on some level by China or one of its exporters.

The WTO recently issued two significant rulings against China, finding that it improperly imposes export tariffs on raw materials in order to protect domestic supplies, and ordering China to bust a state-backed monopoly on processing some credit-card payments.

The most recent case dates back to the U.S. imposing punitive tariffs of up to around 20% on Chinese steel pipes, tires, and laminated woven sacks in 2007. A year later, China complained to the WTO that the U.S. had acted illegally. In October, the WTO rejected those claims.

Beijing appealed, arguing the U.S. couldn't legally impose two different classes of punitive duties—antidumping and antisubsidy— on the same goods. Antidumping duties punish dumping, the selling of goods below cost in a foreign country, while the latter compensate for government aid, such as grants and low-interest loans.

Typically, antidumping duties are levied on countries that are not designated as "market economies," because some subsidies are assumed in those countries. Instead, the WTO permits importers to calculate probable cost of the good using another country as a reference. For China, it is often another emerging economy such as Turkey or Mexico. Most countries, the U.S. included, don't consider China a market economy, and therefore usually don't apply antisubsidy duties. The EU has never imposed antisubsidy duties on China. Beijing has been campaigning hard for market-economy status from both the U.S. and EU because it would make it harder for those countries to levy antidumping duties.

In its 232-page report, the WTO's judges said that the U.S. couldn't apply both kinds of duties.

"The Appellate Body's decision on the 'double remedies' issue is likely to cause concern" among U.S. manufacturers and labor unions who lobby the government to impose duties, said Simon Lester, founder of LLC, a Washington consulting firm.

U.S. Trade Representative Ron Kirk reacted angrily to the ruling by the WTO. "I am deeply troubled by this report," he said."It appears to be a clear case of overreaching by the Appellate Body." The U.S., he added, is "reviewing the findings closely in order to understand fully their implications."

The U.S. must now comply with the ruling by removing some of the duties and change its methodology for future cases.

U.S. trade officials pointed out that the WTO panel upheld some parts of the U.S. case, including the finding that certain banks that gave loans to the exporters were "state bodies."

China welcomed the ruling. The panel, a government statement said, "has conclusively established that the United States acts unlawfully in the methods by which it calculates and imposes countervailing duties on imports from China."


China is NOW the world's biggest producer

It was inevitable that China would overtake the US for total production and that great day has now arrived.

What is interesting is that China is merely retaking the position it held in the 19th Century. Think of this as mean reversion. It was always going to happen after what history will see as the blip of communism (a large blip granted).

The UKs once leading position, taking over from China, now seems a long time ago.

It is still astonishing that although China now has the top spot that it takes 9 people to the US's one to manage it. Now we see the gulf between China and the US is still a large one.

China noses ahead as top goods producer [FT]

China has become the world’s top manufacturing country by output, returning the country to the position it occupied in the early 19th century and ending the US’s 110-year run as the largest goods producer.

The change is revealed in a study released on Monday by IHS Global Insight, a US-based economics consultancy, which estimates that China last year accounted for 19.8 per cent of world manufacturing output, fractionally ahead of the US with 19.4 per cent.

China’s reversion to the top position marked the “closing of a 500-year cycle in economic history”, said Robert Allen of Nuffield College, Oxford, a leading economic historian.


The last time China was the world’s biggest goods producer was in about 1850 when the country was close to the end of a long period of population growth and technological ascendancy. Buoyed by the industrial revolution, the UK then became the top maker of factory goods and held this position for almost 50 years, following which the US began a long run as the world’s premier manufacturing nation.

China makes more than the US, but takes nine times as many people to do so
Nicholas Crafts of Warwick university, an expert on long-term economic change, said: “This marks a fundamental shift in the global division of labour [involving goods production] which is unlikely to be reversed in the near future.”



Sunday 13 March 2011

Banking in China continued

China financial markets has a post on the RMBs potential as a reserve currency. Pettis correctly points out that this is unlikely in the near future.

What is more interesting is his comment on the state of the banking sector. In this we yet again share the same view. This is a massive problem waiting to happen.

The dollar, the RMB and the euro?

I will write a lot more about this in the next month or so, but for now it is worth pointing out that the Chinese banking system is one of the least efficient in the world when it comes to assessing risk and allocating capital, and would be bankrupt without repressed interest rates and the implicit (and sometimes explicit) socialization of credit risk. Beijing accepts this because of the tradeoff that gives it banking stability


Friday 11 March 2011

The impending bank crisis in China

I have become increasingly convinced that a bank crisis is just around the corner for China. The planets are lining up.

In my view it is all about property prices. This is a bubble by any name and the reasons for the bubble would take many a blog post but I am convinced that this bubble is there and it is large. The other problem is "bad loans". There are a lot of them, a real lot of them.

This very recent Wall Street Journal article saves me the time of writing up my worries.

It is impressive that Fitch Ratings have shown some balls to make this call.

A 60% chance of a banking crisis by 2013 seems pretty darn high to me actually (and fairly accurate. It is therefore important to understand exactly what the implications would be.

Fitch’s Bold Call on China Banking-System Risk [WSJ]
Fitch Ratings has developed a strong record on China’s banking sector in recent years, thanks largely to the perspicacious analysis of its lead banks analyst in Beijing, Charlene Chu. She was one of the first observers, back in 2009, to flag how Chinese banks were moving loans off their balance sheets to lightly regulated trust companies to avoid government lending caps. This past December, she and her colleagues published a report estimating that China’s banks had used trusts and other tools to blow past the government’s 7.5 trillion yuan ($1.14 trillion) quota for new yuan loans 2010 to the tune of an additional three trillion yuan not recorded on their balance sheets.

Last month, the People’s Bank of China effectively validated Ms. Chu’s analysis, saying that its longstanding measure of new bank lending failed to capture actual credit flows, and that the banks were responsible for creating around 11.5 trillion yuan of new credit last year.

So it turned a few heads Tuesday when an analyst elsewhere at Fitch was quoted saying that China has a 60% probability of experiencing a banking crisis by 2013. Ms. Chu’s analysis had pointed to significant flaws in China’s banking system, but this call put Fitch out there toward the Jim Chanos end of China Cassandra spectrum.

The analyst, Richard Fox, a London-based senior director at Fitch, told Bloomberg News that Fitch sees risks of “holes in bank balance sheets” should a property bubble burst.

The jarring assessment was based on the Macro-Prudential Risk Monitor, a sort of analytical tripwire system that Fitch developed in 2005 to flag potential bank crises. Using a formula based on credit-growth rates and asset-price increases, Fitch places national banking systems in three categories based on their “Macro-Prudential Indicator” scores, with MPI 1 being the least risky and MPI 3 the most.

As noted by Bloomberg, which said it interviewed Mr. Fox by phone on March 4, Fitch actually assigned China to the MPI 3 category back in June. But the move went largely unnoticed.

According to Fitch, an emerging-market economy like China has a 60% chance of experiencing a banking crisis within three years of being designated MPI 3. Thus it would follow there’s a better-than-even chance that D-Day will dawn for Beijing sometime before mid-2013.

Fitch bases that assertion on surveying almost 40 past banking crises. It says that a combination of abnormally fast growth in credit, assets prices, and the real effective exchange rate is a solid predictor of ill fortune for countries’ financial sectors.

Some countries enter MPI 3 and are removed without undergoing banking crises, among them, in the last three years, are Brazil, France, Denmark and New Zealand. On the other hand, according to Bloomberg’s interview MPI 3 correctly sounded the alarm for countries including Ireland and Iceland.

“We look at indicators and conditions which have preceded past crises,” Mr. Fox said in an email exchange with The Wall Street Journal on Tuesday. “MPI 3 shows these are present in China. Past evidence suggests there is therefore a 60% chance of a crisis in three years.”

If China does indeed fall into a banking crisis in the next 28 months, Fitch’s prediction will be lauded for its prescience—though it would also be grim news for the world economy. It’s safe to say that few experts in China who follow the banking system closely think there is a probability of a crisis in such a short period of time—including those who agree that China’s lending binge since 2009 has inevitably created a mountain of new bad loans that will someday have to be reckoned with.

News of the Fitch assessment apparently infuriated Ting Lu, China economist for Bank of America-Merrill Lynch, who blasted the 60% assessment in a note Wednesday. “Being cautious is one thing, exaggerating risks is quite another,” he wrote.

A Fitch spokesman declined to comment on the remark.

Certainly China’s loan growth is worrisome. The volume of outstanding yuan loans in the banking system has jumped by more than half in just the past two years. It’s almost impossible to imagine such a flood of credit being issued without sizeable mistakes. Indeed, regulators are clearly aware of the problems and have already been working to ensure that the banks hold sufficient collateral for loans made to infrastructure investment platforms backed by local governments, a group of borrowers deemed most worrisome.

Still, it could be a stretch to put a numerical probability on something as uncertain as the timing of a financial crisis in China, especially if it’s based on a one-size-fits-all model applied to diverse economies across the globe.

The Fitch model says four conditions have to align before it’s time to sound the alarm. Real private-sector credit growth must exceed 15% a year, sustained over two years. Property prices need to grow more than 5% a year and the real effective exchange rate (that’s a measure of the currency on a trade-weighted basis, adjusted for the effects of inflation) must appreciate by more than 4% a year over the same two-year period. And finally, equity prices need to gain more than 17% a year over the preceding two year period. China has fulfilled the credit and property-price conditions for most of the decade, but a stock market bubble in 2006-2007 and strong yuan appreciation pushed it over in 2008.

China’s government is far from omnipotent, but it does have significant ability to mitigate or delay a crisis—not least because the state is ultimately the owner of both the banks and most of the big borrowers they lend to. And given that the once-a-decade transition in China’s leadership, which begins in the autumn of next year and runs through early 2013, there will be a serious political imperative to paper over problems in the economy. It could be a while yet before the big cracks start showing in the banking system.