China fears boom and bust cycle

[Alban]

For those of us investing in China on the cheap ASX (relative to very high valuation Chinese stock markets) it's as well to keep an eye on the bigger picture too.


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The Chinese government has issued a new warning that too much bank lending for real estate and certain industrial projects could lead to supply gluts and trigger a financial crisis.

The country's central bank, the People's Bank of China, has taken fresh measures to try to curb the amount of money that Chinese banks are lending.

The move comes after Premier Wen Jiabao warned last month of the need to avoid a boom and bust cycle.

All over China, gleaming new towers of steel and concrete are going up, bridges and roads are mushrooming, and factories are springing up.

Curbing overheating

But this new industrial revolution is increasingly worrying the government because of the growing warning signs of overheating in the economy.

Raw material prices are rapidly surging, energy is in short supply, and the country's transport infrastructure is becoming ever more overloaded.

It is a sign of Beijing's deep concern that the People's Bank of China has now announced fresh measures to try to curb lending for new projects by commercial banks.

It is raising the minimum reserve requirements that banks have to hold up to 7.5% of their outstanding loans.

The hike, which is designed to help reign in the country's spiralling billions of dollars of bad loans is the third in the space of eight months.

Chinese leaders seem to be finding that warning about potential overheating is not enough to curb the frenzied expansion.

But if these measures to curb bank lending do not work, and inflation continues to rise, then they could be forced to use even more drastic strategies like slamming the brakes on the economy by raising interest rates.

http://news.bbc.co.uk/2/hi/business/3619485.stm

[KD]

It would be good to hear about some more promising ASX listed companies operating in China/Asia. Apart from OTI and ATR I have bought into a float of an exchange traded fund listed under the ASX as GCA. I'm also interested in an investment company Loftus Capital Partners (LCP) which was once a Pooled Development Company but no longer has that status. LCP now invests in small companies with a preference for those with Asian exposure (e.g. OTI, Waterco). Currently LCP is trading below NTA following a capital raising. GCA, ATR and OTI are long term holds for me. I've found quite a number of other firms but nothing that has really grabbed my attention like ATR and OTI.

[draffthorse]

If your into options, one that could be worth taking a look at which is not on the ASX is CHINA on the NASDAQ.

website: www.corp.china.com

[KD]

thanks drafthorse - my online broker doesn't cater for OS transactions and I'm happy at the moment with that. However this may interest others.

cheers

[Alban]

A bit more on China:

Is China's economic miracle in meltdown?

World leaders seldom stand up to dish the dirt on their country's economy.

But China's Premier Wen Jiabao has been doing just that on his European tour this week, warning that China's roaring juggernaut of an economy risks coming off the rails after growing 9.1% last year.

At dinner with 400 UK executives in London, Mr Wen compared himself to the driver of a speeding car, trying to avoid an emergency stop. "We cannot slam the brakes, we have to press the brakes gently," he said.

In Brussels, he was even more blunt, triggering headlines by describing aspects of China's growth as "excessive".

Change of tone

In his dark business suit, sober tie and lacquered hair, Mr Wen looked the textbook example of China's new post-Mao, pro-market leaders.

But his admission that China is "overheating" comes as something of a break from Communist Party traditions of celebrating ever-increasing output of everything from pigs to microprocessors.


Mr Wen says better co-ordinated growth is a priority

So what has sparked Mr Wen's warnings?

And how has China switched so swiftly from being a miracle growth story, the darling of international bankers and businesses, to a potential meltdown?

Reckless investment in new factories by state firms which borrow from banks that operate minimal credit checks and are wide open to pressure from local officials is nothing new, but the focus on stopping it is.

Premier Wen and President Hu Jintao are relatively new at the top, having inherited the two most powerful government posts in March 2003.

Foreign economists agree with the new leadership's economic medicine.

But they are nervous about the consequences. Morgan Stanley chief economist Stephen Roach wrote that a slowdown in China's economy "should be viewed as a global event".

Investment cutbacks could "spread well beyond Asia", he said.

The Asian giant is the world's sixth largest economy and fourth biggest exporter; the US ran a trade deficit with China of $124bn (£70bn) last year.

China's appetite for raw materials has pushed up prices worldwide, and factory gate prices at home. In 2003, China consumed 27% of world steel, 31% of coal and 40% of cement.

Since October 2001, the Economist all-items index of commodity prices has risen 59%, with metal prices jumping 50% and industrial raw materials 73%.

Factory glut

"China's biggest problem", said Mr Wen in London, is "excess growth in fixed asset investment" - in other words, too many factories and a real estate bubble that has sucked in raw materials and gridlocked the transport system, where rising prices hurt everyone.


Officials face pressure to generate jobs

"We are now under pressure of inflation," admitted Mr Wen. Overall inflation rose by a manageable 2.8% in the first quarter of 2004, but factory gate prices jumped by roughly 7%, he said.

Mr Wen's confessional openness was aimed at wooing Western investors with a transparent, responsible image, whilst issuing a warning back home.

Investors certainly loved it. "He comes across as a very deep-thinking person," said Peter Nightingale, chief executive of the China-Britain Business Council.

Social reforms

But China's economic reformers may find themselves stranded without either a sufficiently developed market mechanism or enough old-style centrist clout to tackle overheating.

The trouble is that much reckless investment is being carried out by local officials who firmly believe they are doing what Beijing wants. Or who do not care.

Allan Zhang was an economist at China's foreign trade ministry for 14 years before joining audit firm Pricewaterhouse Coopers in London, where he heads the China Business Centre.

He points out that Chinese officials focus on beefing up local growth rates because "you're more likely to be promoted".

"The central government is trying to

[Alban]

China's inflation at 7-year high

China's annual rate of inflation hit a seven-year high in April, underlining fears that the economy is overheating.
Consumer prices rose 3.8% in April from a year earlier, driven mainly by increases in food costs, according to the State Statistical Bureau.

Some economists are now predicting the first interest rate rise in nine years as policy makers try to cool growth.

Premier Wen Jiabao this week warned that the economy risks coming off the rails after expanding 9.1% last year.

The first three months of 2004 exceeded even that, surging to an annual rate of 9.7%.

Light-footed

During his European tour, Mr Wen described China's growth as "excessive" and compared himself to the driver of a speeding car that needs to slow down.

He added that: "We are now under pressure of inflation".

During April, food prices jumped 10%, while the cost of grain rocketed by more than a third.

Beijing is already taking steps to rein in inflation, such as capping increases in utility costs and limiting lending by state banks.

Economists, however, are warning that a slowdown in China's economy may have repercussions around the globe.

The Asian giant is the world's sixth largest economy and fourth biggest exporter and its appetite for raw materials has pushed up prices worldwide.

In 2003, China consumed 27% of world steel, 31% of coal and 40% of cement.

http://news.bbc.co.uk/2/hi/business/3713351.stm

[bull....]

Amazing how a bit of publicity about china falling of the rails actually derails the whole commodity upswing if only temporary.