China's reforms continue to be slow, safe and steady

[greengiraffe]

PUBLISHED MAY 06, 2014
China's reforms continue to be slow, safe and steady
Beijing has gone in for gradual progress on many fronts

Keeping the balance: The overall verdict six months after the reform blueprint was announced is that so far, despite the economic slowdown and signs of financial strains highlighted by China's first domestic bond defaults, Beijing has not strayed from the course. - PHOTO: BLOOMBERG
[BEIJING] Six months into China's grand economic makeover, Beijing is playing it safe, choosing gradual progress on many fronts over game-changing, riskier reforms such as removing all controls over bank interest rates.
Yet taken together, the incremental steps promise to reach enough critical mass to sustain reform momentum and help the world's second-largest economy shift down fairly smoothly after decades of red-hot investment-fuelled growth.
It's a 21st century version of Deng Xiaoping's "crossing the river by touching the stones" strategy of cautious economic experimentation in the 1970s and 1980s. The caution is still there; the difference is today China is crossing that river in many spots at once and the water is probably deeper.
Economists say there is no substitute for fundamental changes if China is to succeed in its transformation from a bureaucratically-run, pollution-spewing industrial powerhouse to a more balanced, market-driven economy.
However, reforms such as freeing up bank interest rates or dismantling state monopolies will cause much short-term pain, and provide gains only in the long-term. With the economy expected to grow by 7.3 per cent this year, the slowest in 24 years and close to the level Beijing believes is needed to preserve financial and social stability, those reforms will have to wait. "We are doing easier ones first and leaving the difficult reforms for later," said Xu Hongcai, senior economist at China Centre for International Economic Exchanges, an influential think-tank in Beijing.
But Mr Xu and others are encouraged by the progress so far and the consistency President Xi Jinping and Premier Li Keqiang have shown in pushing for a greater role for markets across the economy. "The leadership is committed to reforms, there is no doubt about that," said Lu Feng, vice dean of National School of Development at Peking University and a government policy advisor.
Since November, when Communist Party leaders adopted a reform blueprint for the rest of the decade, no week has passed without new initiatives in areas ranging from the environment, resource pricing to capital flows and financial regulation. "We have indeed seen in the last four or five months a steady accumulation of steps in key areas," said Louis Kuijs, chief China economist at Royal Bank of Scotland in Hong Kong and a former World Bank economist in Beijing.
Financial market liberalisation is a good example.
Freeing up of lending rates last July and the doubling of the yuan trading band in March got most airtime, but they were accompanied by many other steps making it easier to move capital within China and across its borders.
Just over the past two months, regulators eased curbs on foreign investments in Chinese stocks, allowed cross-border share investment between China and Hong Kong, eased approvals for overseas acquisitions and domestic mergers and takeovers.
However, a deposit insurance scheme expected to pave the way to removal of curbs on deposit rates has been slow in coming and it is clear that a free-floating yuan and opening up of China's capital account are still years away.
But changes made so far have already had the effect of allowing more balanced capital flows.
The scaling back of central government's administrative approval powers and simplified business registration are also expected to bring not yet easily measurable, but tangible economic benefits.
The thorniest decisions, such as stripping big state firms of an implicit government guarantee or opening sectors such as banking to competition, still lie ahead.
Little has also happened with mooted reforms to China's residence registration system and land property rights needed to boost the nation's urban population, among Beijing's strategic priorities.
Economists also expect slow progress with the promised revamp of how revenues, spending and responsibilities are split between Beijing and local governments, made tricky by high levels of local debt and the need for new sources of tax revenue.
Beijing's top leaders have themselves warned that resistance from those affected by change such as powerful managers of state firms or provincial officials will only get stronger. The say the reforms are entering "deep waters".
Yet, the overall verdict six months after the reform blueprint was announced is that so far, despite the economic slowdown and signs of financial strains highlighted by China's first domestic bond defaults, Beijing has not strayed from the course.
In another development, China's manufacturing sector contracted for a fourth consecutive month in April, HSBC said yesterday, the latest sign that the world's second-largest economy is slowing.
The British banking giant's purchasing managers index (PMI) came in at 48.1 for last month, a tad up from 48.0 in March but weaker than the 48.3 reported in its preliminary report on April 23.
A figure below 50 indicates contraction while anything above points to growth. - Reuters, AFP

[greengiraffe]

http://www.todayonline.com/business/chin...on-says-xi


PUBLISHED: MAY 12, 4:12 AM(PAGE 1 OF 1) - PAGINATE
SHANGHAI — Chinese President Xi Jinping said the nation needs to adapt to a new normal in the pace of economic growth and remain cool-minded amid a slowdown in expansion.

China’s growth fundamentals have not changed and the country is still in a significant period of strategic opportunity, said the Xinhua news agency on the central government’s website late yesterday, citing Mr Xi.

At the same time, the government must prevent risks and take timely countermeasures to reduce potential negative effects, he said.

China’s policymakers are trying to keep economic expansion from slipping below Premier Li Keqiang’s 2014 target of about 7.5 per cent, while reining in a credit boom that a central bank official said threatens to undermine the financial system.

The government has so far limited its support to tax breaks, as well as speeding up infrastructure and social housing investment, with Mr Li saying last week the focus remains on the quality of growth and on changing the structure of the economy.

“The authorities have increased their tolerance to somewhat lower growth as a necessary condition to push for structural reforms and contain financial risks,” Banco Bilbao Vizcaya Argentaria economists wrote in a report last Friday.

“Risks are still tilted to the downside, concentrating on elevated financial fragilities and uncertainties about the implementation of their reform agenda.”

During a visit to Henan province last week, Mr Xi was quoted by Xinhua as saying the government will continue to balance the relationship between economic expansion, reform, restructuring, improving people’s well-being and preventing risks to ensure sound economic growth and social stability.

“We must boost our confidence, adapt to the new normal condition based on the characteristics of China’s economic growth in the current phase and stay cool-minded,” he said.

China’s benchmark Shanghai Composite Index has dropped 5 per cent this year on concern growth is slowing.

Gross domestic product increased 7.4 per cent in the first quarter, the least since 2012, and is forecast to expand 7.3 per cent this year, the weakest pace since 1990, based on the median estimate in a Bloomberg survey last month.

Last month, Mr Li said the government would not adopt short-term and strong stimulus policies in response to temporary fluctuations in the economy.

People’s Bank of China (PBOC) governor Zhou Xiaochuan reiterated that stance yesterday at a conference, said a report of his comments.

Responding to a question about whether a cut in banks’ reserve requirement ratio is imminent, Mr Zhou said the PBOC is always fine-tuning its policies and some of that is invisible to the market.

Almost half of the economists surveyed by Bloomberg last month predicted a cut in the reserve requirement ratio this year as part of an easing of monetary policy to support the economy.

Expectations for a reduction have increased after a government report last week showed consumer inflation moderated to an 18-month-low last month and factory-gate prices fell for a 26th month.

China’s potential growth rate may slow as a result of demographic changes and economic restructuring, the PBOC said in its first-quarter monetary policy report last week.

At the same time, reforms will help to stimulate growth in productivity, it said.

Government efforts to curb dangers posed by a surge in shadow banking risk exacerbating the economic slowdown. Any crackdown on interbank borrowing and wealth management products would withdraw liquidity that has funded speculative investment, leading to bankruptcies and defaults.

Yesterday, deputy central bank governor Liu Shiyu warned that shadow banking threatens to undermine the financial system and called for tougher rules to control an industry that has driven up borrowing costs and done little to support the economy and productivity.

Shadow finance has created a “gambling” mindset, as money lured by higher returns is channelled into short-term investments, Mr Liu said at a conference in Beijing.

Mr Li Daokui, a former academic adviser to the PBOC, said at the same conference that the commercial banking sector is the greatest danger to the economy and that credit risks are accumulating as growth slows.

Shadow banking needs to be more transparent and brought under tight control, he said. Bloomberg

[greengiraffe]

Why free markets are not enough to save China

Adair Turner
1056 words
14 May 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Asia The Chinese economy needs to transition not to a Western model but an entirely new one combining market discipline with strong public policy constraints. Adair Turner

Back in 2007, China's then prime minister, Wen Jiabao, famously described his country's economy as "unstable, unbalanced, uncoordinated and unsustainable". Today, the imbalance remains, with the economy too focused on investment and too dependent on credit.

China's current leadership is committed to building a more balanced model, and believes that the market must play a "decisive role" in achieving that. But, while stronger market discipline is needed in some areas, Chinese officials should be under no illusion that free markets are a panacea for the financial sector. Indeed, China's current economic imbalances partly reflect the dangers created by competition in credit markets.

Even before the 2008 global financial crisis, annual investment in China was running at an exceptionally high 40 per cent of gross domestic product, and economists were calling for a transition to more consumption-led growth. But the huge credit stimulus introduced in 2009 drove the economy further in the opposite direction. The investment ratio rose to 47 per cent by 2012, and construction now accounts for 30 per cent of all output. Total credit has risen from 130 per cent of GDP to 200 per cent, and bank loans and "shadow bank" credit are expanding rapidly.

Both China and the global economy benefited from that stimulus, which helped prop up overall demand in dangerously deflationary times. But it has led to significant wasted investment in heavy industry, real estate and urban infrastructure, and leaves China facing the challenge of deleveraging and working out bad debts.Market discipline

In many areas, improved market discipline does have an important role to play in addressing the structural causes of imbalance. Wasteful construction investment is encouraged by the under-pricing of rural land. The lack of a normal ownership relationship between the central government and state-owned enterprises (SOEs) allows the latter to pay minimal dividends and overinvest in business expansion. Caps on interest rates on bank deposits result in household savers supplying a large subsidy to corporate borrowers. And SOEs have better access to credit from state-owned banks than private companies do.

But the belief that financial liberalisation will provide an easy route to a balanced and stable economy is a delusion, as Japan's experience in the 1980s illustrates. As Joe Studwell argues persuasively in his book How Asia Works, neither Japan nor South Korea based its successful economic development on free markets in credit supply. Instead, they relied on the deliberate direction of credit towards industrial development rather than real estate or consumption.

When Japan relaxed constraints on its banking system in the 1980s, the result was an enormous real-estate boom and subsequent bust, followed by two decades of slow growth and deflation. China's per capita income is still only about a quarter of Japan's in 1990; it would be a tragedy if it suffered a similar setback before completing the path to developed-country living standards.Infrastructure

One striking feature of the Chinese economy, however, is that real estate and urban infrastructure development – high-rise housing, grand transport projects, convention centres, sports stadiums and museums – already play a far more important role than they did in Japan and South Korea at comparable stages of economic development.

This reflects the interaction of two distinctively Chinese factors and one inherent feature of all banking systems. The first Chinese factor is the authorities' focus on "urbanisation" as an end in itself rather than a byproduct of industrialisation. The second is China's decentralised approach to economic development, with strong competition between regions and cities, often focusing on prestige urban infrastructure projects.

The universal feature in this mix is the fact that banks everywhere can create private credit, money and purchasing power that did not previously exist, and they have a natural bias to allocate it to fund real-estate developments, which drive rising land prices.

These factors will drive construction booms and busts even if obvious market distortions are removed and market discipline is tightened. The pre-crisis Irish and Spanish banking systems proved just as capable as China's state-owned banks at funding excessive real-estate construction.Credit constraint

So, even as China introduces greater market discipline to a largely positive effect, it must plan to constrain credit creation with policy tools that were missing in the advanced economies before the 2008 crisis. Caps on loan-to-value or loan-to-income ratios on real-estate loans should be used aggressively. Capital requirements for banks should reflect higher risk weightings for real-estate lending than banks' private assessments of credit risks suggest are appropriate.

The People's Bank of China should maintain requirements for commercial banks to contain credit creation rather than reject them as old-fashioned, as occurred in the advanced economies in the decades before 2008. Credit provision by shadow banks needs to be tightly regulated.

China faces a difficult challenge. It must undergo a transition not to the Western model that produced the 2008 crisis, but to an entirely new model that combines elements of market discipline with strong public policy constraints.

How smoothly that transition occurs matters for the whole world. By the early 2020s, China's GDP will be $US20 trillion ($21 trillion). If the credit/GDP ratio reaches 250 per cent by then, total loans and debt securities would equal $US50 trillion, which is more than three times the total of US mortgage debt in 2008. Today, much of that debt represents claims within the state sector – owed, for instance, by SOEs to state-owned banks. But, as the private sector develops, SOEs are subjected to hard budget constraints and the external capital account is opened, this huge credit mountain will create increasing global financial vulnerability.

One hopes that the Chinese authorities understand the dangers as well as the benefits of free financial markets better than advanced economy policymakers did before the 2008 crisis. If not, another crisis – far more severe than the last – may become inevitable.

Adair Turner, former chairman of Britain's Financial Services Authority, is a member of the Financial Policy Committee and the House of Lords.


Fairfax Media Management Pty Limited

Document AFNR000020140513ea5e0000e

[greengiraffe]

PUBLISHED MAY 23, 2014
Slowing Chinese economy in adjustment period
It should regain stability by 2016, says economist
BYKARA QUEK
karaquek@sph.com.sg

[SINGAPORE] The slowing of the Chinese economy is representative of a period of adjustment in the system, and the economy should regain stability in two years from now, a leading Chinese economist said yesterday.
Li Daokui, a professor at Tsinghua University and former adviser to the People's Bank of China, was speaking at the first day of the UBS Family Office Summit, held in Singapore for the third year running.
The slowdown was evident, Prof Li pointed out as the Chinese economy's growth rate has fallen from over 10 per cent two years ago, to just below 7.5 per cent now.
"Fundamentally, I think this is because the economy is looking for new engines of growth," he said.
Older engines of growth, such as exports and the property market, are losing attractiveness, and as newer engines of growth are still gathering steam, the lull in economic growth is understandable, he added.
Mr Li mentioned new areas of growth such as urbanisation, homeland construction, and private consumption.
Investing in China during this period of transition would have risks, said Prof Li. With the ongoing anti-corruption campaign being carried out more on an ad-hoc basis rather than a rule-based, institutionalised one, he pointed out that new anti-corruption policies do not get implemented.
However, Prof Li was optimistic that those efforts would soon become more official, transparent, and rule-based.
The period of adjustment could be over within the next two years, he added. "By 2016 . . . the economy will be more stabilised, a lot of risks will be behind us, (and) the economy will grow," he said.
The two-day UBS Family Office Summit, being held over yesterday and today, saw more than 170 global investors come together. Other speakers who discussed regional macroeconomic trends during the summit were Larry Hatheway, chief economist at UBS Investment Bank, and Axel Weber, chairman of UBS.

[greengiraffe]

China 'still a sound place to invest'

Social policy reforms will increase demand for more infrastructure, housing in urban areas: Expert
Published on May 25, 2014 1:27 AM

The Chinese government estimates that 60 per cent of its population will live in urban areas by 2020 compared with about 53.7 per cent last year. This translates to 115 million new urban residents, a Deutsche report says. -- PHOTO: BLOOMBERG

By Tee Zhuo

There are plenty of doomsayers warning about the Chinese economy, but Deutsche Bank suggests the country still makes a sound investment destination.

Mr Dixit Joshi, its Asia-Pacific equities head, told The Straits Times last Mondaythat urbanisation will be a "big potential driver" for many years to come, boosting related industries.

He cited China's more favourable social hukou policy, which has recently allowed more rural and migrant Chinese workers to be granted official "urban hukou" - or urbanite - status.

This, in turn, will increase demand for more infrastructure and housing as the population moves, creating opportunities for firms in the building trade.

The Chinese government estimates that 60 per cent of its population will live in urban areas by 2020 compared with about 53.7 per cent last year. This translates to 115 million new urban residents, a Deutsche report said.

Mr Joshi was speaking on the sidelines of Deutsche's two-day dbAccess Asia investor conference which ended last Tuesday. It attracted more than 1,600 bankers, economists and senior executives. Speakers included Apple co-founder Steve Wozniak, the Financial Times' chief foreign affairs columnist Gideon Rachman, and former United States vice-president Al Gore.

Mr Joshi also highlighted plans to connect the stock exchanges of Hong Kong and Shanghai, which he called "a major step forward".

The arrangement will allow shares listed in both exchanges to be traded at either bourse at volumes of up to 23.5 billion yuan (S$4.7 billion) a day. This is more than four times the daily average traded on the Singapore Exchange last month.

Mr Joshi added that fears about the Chinese economy, including the possible defaults from its vast shadow banking sector, may be overstated.

"In any growing economy, defaults happen, it's part of the process... the question is how large and proportional to the size of the economy are those defaults, and whether the banking sector has the capacity to deal with it."

Earlier this month, Chinese shares dipped when the government valued the country's shadow banking sector at 27 trillion yuan, almost a fifth of the domestic banking sector's total assets. Deutsche's estimates put the figure at 19.7 trillion yuan as of last year.

But Chinese stocks bounced back earlier last week after reports that state-linked funds were buying equities.

Deutsche Bank has been largely positive on the Chinese economy, a view not shared by many in recent months. It predicts 8 per cent gross domestic product growth next year, higher than the World Bank's 7.5 per cent forecast.

Dr Michael Spencer, chief economist and Asia-Pacific research head at Deutsche Bank, said people will be "positively surprised" by the growth.

"The consensus view has been generally negative on China, seeing slowing growth as structural, whereas we see it as largely cyclical, reflecting the loss of external demand momentum and withdrawal of government stimulus," he added.

"We expect contribution to growth from external demand will be regained over the next few quarters."

The World Bank predicts China - which overtook Japan to become the world's second-largest economy in 2010 - could dethrone the United States as No. 1 by the end of this year.

Mr Joshi noted that the Chinese government committed itself to several economic and social reforms last November.

"I don't think it has registered in the minds of people just how much reform has been taking place and will be taking place in China," he said.

teezhuo@sph.com.sg

[greengiraffe]

PBOC unveils details on reserve-ratio cuts


DOW JONES JUNE 10, 2014 1:15PM

China's central bank on Monday unveiled details of plans to let some banks lend more of their deposits, in a move to give the sluggish economy a boost.

The People's Bank of China said that it was making a "targeted cut" in the portion of deposits that banks need to keep on reserve. It trimmed the rate by half a percentage point for banks that lend to the rural sector and smaller companies.

The move effectively frees up more money for banks to lend, though it falls short of a broad reserve-rate cut that would have included China's biggest banks.

Late last month, China State Council, or cabinet, promised a cut in the reserve requirements for some banks but gave no details. It followed another targeted move in April aimed at county-level rural commercial banks and rural cooperatives.

China's economy has been posting slower growth this year, and the government has been looking for ways to ensure that sufficient credit is channeled to key segments of the economy. Growth slowed to 7.4% year-over-year in the first quarter from 7.7% in the final quarter of last year.

"It's a timely move and shows that the central bank realizes how serious the economic slowdown is," said Shen Jianguang, economist at Mizuho Securities. "But it's not enough."

Analysts said that it is difficult to estimate the impact due to the lack of details in the central bank's statement. Some said it could release about 100 billion yuan--still a small portion of the total of about 111.7 trillion yuan ($18 trillion) in deposits in the banking system.

"It's a positive signal in support of the economy, which still faces downward pressure," said Ma Xiaoping, economist at HSBC. "It's a targeted cut and it is consistent with the central bank's objective this year of avoiding the kind of big stimulus that had been used in the past."

Beijing has been trying to avoid a bigger stimulus package for the economy and not repeat the spending spree that resulted from its effort to cushion the impact of the 2008 financial crisis. That led to an overdose of spending on projects that were unproductive and created overcapacity, such as in steel and cement, and ultimately led to bad loans in the banking system.

Beijing instead has focused on railway spending and tax breaks for small businesses while it has also told local governments to speed up spending on already approved projects.

More recently, the central bank has come under pressure to announce an across-the-board cut in the bank reserve requirement ratio--which now stands at 20% of deposits for most banks.

So far it has flexed its growing political muscle and resisted that pressure, preferring to use tools that can be aimed at specific sectors of the economy.

On Monday, the Chinese Securities Journal, a major state-run newspaper, joined the chorus that has been calling for a broader cut in the bank reserve ratio.

"Amid considerable downward pressure on economic growth, there has been a consensus that monetary policy easing is necessary," the China Securities Journal said.

"In order to effectively reduce the funding costs of the real economy, lowering banks' reserve-requirement ratio at an appropriate time is a good option," the paper said, without saying when the move should be made.

The central bank said on Monday that its latest move, which takes effect June 16, will affect about two-thirds of the nation's city commercial banks and applies to financial leasing and auto financing firms.

The central bank also said on Monday that the measures don't signal a monetary policy change. It added that it is maintaining its prudent monetary policy.

[greengiraffe]

No more stimulus planned: Beijing
AP JULY 10, 2014 12:15AM
Print
Save for later
China's finance minister says the country is not planning any new stimulus measures and it is up to the United States to drive the global economy.

Lou Jiwei said that leaders are satisfied with the country's economic performance so far this year and that in the first five months China had created up to 6 million jobs, 60 per cent of this year's target.

Analysts say the ruling party appears willing to accept economic growth below its 7.5 per cent target this year so long as the rate of creation of new jobs stays high enough to avoid political tensions.

Lou said China is emphasising structural reforms to spur economic growth and is unlikely to repeat the kind of massive economic stimulus it did in the wake of the 2008 global financial crisis.

"Therefore the global economic recovery depends on the situation in the United States," he told reporters at a briefing on the sidelines of an annual US-China strategic and economic dialogue in Beijing attended by US Treasury Secretary Jacob Lew.

Lou pointed out that the US economy shrank at a 2.9 per cent annual rate from January to March -- largely because of a brutal winter -- and said China hopes the US "can take measures to ensure the momentum of growth."

He also said China hopes the US can rebalance its economy by encouraging Americans to save more.

[greengiraffe]

PUBLISHED AUGUST 07, 2014
Top China analyst sees anti-graft dividend

Shanghai index to gain 15% from anti-corruption drive, says Value Partners boss

Mr Cheah: Corruption crackdown will improve the quality of growth and bolster investor confidence
[SHANGHAI] China's anti-graft drive has got Cheah Cheng Hye more bullish on mainland stocks than at any time since valuations plunged in the global financial crisis six years ago.
The chairman of Hong Kong-based Value Partners Group, which runs the best-performing Greater China equity fund during the past five years, is predicting a further gain of about 15 per cent for the Shanghai Composite Index by year-end. While President Xi Jinping's anti-corruption measures may be a short-term drag on growth, they will make state-owned enterprises more efficient and help curb excessive debt, he said.
The call by Mr Cheah, who was dubbed the Warren Buffett of Asia by Apollo Global Management's Tan Chin Hwee for his long-term track record of picking undervalued stocks, pits him against Tom DeMark, the developer of market-timing indicators who forecast on Monday that the rally may end within days.
"We are seeing that the anti-corruption campaign is for real," Mr Cheah, 60, whose US$547 million Value Partners China Greenchip Fund returned an annualised 13 per cent during the past five years to beat 134 peers tracked by Bloomberg, said on Saturday. "This is giving a lot of encouragement to investors." President Xi's campaign to rein in graft reached new heights last week as the government announced a probe of former security chief Zhou Yongkang.
The anti-corruption measures will improve the quality of China's economic growth and bolster investor confidence, Mr Cheah said. Gross domestic product will expand 7.4 per cent this year, according to the median of 54 economist forecasts compiled by Bloomberg, compared with 7.7 per cent in 2013 and 10.4 per cent in 2010.
"The kind of growth you get from corruption is what we call useless growth," said Mr Cheah, whose firm manages about US$10.5 billion. "Investors are willing to accept a lower growth rate in China. Maybe 6.5 per cent growth is OK."
China also needs to improve corporate governance if it wants to lure back investors after a 60 per cent slump for the Shanghai Composite Index since the start of 2008, he said.
The Shanghai gauge has gained 4.2 per cent this year after rebounding 11 per cent from its January low. The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong entered a bull market on July 28 with a 20 per cent rally from its March low, and has climbed one per cent this year. The iShares China Large-Cap ETF sank 1.5 per cent to US$40.47 on Tuesday.
The Shanghai index trades at 8.2 times projected 12-month earnings, compared with the five-year average of 11.3, and the current multiple of 11 times for the MSCI Emerging Markets Index, according to data compiled by Bloomberg.
"I am quite optimistic," Mr Cheah said. "The market has bottomed out. We're beginning to see the beginning of a recovery in the months of June and July. The strong performance may only be the beginning."
Restoring trust in the equities market is crucial before the planned start of a link between the Hong Kong and Shanghai stock exchanges that will make it easier for international investors to buy mainland shares, Mr Cheah said. The Hong Kong-Shanghai Connect is "very important" because it will narrow the valuation differential between dual-listed equities and its success would presage the possible inclusion of China's local-listed A shares in global indexes, he said.
Mr Cheah is joining bulls from Templeton Emerging Markets Group to JPMorgan Chase & Co. Chinese stocks will rise an additional 20 per cent, Mark Mobius, whose US$13 billion Templeton Asian Growth Fund has outperformed more than 90 per cent of peers this year, said on July 24. Adrian Mowat, the chief emerging market strategist at JPMorgan, last week raised his rating on Chinese stocks to neutral from underweight, predicting gains through October.
Mr DeMark, who predicted the Shanghai Composite's peak last year, says its current rally is poised to end. The gauge will probably fall below this year's intraday low of 1,974.38 in about six months, he said.
Mr Cheah, who co-founded Hong Kong-listed Value Partners in 1993 after a period as a financial journalist, favours shares of energy companies that will benefit from deregulation as well as those that will gain from a rebalancing of the economy toward healthcare, environmental protection and services.
PetroChina Co, which has rallied 19 per cent in Hong Kong this year, and Shenzhen-listed Chongqing Changan Automobile Co, up 18 per cent, were the two biggest holdings at the end of June in the firm's US$1.24 billion Value Partners Classic Fund, which has gained 18 per cent during the past 12 months.
Since taking office 18 months ago, President Xi's anti-corruption campaign has ensnared more than 480 officials spanning all of China's provinces and largest cities. The probe has toppled figures including Zhou, the former Politburo Standing Committee member and ally of ousted Chongqing party boss Bo Xilai. The probe into Zhou, a former head of PetroChina's parent, "will unlock significant shareholder value" in the nation's biggest oil company, Jefferies Group said in a note last week.
"Fifty years from now, Xi Jinping will be seen in history in the same way as Deng Xiaoping, with the things he is doing now to boost confidence in the country," Mr Cheah said, referring to the former leader who opened up the economy. - Bloomberg

[greengiraffe]

Can high-flying China slow down without crashing first?

Kenneth Rogoff
852 words
10 Oct 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.

Economics A soft landing in China is vital for world recovery. How do we tell if the country is on course to actually achieve this? Kenneth Rogoff

While virtually every country in the world is trying to boost growth, China's government is trying to slow it down to a sustainable level. As China shifts to a more domestic-demand driven, services-oriented economy, a transition to slower trend growth is both inevitable and desirable. But the challenges are immense, and no one should take a soft landing for granted.

As China's economy grows relative to the economies of its trading partners, the efficacy of its export-led growth model must inevitably fade. As a corollary, the returns on massive infrastructure investment, much of which is directed towards supporting export growth, must also fade.

Consumption and quality of life need to rise, even as China's air pollution and water shortages become more acute in many areas. But, in an economy where debt has exploded to more than 200 per cent of GDP, it is not easy to rein in growth gradually without triggering widespread failure of ambitious investment projects. Even in China, where the government has deep pockets to cushion the fall, one Lehman Brothers-size bankruptcy could lead to a major panic.

Think of how hard it is to engineer a soft landing in market-based economies. Many a recession has been catalysed or amplified by monetary-tightening cycles; former US Federal Reserve chairman Alan Greenspan was christened the "maestro" in the 1990s, because he managed to slow inflation and maintain strong growth simultaneously. The idea that controlled tightening is easier in a more centrally planned economy, where policymakers must rely on far noisier market signals, is highly questionable.Risks portrayed as modest

If one were to judge by official and market growth forecasts, one would think that the risks were modest. China's official target growth rate is 7.5 per cent . Anyone forecasting 7 per cent is considered a "China bear," and predicting a downshift to 6.5 per cent makes one a downright fanatic.

For most countries, such small differences would be splitting hairs. In the United States, quarterly GDP growth has fluctuated between -2.1% and 4.6% in the first half of 2014 And Chinese growth almost surely fluctuates far more than the official numbers reveal, in part because local officials have incentives to smooth the data that they report to the central authorities.

So where is China's economy now? Most evidence suggests that the economy has slowed significantly. One striking fact is that annual growth in electricity demand has fallen sharply, to below 4 per cent for the first eight months of 2014, a level recorded previously only in the depths of the global financial crisis that erupted in 2008. For most of China's modernisation drive, electricity consumption has grown faster than output, not slower.

Weakening electricity demand has tipped China's coal industry into severe distress, with many mines effectively bankrupt. Falling house prices are another classic indicator of a vulnerable economy, though the exact pace of decline is difficult to assess. The main house-price indices measure only asking prices and not actual sales prices. (Data in many other countries – for example, Spain – suffer from the same deficiency.)

Unfortunately, China's data is not nearly as reliable as that measuring a developed economy, which makes it difficult for anyone to be sure of what is happening. Electricity usage is typically one of the most reliable measures of growth; but, with the economy shifting toward services, and with many energy-intensive industries such as cement and steel production slowing down, it is perfectly possible that slow electricity growth is simply a symptom of rebalancing. What seems clear is that China's leadership is intent on pursuing many of the market-oriented reforms approved by the third plenary in 2013. President Xi Jinping's aggressive anti-corruption campaign might be seen as preparation for political resistance to further economic liberalisation.

On the other hand, one can argue that, until now, Chinese corruption was more of a tax than a paralysing force, and that dramatically changing the rules of the game could by itself catalyse a sharp drop in output.

Can China's government engineer a soft landing while weeding out corruption, reducing pollution, and liberalising markets to ensure long-term growth?

The stakes are high. If Chinese growth collapses, the global fallout could be far worse than that caused by a normal US recession.

China's growth rate remains perched at a very high level, so there is a great deal of room to fall. The potential vulnerability of Western exports and equity prices is massive.

Of the two major instances of policy tightening occurring in the world today, the US Fed's may be the easier one to understand, but it is not necessarily more consequential for the world than what is happening in China.

Kenneth Rogoff is professor of economics and public policy at Harvard University.


Fairfax Media Management Pty Limited

Document AFNR000020141009eaaa0003r