China pulls financial plug on Western debt
“This year we will continue to control the pace and demand of the credit supply,” Mr. Liu said at a conference in Hong Kong. All banks, he added, had been ordered to “heighten their vigilance against an impossible, embedded credit risk.”
For about a year now, China has been giving signs and exerting influence on world markets and political circles that they would be ending their massive purchases of Federal Reserve bonds (also known as buying US government debt bonds) to which they know the US will never repay. It is looking more and more like the predictions by many have been right a long time; that is that China’s revaluation of their currency and the cessation of spending on financing debts abroad for countries unlikely to pay them back will cause “financial tsunami” around the world.
All this should tell us that where China goes, so goes the rest of the world (Western nations in debt to the Chinese). Any economic recovery of worth depends on its ability to perform in an inflationary-secure environment while the rest of us pick up on the consumer end of things. This should be sounding a little contradictory to all of you. If there are any serious signs of trade between us and them faltering, currencies of importing countries will usually be the first to take a hit.
As a citizen of an independent nation, as a consumer, and investor,we shouldn’t like the thought of the world depending on one nation (China, now the biggest exporter above Germany) to pull the rest of us out of the proverbial ditch. It is too much to depend on China to do the heavy lifting. like buying other nations’s debt, in order for us to return to the good life of indulging consumerism.
The West (ie. Europe & USA) has been after China for a while to raise the value of its currency and provide a more level playing field for trade. Restricting lending in China (as the below article states is happening) by raising rates is likely to have this effect:
- Our prices will look relatively cheaper to the Chinese and there s a chance they will buy more of our stuff instead of the other way around.
- Dollar denominated debt will be relatively cheaper and easier to pay down.
The overall effect will be to encourage home based manufacturing and stimulate the job market both for home and overseas consumption; at least, this is what is hoped will happen. The Chinese have never lacked smarts and they know when the proverbial party is winding down.
China to Slow Lending Amid Bubble Worries
By BETTINA WASSENER Published: January 20, 2010 NYTimes
HONG KONG — The Chinese authorities signaled Wednesday that bank lending would slow significantly this year and reportedly instructed some banks to curb loans — the latest in a series of moves designed to forestall inflation and stave off bubbles in the stock and property markets.
Liu Mingkang, chairman of the China Banking Regulatory Commission, said he expected Chinese banks to extend loans totaling about 7.5 trillion renminbi, or $1.1 trillion — down nearly 22 percent from the record 9.6 trillion renminbi lent last year.
“This year we will continue to control the pace and demand of the credit supply,” Mr. Liu said at a conference in Hong Kong, The Associated Press reported. He added that regulators were paying special attention to loans for local government projects and real estate. All banks, he added, had been ordered to “heighten their vigilance against an impossible, embedded credit risk.”
Stock markets in China and Hong Kong fell on the news. The Shanghai composite index, the main gauge of the mainland Chinese market, ended 2.9 percent lower, while the Hang Seng index in Hong Kong dropped 1.8 percent.
Bank of China and China Construction Bank sagged 3.4 percent and 3.1 percent, respectively, in Hong Kong, while Industrial and Commercial Bank of China fell 2.6 percent.
Still, economists said that the Chinese policy makers’ signal was neither surprising nor dramatic and that it showed Beijing “tapping on the brakes,” rather than engineering a major policy reversal.
“The 7.5 trillion renminbi target for this year is hardly an insignificant amount by anyone’s definition,” said Patrick Bennett, a strategist at Société Générale in Hong Kong, adding that he believed the market reaction had been excessive.
America wakes up to the unsustainable bubble in China
Posted by Jon Talton of Seattle Times
Top of the News: The stock market has become such a stoned-in-the-dorm-on-derivatives place in recent years that it’s no longer an indicator of much of anything but the day’s casino payout and hidden trends such as the carry trade. (Captain Greenspan Renault: “I’m shocked, shocked to find that gambling is going on in here!” Your winnings, sir. “Oh, thank you very much.”). Today is different.
Stocks nosedived after Chinese authorities did an about-face and ordered banks to temporarily halt lending. This is the starkest evidence yet of the dangerous asset bubble that has been building in China, a result of a stimulus that relied heavily on pushing money out the door of state banks into state-controlled industries and elsewhere. One of the biggest danger zones is in — surprise! — real estate, as well as stocks.
With the U.S. economy so badly damaged, economists had hoped that China could lead the world out of recession. That won’t happen if Chinese regulators are too late to avoid a bubble collapse. The consequences for trade-dependent Washington state would be nasty, too.
And remember, the imbalances between China and the U.S. haven’t been worked out by the downturn — which is one of the few good things recessions are supposed to do. China’s reserves climbed to $2.4 trillion in the fourth quarter, vs. $1.9 trillion a year earlier.
The Midweek Briefing: Things are tough all over, but blue-collar workers are among the hardest hit by the recession. According to Northeastern University’s Center for Labor Market Studies, blue-collar industries have cut one in six jobs vs. one in 20 for the economy as a whole.
— On the other hand, job cuts by tech companies last year reached their highest level since 2005, according to Challenger, Gray & Christmas. At more than 174,600, the planned cuts would be 12 percent higher than in 2008.
— “We’re more strict with our poor than with our banks.” So says Nobel laureate economist Joseph Stiglitz in a new interview on Huffington Post. Stiglitz warned of the systemic risk of the casino financial system early on and events have proven him right. He distills his critique in the new book, Freefall. One big difference: The American poor don’t have the ability to collapse the world economy.