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I saw a large investment bank in Europe having a furious inside quarrels for the price of bulk commodities. The stock department, Chinese economy research department and global bulk commodities department had three different opinions for China’s economy. Some are extremely negative opinions for China’s economic outlook, which are based on the downturn of China’s economic growth and consumption. Without a consensus, the three departments had to give their opinions to the clients, letting them make their own choices,”said Ba Shusong, deputy director of the Financial Institute of the State Council’s Development Research Center, in a forum in Shanghai. This revealed foreign research institution’s “contradictory” views about China’s economy and bulk commodities.
Foreign media’s negative opinions
When foreign research institutions have not reached the consensus about the future of China’s economy, many foreign media expressed pessimistic and negative opinions about China’s economy. Recently, the Wall Street Journal, Bloomberg, and Fuji Sankei Business all published articles, stating that the feast of highspeed economic growth of China will be over and China will have a “hard landing” thanks to the growth of local government debt.
Some even considered the high-speed growth of China’s economy from 2008 as a dreamscape. They said that 30%-40% of China’s 8%-10% annual GDP growth rate is created by newly-lent loans. And 20%-25% of these loans will turn out to be bad debts eventually, causing the loss accounting for 6%-10% of the GDP. If the loss were deduced, the GDP growth rate of China would be decreased a lot.
When summarizing all the opinions about China’s economy, “soft landing” or “hard landing” is the center of the discussion. Some reviewers said that shrinking export and unsupportive domestic demand in China, which were caused by inflation, RMB appreciation and trade protectionism, have resulted in the supply in excess of demand. Meanwhile, the regulation and control of the real estate market led to the decreasing growth rate of investment and exposed the risk of local financing platform, which provide another solid proof for negative opinions.
The trend of the stock market is considered another reflection of investors’ concerns. Frank Gong, general manager of JP Morgan Asian-Pacific Areas, said: “the current development trend of the stock market is completely different from the one in 2009. Driven by the 4-trillion-yuan investment, China’s economy took the initiative in recovering in 2009, along with which the A-share market got stable. In comparison, the A-share market only had tiny rebound recently when the U.S. stock market hit the historical high. This proved that China’s economy is a follower instead of a leader.”
The Japanese monthly magazine Voice classified its pessimistic opinions into five points. One: the Chinese economy is approaching the point when the property bubble breaks and the Chinese stock market never gets rid of the depression.
Two: the “financing platform”, which raises capital from increasing housing price, now encounters unstable operation and poses the risk of shaking financial system of China.
Three: the European financial institutions are hit by the “sovereign debt crisis” and are reducing the loans lent to emerging countries in consideration of the difficulties in financing and improving self-owned capital adequacy rate.
Four: the worsening European economy led to the shrinking export of China, which greatly struck the export-oriented small- and middlesized enterprises in the coastal areas of China. The RMB appreciation also played an important role in landing this strike.
Five: China has seen its competitive power as the world factory decrease.
Traditional viewpoints held that China could make use of its huge foreign exchange reserves, the massive domestic deposits in China and the low debt level to boost the consumption demand. But the huge foreign exchange reserves are a double-edge sword. An article from the Wall Street Journal said that if China planned to get rid of its huge amount of foreign exchange assets, it would lead to the drastic depreciation of overseas bonds and the appreciation of RMB against the other currencies, causing great loss for China.
In addition, the huge amount of foreign exchange reserves forces China to buy more bonds of U.S. dollars, euro and Japanese yen to keep the value of its existing foreign exchange reserves. But that inevitably increases the size and the risk.
Investment banks have optimistic viewpoints
Different from foreign media, many foreign investment banks changed their viewpoints towards China’s economic outlook in March. They collectively stated their optimism. A common view is that the Chinese economic growth rate will hit the bottom in the first quarter of 2012 before climbing up again.
Deutsche Bank, Morgan Stanley, Nomura Group and Royal Bank of Scotland have already increased the expected economic growth rate of China to 8.2%-8.8%. Notable is that the increase happened after the Chinese government lowered its expected GDP growth rate to 7.5%. It was not a surprise that a heated discussion was soon spread in the market.
Nomura Group increased its forecast of China’s economic growth rate from the previous 7.9% to 8.2%. Last year, this institution forecasted that China’s economy had an approximately 70%-chance to have a soft land before 2014.
Qiao Hong, chief economist of Morgan Stanley Greater China, said that Morgan Stanley made an 8.4% growth rate forecast for China’s economy. “Previously our forecast is the second highest among all foreign investment banks. Now our peers have caught up with us. The forecast of China’s economic growth by foreign investment banks previously ranged between 7.9% and 8.6% and recently the Wall Street increased the forecast to 8.2%-8.8% and none of them thought that China’s economy would hard land.”
In Qiao Hong’s opinion, the 7.5% growth rate is the government goal of the government and the 8.4% growth is the forecast of foreign banks. The decrease of economic growth rate of China mainly releases a signal that China is devoting itself to changing its economic growth pattern, revealing its determination of shifting the focus on speed to quality.
In her opinion, though foreign demand of China may still go downward as well. But China’s economy has gradually gone from depending on foreign demand to counting on domestic demand. In addition, chance is still available to make domestic demand driven by consumption instead of investment. “The driving force of China’s GDP will come from two aspects – the investment and the consumption, which will respectively make China’s GDP grow by 4.3% and 4.1%. In comparison, the contribution rate of foreign demand is only zero.”
Different from Morgan Stanley, some investment banks did not nullify the contribution of foreign demand to China’s economic growth rate. Ma Jun, chief economist of Deutsche Bank Greater China, said the positive increase PMI index of Japan, the United States and Europe in recent months was an important reason for Deutsche Bank to increase its forecast of China’s economic growth rate to 8.6%. Historical data revealed that every 1.5 percent increase of the PMI index in the three areas means 5% exports growth rate of China. Deutsche Bank forecasts that Chinas’ export will have an 8% year-on-year growth in the first half of 2012 and the growth will climb to 18% in the second half of this year.
In addition, the house price is getting more and more reasonable and the impact from the property industry on the fixed assets investment seems not so strong. Both UBS and Barclays admitted that the amazing growth in China’s fixed assets investment in the first two months of 2012 was beyond expectation.
Therefore, Ma Jun thought it possible to control the impact of the slowed property industry to the entire economy and the effect won’t last long. The investment growth rate may get stable in the second half of 2012.
Cui Li, chief economist from Royal Bank of Scotland also agreed on this viewpoint. She thought the tiny decline of consumption and investment data at the beginning of this year proved that the economy was following the track of soft land. The fixed assets investment, which was cooled down at the end of 2011, became stable in January and February thanks to the increasing speed of indemnificatory house construction.
Negative opinions for China are wrong
Foreign investment banks denounced foreign media’s negative opinions for China’s economy in unison with sound reasons. The U.S. investment analyst Jim Rogers told the media that “having negative opinions for China is completely wrong”.
“The U.S. went through 15 Great Depressions in the 19th century. We had neither human right, nor legal system and a terrible civil war broke out. But we became the most successful country in the 20th century.” In Rogers’ opinions, the development process of the U.S. revealed that China would meet a lot of setbacks.“The savings rate of Chinese people is very, very high. They save 35% of their income in the bank. Therefore, even their conditions get worse, they have something to count on. This is completely different from the U.S. and other places in the world,” said Rogers.
Which frustration will China’s economy meet in the future? At this point the foreign investment banks and media have a consensus –the debt risk of local financing platforms that is likely to break out anytime.
In a report of Bloomberg, the Chinese Banking Regulatory Commission (CBRC) stressed that the local government debt are controllable for they take a small proportion of the GDP. However, this optimistic opinion seems to be changed recently, meaning that the risk of local government debt is seriously underestimated.
“The CBRC pointed out in March that about 1.8-trillion-yuan local governments’ debts are wrongly classified as the safest credit. The banks made mistakes in calculating the risk when deciding to lend loans or not, this led to the wrong classification of the loans,” a source told Bloomberg.
Zhang Yi, a senior analyst from Moody’s, said: “Our stress test showed that about 20%-33% of these debts will become bad debts without the government’s assistance. If the 1.8-trillion-yuan debt was re-classified, the risk weights will increase by 50%.
In truth, different banks have already extended the term for local government debt to avoid the intensive coming-out of defaults. Local governments also require “the extension of credit terms”. Recently, the CBRC issued documents, forbidding commercial banks in lending new loans to financing platforms. The commercial banks are required to formulate detailed measures of repayment together with the financing platforms. The plan should be submitted to the CBRC by the end of April.
Analysts thought that the regulatory department required the detailed regulatory measures for loans of financing platforms at this time because of the advent of the first round of repayments in 2012.
Foreign media’s negative opinions
When foreign research institutions have not reached the consensus about the future of China’s economy, many foreign media expressed pessimistic and negative opinions about China’s economy. Recently, the Wall Street Journal, Bloomberg, and Fuji Sankei Business all published articles, stating that the feast of highspeed economic growth of China will be over and China will have a “hard landing” thanks to the growth of local government debt.
Some even considered the high-speed growth of China’s economy from 2008 as a dreamscape. They said that 30%-40% of China’s 8%-10% annual GDP growth rate is created by newly-lent loans. And 20%-25% of these loans will turn out to be bad debts eventually, causing the loss accounting for 6%-10% of the GDP. If the loss were deduced, the GDP growth rate of China would be decreased a lot.
When summarizing all the opinions about China’s economy, “soft landing” or “hard landing” is the center of the discussion. Some reviewers said that shrinking export and unsupportive domestic demand in China, which were caused by inflation, RMB appreciation and trade protectionism, have resulted in the supply in excess of demand. Meanwhile, the regulation and control of the real estate market led to the decreasing growth rate of investment and exposed the risk of local financing platform, which provide another solid proof for negative opinions.
The trend of the stock market is considered another reflection of investors’ concerns. Frank Gong, general manager of JP Morgan Asian-Pacific Areas, said: “the current development trend of the stock market is completely different from the one in 2009. Driven by the 4-trillion-yuan investment, China’s economy took the initiative in recovering in 2009, along with which the A-share market got stable. In comparison, the A-share market only had tiny rebound recently when the U.S. stock market hit the historical high. This proved that China’s economy is a follower instead of a leader.”
The Japanese monthly magazine Voice classified its pessimistic opinions into five points. One: the Chinese economy is approaching the point when the property bubble breaks and the Chinese stock market never gets rid of the depression.
Two: the “financing platform”, which raises capital from increasing housing price, now encounters unstable operation and poses the risk of shaking financial system of China.
Three: the European financial institutions are hit by the “sovereign debt crisis” and are reducing the loans lent to emerging countries in consideration of the difficulties in financing and improving self-owned capital adequacy rate.
Four: the worsening European economy led to the shrinking export of China, which greatly struck the export-oriented small- and middlesized enterprises in the coastal areas of China. The RMB appreciation also played an important role in landing this strike.
Five: China has seen its competitive power as the world factory decrease.
Traditional viewpoints held that China could make use of its huge foreign exchange reserves, the massive domestic deposits in China and the low debt level to boost the consumption demand. But the huge foreign exchange reserves are a double-edge sword. An article from the Wall Street Journal said that if China planned to get rid of its huge amount of foreign exchange assets, it would lead to the drastic depreciation of overseas bonds and the appreciation of RMB against the other currencies, causing great loss for China.
In addition, the huge amount of foreign exchange reserves forces China to buy more bonds of U.S. dollars, euro and Japanese yen to keep the value of its existing foreign exchange reserves. But that inevitably increases the size and the risk.
Investment banks have optimistic viewpoints
Different from foreign media, many foreign investment banks changed their viewpoints towards China’s economic outlook in March. They collectively stated their optimism. A common view is that the Chinese economic growth rate will hit the bottom in the first quarter of 2012 before climbing up again.
Deutsche Bank, Morgan Stanley, Nomura Group and Royal Bank of Scotland have already increased the expected economic growth rate of China to 8.2%-8.8%. Notable is that the increase happened after the Chinese government lowered its expected GDP growth rate to 7.5%. It was not a surprise that a heated discussion was soon spread in the market.
Nomura Group increased its forecast of China’s economic growth rate from the previous 7.9% to 8.2%. Last year, this institution forecasted that China’s economy had an approximately 70%-chance to have a soft land before 2014.
Qiao Hong, chief economist of Morgan Stanley Greater China, said that Morgan Stanley made an 8.4% growth rate forecast for China’s economy. “Previously our forecast is the second highest among all foreign investment banks. Now our peers have caught up with us. The forecast of China’s economic growth by foreign investment banks previously ranged between 7.9% and 8.6% and recently the Wall Street increased the forecast to 8.2%-8.8% and none of them thought that China’s economy would hard land.”
In Qiao Hong’s opinion, the 7.5% growth rate is the government goal of the government and the 8.4% growth is the forecast of foreign banks. The decrease of economic growth rate of China mainly releases a signal that China is devoting itself to changing its economic growth pattern, revealing its determination of shifting the focus on speed to quality.
In her opinion, though foreign demand of China may still go downward as well. But China’s economy has gradually gone from depending on foreign demand to counting on domestic demand. In addition, chance is still available to make domestic demand driven by consumption instead of investment. “The driving force of China’s GDP will come from two aspects – the investment and the consumption, which will respectively make China’s GDP grow by 4.3% and 4.1%. In comparison, the contribution rate of foreign demand is only zero.”
Different from Morgan Stanley, some investment banks did not nullify the contribution of foreign demand to China’s economic growth rate. Ma Jun, chief economist of Deutsche Bank Greater China, said the positive increase PMI index of Japan, the United States and Europe in recent months was an important reason for Deutsche Bank to increase its forecast of China’s economic growth rate to 8.6%. Historical data revealed that every 1.5 percent increase of the PMI index in the three areas means 5% exports growth rate of China. Deutsche Bank forecasts that Chinas’ export will have an 8% year-on-year growth in the first half of 2012 and the growth will climb to 18% in the second half of this year.
In addition, the house price is getting more and more reasonable and the impact from the property industry on the fixed assets investment seems not so strong. Both UBS and Barclays admitted that the amazing growth in China’s fixed assets investment in the first two months of 2012 was beyond expectation.
Therefore, Ma Jun thought it possible to control the impact of the slowed property industry to the entire economy and the effect won’t last long. The investment growth rate may get stable in the second half of 2012.
Cui Li, chief economist from Royal Bank of Scotland also agreed on this viewpoint. She thought the tiny decline of consumption and investment data at the beginning of this year proved that the economy was following the track of soft land. The fixed assets investment, which was cooled down at the end of 2011, became stable in January and February thanks to the increasing speed of indemnificatory house construction.
Negative opinions for China are wrong
Foreign investment banks denounced foreign media’s negative opinions for China’s economy in unison with sound reasons. The U.S. investment analyst Jim Rogers told the media that “having negative opinions for China is completely wrong”.
“The U.S. went through 15 Great Depressions in the 19th century. We had neither human right, nor legal system and a terrible civil war broke out. But we became the most successful country in the 20th century.” In Rogers’ opinions, the development process of the U.S. revealed that China would meet a lot of setbacks.“The savings rate of Chinese people is very, very high. They save 35% of their income in the bank. Therefore, even their conditions get worse, they have something to count on. This is completely different from the U.S. and other places in the world,” said Rogers.
Which frustration will China’s economy meet in the future? At this point the foreign investment banks and media have a consensus –the debt risk of local financing platforms that is likely to break out anytime.
In a report of Bloomberg, the Chinese Banking Regulatory Commission (CBRC) stressed that the local government debt are controllable for they take a small proportion of the GDP. However, this optimistic opinion seems to be changed recently, meaning that the risk of local government debt is seriously underestimated.
“The CBRC pointed out in March that about 1.8-trillion-yuan local governments’ debts are wrongly classified as the safest credit. The banks made mistakes in calculating the risk when deciding to lend loans or not, this led to the wrong classification of the loans,” a source told Bloomberg.
Zhang Yi, a senior analyst from Moody’s, said: “Our stress test showed that about 20%-33% of these debts will become bad debts without the government’s assistance. If the 1.8-trillion-yuan debt was re-classified, the risk weights will increase by 50%.
In truth, different banks have already extended the term for local government debt to avoid the intensive coming-out of defaults. Local governments also require “the extension of credit terms”. Recently, the CBRC issued documents, forbidding commercial banks in lending new loans to financing platforms. The commercial banks are required to formulate detailed measures of repayment together with the financing platforms. The plan should be submitted to the CBRC by the end of April.
Analysts thought that the regulatory department required the detailed regulatory measures for loans of financing platforms at this time because of the advent of the first round of repayments in 2012.