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Strategies & Market Trends : China Warehouse- More Than Crockery -- Ignore unavailable to you. Want to Upgrade?

To: RealMuLan who wrote (614)	8/30/2003 11:02:28 PM
From: BubbaFred	Read Replies (2) \| Respond to of 6370

China's Central Bank Takes Away Punchbowl: William Pesek Jr. Aug. 27 (Bloomberg) -- Central banks, it's often said, are there to take away the punchbowl just as the party gets going. China's did just that this week, and investors shouldn't miss the significance of the move. China is the sexiest economic story there is, and its potential is indisputable. The world's most populous nation also boasts the most dynamic economy. Its rate of foreign investment has other nations wondering how to get in on China's boom. Amid all the excitement, little attention is being paid to the risks. One of the biggest is China's fragile financial system, which many observers believe harbors a bad-loan problem that dwarfs Japan's. You'd think that when the legs on which an entire economy stands are shaky, investors would care. Few seem to. The hype surrounding China's rise is reminiscent of the dot- com mania of the late 1990s. Like Internet companies then, China is thought to be run by geniuses with boundless prospects. Companies that don't join in will miss capitalism's greatest gold rush. But two developments this week serve as reminders that investing in China comes with risks, and big ones. First was the People's Bank of China's move to increase reserve requirements on commercial banks. It wants to curb money supply growth in an economy experiencing rising corporate defaults despite 8 percent growth. Bad Loans Second, China plans to spend as much as 1 trillion yuan ($121 billion) to bail out the nation's four biggest state banks for a third time, according to the South China Morning Post. The money would boost the capital adequacy ratio of Agricultural Bank of China, Bank of China, China Construction Bank and Industrial & Commercial Bank of China to 8 percent from 5 percent in five years and reduce their average non-performing loan ratio to 15 percent of total credit. Beijing says bad loans total 19.6 percent; many private analysts think the real figure is more than double that. Beijing is concerned banks won't be able to write off enough bad loans by 2006, when China fully opens its financial markets. And it should be. China continues to pursue a Japan-like strategy of thinking it can grow its way out of its bad-loan problems. Tokyo's been trying that -- and failing -- for 13 years now. Taken together, the steps signal recognition that China has problems. The central bank's fears are more than justified. In July, China's financial institutions made loans at the fastest pace since 1996. This month, monetary officials said publicly that excess money supply and runaway credit might hurt the economy. Real Estate One of the biggest risks is the increased concentration on lending to real estate developers. Banks, sitting on excess liquidity, have been hard pressed to lend it to households or a more diversified group of businesses. That's led to excess credit being pumped into the real estate sector. China's M2, the broadest measure of money supply, rose to 20.6 trillion yuan last month, up 21 percent from a year ago, the seventh time the growth exceeded central bank targets. The central bank in May raised the annual target to 18 percent, from 16 percent at the beginning of this year. None of this means China's economy is about to implode -- far from it. While observers like Gordon Chang, who wrote ``The Coming Collapse of China,'' and Joe Studwell, author of ``The China Dream,'' have some valid concerns, Beijing isn't acting wildly irresponsible on the economy. After all, the government there faces what Columbia University professor Jeffrey Sachs calls the great development challenge in history. But China's outlook may not be as pretty and clean as many investors seem to think. Its banking troubles continue to mount and cast a shadow over China's near-term role in the global economy. Rising non-performing loans could cause a credit crunch and undermine the economy. Vulnerabilities What's ironic is that the world's biggest economies are fretting over China's strengths, not its vulnerabilities. A financial crisis in China would have huge implications for the global economy. Yet, rather than asking Beijing what it's doing to avoid one, officials in Washington, Tokyo and Frankfurt are focused on China's currency policy. Talk about missing the big picture. China's currency, the yuan, is pegged to the weakening U.S. dollar. In the eyes of manufacturers, that's making China's products artificially cheap and wreaking havoc with global growth. Yet that's nothing compared with what a Chinese banking crisis would do to their profits. Let's hope China's leaders understand what's at stake here. Policy makers say at least 7 percent growth is needed annually to create jobs for millions of unemployed, and to absorb the shock of opening China's economy. China's ability to clean up its banking system will say much about its growth rates in the years ahead, and how well it can maintain social stability. China's rise is a force to be reckoned with, not just in Asia but the entire world. It's thriving while the U.S., Japan and many of Europe's biggest economies walk in place. In the long run, though, China will only be as strong as its underlying financial system. And it's not looking very vibrant at the moment. Last Updated: August 26, 2003 22:09 EDT quote.bloomberg.com

To: RealMuLan who wrote (614)	8/31/2003 11:38:58 AM
From: BubbaFred	Read Replies (1) \| Respond to of 6370

China is forced to raise the value of RMB as token gesture and for public relation. So the 5% move can be stretched out over 6 to 12 months.