Sunday, July 18, 2004

China Watch: China Cooked Books Meltdown?

As the oldman noted before, in the past week or so Investor's Business Daily had a front page story about how the nominal GDP growth seemed to be reined in by the central government's margin restrictions. However The Asia Times leads with two insider articles that indicate the economic bubble just went underground and under the table.

HONG KONG - The Great Chinese Land Grab is hurtling on, flouting official diktats, benefiting the rich and robbing poor farmers of cropland in a vast nation that has relatively little arable land.

Over the past seven years, China has lost 66,670 square kilometers in arable land, according to the Ministry of Land Resources, an estimate that many experts consider grotesquely below the actual figure and not reflecting desertification, poor management and unbridled illegal land grabs. While China is a vast country, the amount of arable land for a population of 1.3 billion, more than 800 million of them farmers, is relatively small and intensely cultivated. The situation is getting worse; China is now planning to lease cropland from Vietnam to help feed the Chinese people.

In April Chinese Premier Wen Jiabao announced a series of measures to curb widespread illegal land requisition nationwide, both in an effort to rein in the red-hot real-estate sector and to protect the lawful rights, interests and livelihood of millions of farmers and others who depend on the rural economy. It is these rural poor, already missing out on China's new-found wealth, enjoyed by the relative few, who bear the brunt of this nationwide wave of land appropriation.

Industry experts consider Wen's reining-in measures to be justified and timely, even too late, in view of the over-supplied property market with a recorded vacancy rate of 14% at the end of 2003. However, not all the subordinate provincial and local governments dance to the premier's and the economists' tune.

That's pretty extreme, if the Chinese government is having to lease arable land to supply food production to the Chinese people. The artificial incentives of speculation must be incredible to snap up farmland and convert it to speculative real estate development while people are literally starving on the streets. Apparently as the second article notes, it's also not limited to the real estate market as the official controls and numbers of Beijing are being flouted by the black market and unofficial economy as well as being openly opposed because of the wave of greed.
'Cool down' decrees fall on deaf ears
What happened is that, with energy and transportation sectors already bursting at the seams under the deluge of investment in industries such as steel, cement and real estate, and with bad debts piling higher on banks' books, Beijing tried to rein in the runaway enthusiasm, issuing a moratorium on further investment in those key industries. The central state's decree fell on deaf ears. Local governments kept pouring money into these booming sectors. First-quarter investment in infrastructure jumped another 47%. Infuriated, Beijing resorted to the one method that it finds most handy and proves most effective - it sacked the party secretary of one city that is home to a steel mega-project.

That would have been the end of the story. By tradition, all officials, all newspapers, experts and academics would sing along about the "necessity and wisdom" of the center's decisions, until the next wave of opportunities present themselves or a new crop of enterprising, opportunistic officials grow up.

But in a sign of changing times, some newspapers have aired opinions criticizing the central decisions as coming too late, being too arbitrary, too simplistic and ill-advised.

China Business Daily on May 9 reported that thanks to unstoppable rumors about implementation of macro-policies, panic is setting in and that damage has been done: in 17 trading days, Shanghai's stocks index dropped 200 points. Commodities prices such as copper, rubber and soybeans also lost a lot of ground. Even the Hong Kong Hang Seng Index's dive under 12,000 points was blamed on Beijing. The paper went on to quote the president of the finance school of the Northeast Finance University as warning against an over-drastic adjustment under the current pressure of unemployment and the reform of state-owned enterprises. Dr Huang Jinlao, head of domestic financial research at Bank of China, agreed, saying that administrative measures should be avoided as much as possible, because it is up to the banks to decide where to invest, free from government intervention.

Local governments, too, tried to make themselves heard through sympathetic media. A Jilin provincial official told Economy Magazine that some of the central government policies are not very reasonable, because the decision-makers are too high above, and too far away, to have a clear grasp of everything at the grassroots level. The southern Yunnan province believes its economy is lagging too far behind the rest of the country. So investment into the "western" area should be increased rather than decreased. "The problem is that investment in our province is not hot enough," the magazine quoted the locals as saying.

In a May 11 article, the Chinese Enterprise Association made a veiled criticism of the "braking policy". It called attention to "two disadvantages of the administrative measures" adopted by the government: 1) The government is suspected of returning to a command economy, contrary to its own overarching market reforms. And 2) Government controls may harm the healthy parts of economic growth and add to volatility.

For once I agree with the central bank and government policies of China with regards to its economy. However the sins of the past including backroom deals and the mercantile culture of the Chinese has reawoken the capitalist demon of greed for profit. There is immense demographic and economic pressure bottled up inside China and it seems that the people are acting subversively toward the central government, even if in this case a further glut of speculation will only create tears later. Right now our economy has become linked to the Chinese economy, and truth be told the credit restrictions put into place by the banking system were rather mild in China. It seems this dragon is about to throw off its chains, but will it soar or crash?


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