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IMF urges China not to stimulate economy because of credit risk
THE AUSTRALIAN AUGUST 17, 2015 12:00AM

David Uren

Economics Editor
Canberra

China demand Source: TheAustralian
While Chinese authorities have been telling Treasurer Joe Hockey they will do “whatever it takes” to achieve their growth targets, the International Monetary Fund has told the government to avoid further stimulus for fear of raising the risk of a credit crunch.

The fund’s annual review of the Chinese economy says the government should accept growth falling short of its target, suggesting a figure of 6.5 per cent this year and 6 per cent in 2016 would be reasonable.

The fund says reining in the vulnerabilities generated by debt-fuelled growth, particularly since the global financial crisis, should remain the top priority.

“Slower growth, of course, is not a goal unto itself but an unavoidable by-product of reining in vulnerabilities,” the staff report says.

“Over the medium term, this unpleasant trade-off can only be improved by structural reforms that create new sources of growth. The faster the progress, the sooner the growth will bottom out in a sustainable way.”

In particular, the IMF board advised that “monetary policy should take a wait-and-see ­approach, especially as significant easing would risk exacerbating the credit and investment vulnerabilities”.

The IMF’s annual review, released on Friday night, followed the release last week of a dismal set of activity indicators for July, showing falls in steel, motor vehicle and cement production, lower heavy manufacturing investment, and further declines in overall construction, including both residential and infrastructure spending.

Westpac’s international economist Huw McKay said the “bleak” figures would force everyone to lower their estimate of where Chinese interest rates would wind up.

He is predicting a further 75 basis points of cuts to the one-year lending rate.

The tension between reacting to the weakening pace of growth and persisting with the reform needed to put the Chinese economy on a more sustainable footing is the result of high levels of debt and the diminishing returns from the investment that China has relied upon to fuel its growth.

Total debt is high, with household, corporate and local government debt reaching 187 per cent of GDP.

Corporate and local government debt has risen by 50 per cent of GDP since the financial crisis. Lending to state-owned enter­prises has resulted in excess capacity and declining profitability.

“While the high level of domestic saving has made it easier to finance this growth model, it is not sustainable, as falling investment efficiency will eventually drag down GDP, household income, and thus savings. A decline in asset prices would also pose risks,” the IMF says.

The IMF says banks should be writing off bad debts in the state-owned enterprise sector at a faster rate. The concern is that banks saddled with bad debts they won’t write off and insolvent companies continuing to operate will result in the “zombie” companies and banks that stalled Japan’s growth for much of the past two decades.

It urges bank write-offs of 1.5 per cent of GDP each year out to 2020 (roughly $US200 billion a year) supported by public capital injections and asset management companies.

A message that the chair of China’s National Development and Reform Commission Xu Shaoshi left with Hockey following their meeting in Canberra last week was that the authorities were determined to achieve their target for job growth of 10 million positions a year, and that with 7.2 million jobs created in the first half of the year, they were confident of doing so.

The IMF says these job targets are being inflated by state-owned enterprises keeping on staff when there is no work to do, and considerable excess ­capacity.

“Stepped-up reform of SOEs and adjustment in overcapacity sectors would, in the near term, release excess labour and push up unemployment rate by half to three-quarters (of a) percentage point,” the fund says. “However, this would facilitate the structural transformation — including services sector expansion and new investment in productive enterprise — to a more sustainable growth path. In contrast, delays in reform implementation would further build up vulnerabilities and weaken medium term employment prospects.”

The fund notes that statistics showing unemployment rates of 5 per cent do not reflect the migrant workers thrown out of work who are returning home.

However, the fund also says employment is being generated as the Chinese economy shifts from heavy manufacturing to more ­labour-intensive service sector work, supported by domestic consumption. There has been progress in raising the level of domestic consumption which, over the past year, contributed fractionally more to economic growth than investment for the first time.

The fund would like to see a more aggressive reduction in public sector investment, including local government infrastructure, with the funds released used for more social spending. However, this would also result in higher unemployment in the short-term.

The slowdown has been most marked in half a dozen provinces, such as Hebei and Tianjin, which have large concentrations of heavy industry. With 15 per cent of GDP, they accounted for 80 per cent of the slowdown in the past year, the IMF estimates.

This highlights the risk for Australia, which is heavily dependent upon demand from China’s heavy industry in these provinces. An analysis of the potential spill-over from China’s slowdown to Australia by Barclays chief economist Kieran Davies shows that a 1 per cent fall in China’s economic growth rate would slow Australia’s economy by at least 0.3 per cent. However, Davies says the number is probably larger than this, as China’s demand for commodities is already much weaker than its GDP growth.

He estimates Chinese demand for Australia’s exports of goods and services is down from a record 7.1 per cent of GDP in 2013-14 to 5.8 per cent last year and is likely to fall further as commodity prices drop.

However, Austrtalia remains the western country with the greatest exposure to the Chinese economy. “The RBA is reluctant to cut further given record household leverage and strong house prices, but we see the downside risk to China underpinning the risk of another rate cut, even as our base case remains that rates are on hold for an extended per­iod,” Davies says.

The IMF report, which was completed ahead of last week’s exchange rate moves, reveals dissension among its member countries about China’s exchange rate.

The fund notes that although China’s current account surplus has fallen sharply as a share of GDP, the country’s external accounts are still too strong.

The fund urges that China should move to a fully floating exchange rate within two or three years. With growing liberalisation of capital movement, the fund says controls on the exchange rate will compromise the effectiveness of monetary policy.
RIP for the 112, and best wishes for the 95, and those remained in hospitals...Sad

Rescuers work to clear China blast site of chemicals before rain falls

TIANJIN, China - Chinese soldiers and rescue workers in gas masks and hazard suits searched for toxic materials in China's port of Tianjin on Sunday as Premier Li Keqiang arrived to offer condolences, days after explosions flattened part of a national development zone.

The goal is to clear the chemicals before any rain falls, which could create further toxic gas.

The death toll rose to 112 from Wednesday's disaster, which sent massive yellow and orange fireballs into the sky, hurled burning debris across a vast industrial area, crumpled cars and shipping containers, burnt out buildings and shattered windows of nearby apartments.

The number of missing rose to 95, most of them fire fighters, state media said, suggesting the toll would rise significantly. More than 720 people remained in hospital.
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http://www.todayonline.com/world/china-b...ing-xinhua
[早安山东]临沂兰陵:只存款不能取钱 这家“银行”有点怪
http://news.cntv.cn/2015/08/14/VIDE14395...3943.shtml
China's financial system gets huge cash injection

2 hours ago
Central bank triples amount pumped in - a sign of Beijing's worry over capital outflows

BEIJING • China's central bank tripled the amount of cash added to the financial system in its open market operations yesterday - the largest amount in 19 months - signalling Beijing's concerns about capital outflows after the recent weakening of its currency.

The central bank conducted 120 billion yuan (S$26.4 billion) of seven-day reverse-repurchase agreements, or reverse repos - a short-term loan to commercial lenders in the money market.

The cash injection is the biggest of its kind since January last year, when the People's Bank of China (PBOC) offered 150 billion yuan via the 14-day reverse repos, the Wall Street Journal reported. The interest rate was kept unchanged from last week at 2.5 per cent.

"There have certainly been capital outflows associated with the yuan's recent weakening and today's move by the PBOC is in response to the tightening liquidity conditions," said economist Suan Teck Kin of United Overseas Bank.

Central bank data released last Friday suggests that funds had been flowing out of China even before the latest currency move, due to a weakening Chinese economy and expectations of rising US interest rates.

Short-term money-market interest rates have risen sharply in view of capital flight since Beijing unexpectedly engineered a "one-off adjustment" by devaluing the yuan against the dollar by 1.9 per cent a week ago. As China continues to slow, and the PBOC spends more foreign reserves to prevent the yuan's free fall, analysts say the authorities will need to take decisive measures, such as cutting banks' reserve requirements.

"As the PBOC tries to stabilise markets, keeping liquidity ample to ensure proper functioning in the domestic financial system is essential," said DBS Group Holdings strategist Eugene Leow.

Central bank intervention to prop up the yuan removes funds from the financial system and risks driving borrowing costs higher unless the monetary authority releases additional cash.

The nation's foreign exchange reserves are expected to drop by some US$40 billion ($56.3 billion) a month for the rest of this year as the central bank buys the Chinese currency. China may cut banks' reserve-requirement ratios as liquidity tightens amid expectations for a weaker yuan, according to a China Securities Journal commentary.

Increases in the interbank money rate, drops in excess reserve levels at banks and a decrease in yuan positions will pressure cash supply, according to the article.

"The more intervention in the currency market, the tighter the money market will be," said Commerzbank AG economist Zhou Hao. "If the PBOC injects too much, the market will worry about further devaluation pressure. It's a balancing act."

The higher funding costs in the money market have also led to a spike on Chinese government bond yields, especially the short-dated ones that are typically more sensitive to policy outlook.

The yield on the benchmark one-year government bond is now at 2.3 per cent, up from 2.19 per cent before Beijing moved to devalue the yuan.
一篇短文看懂天津港事件--作者李波
http://tieba.baidu.com/p/3983092253
·        OPINION
 
·         Aug 20 2015 at 9:18 AM 
 
·         Updated Aug 20 2015 at 2:05 PM 
·         
·        How China's $US600 billion trade surplus will cushion it from collapse

Because China has a trade surplus of $US600 billion ($816.48 billion) or 6 per cent of GDP - and is therefore accumulating foreign exchange - there is no chance that reserve losses will spin out of control. Reuters
by Ambrose Evans-Pritchard
The situation in China is, to borrow an old Viennese saying, desperate but not serious. Countries with a tight exchange controls and state banking systems may come to grief in the long-run, but they do not face the sort of financial collapse seen in the US and Europe in 1931 or 2008.
Because China has a trade surplus of $US600 billion ($816.48 billion) or 6 per cent of gross domestic product (GDP) - and is therefore accumulating foreign exchange - there is no chance that reserve losses will spin out of control.
Jens Nordvig from Nomura says China has $US3.65 trillion in reserves to cover foreign currency debts of $US1.135 trillion, a ratio of 322 per cent.
This a far cry from the East Asia Crisis in 1997-98, when the ratio was 33 per cent in Thailand, 27 per cent in Indonesia and 22 per cent in Korea. All these countries had current account deficits. China does not.
The economy is already coming back to life after hitting a brick wall over the winter. Credit growth jumped to a 31-month high in July. The monetary base has grown at a 20 per cent rate over the past three months, implying an economic spike later this year.
It is worth remembering what has just happened in China. The country is recovering from a ferocious monetary and fiscal shock. The authorities refused to react as falling inflation caused one-year lending rates to ratchet up to 5 per cent in real terms from zero in late 2011.
This was deliberate, of course. Premier Li Kequiang intended to break the back of the property bubble and wean the country off its $US26 trillion credit dependency. But pricking bubbles is no easy task. The authorities overshot.
The crunch came just as fiscal policy went awry. Budget spending contracted in the first quarter. This was not intended.
There was a sudden stop for local governments after they were prohibited from taking out bank loans. The plan was to switch to bond issuance instead, but the bond market was not up and running until May. This is why China crashed into a recession.
The Communist Party has now reverted to stimulus as usual. Local governments issued $US200 billion of bonds over June and last month. Beijing coyly describes its fiscal spending as "proactive": some might say turbo-charged.
NO MYSTERY WHY PROPERTY IS PICKING UP
The property crash is already a memory. House prices have risen for three months. Sales were up 18.9 per cent last month. This matters more than anything happening on the Shanghai stockmarket. Moody's says real estate in all its forms makes up a quarter of Chinese GDP.
The "Tier I" cities led by Beijing have risen 6.5 per cent over the past year, and Shenzhen is up by 25 per cent.
It is no mystery why property is picking up. The government has abandoned its assault on speculation. It slashed the minimum down payment from 60 per cent to 40 per cent in March for second homes. Interest rates have been cut four times.
Housing in the smaller cities has bottomed out, but is still deeply depressed. The International Monetary Fund warned in its latest Article IV report that inventories for the "Tier 3 & 4" cities have risen to three years' supply, and these account for half of all construction. "Working off the excess will require a multi-year adjustment," it said.
At the risk of sticking my neck out, I think that Gothic warnings of a Chinese collapse this year will look silly by Christmas. The reckoning has been delayed again.
The "devaluation" saga this month is a red herring. The People's Bank of China has switched from a dollar peg to a "managed float" to protect itself from any further surge in the US dollar as the Fed tightens policy.
This is not a devaluation. It is an insurance policy against a further rise after a 22 per cent jump in the trade-weighted exchange rate since mid-2012.
There is a fashionable suspicion that the People's Bank of China is hiding behind a "market-led" exchange rate to disguise what is really a beggar-thy-neighbour policy to hold on to export share, but it is far from clear whether China has anything to gain from doing so.
It would risk setting off the very capital flight most feared. It would send a deflationary shock through a fragile global economy, and risk a further escalation in Asia's simmering currency wars. It would invite an iron-fist response from Washington. The costs are high; the benefits scant.
True, Chinese exports are languishing, though over half of the 8.3 per cent fall in exports last month was due to base effects. Yet the "trade intensity" of China's economy is plummeting as the country moves beyond export-led catch-up growth. World bank data shows that exports peaked in 2006 at 36 per cent of GDP. They fell to 22.6 per cent last year.
China is becoming a fortress economy like the US, moving to its own internal rhythm. As Stephen Jen from SLJ Macro Partners puts it, the Chinese downturn is "soft on the inside and hard on the outside".
Nor is there any need to risk a currency war. The economy has been generating 1.2 million jobs a month this year. There are still more vacancies than candidates.
None of this is to say that China's economy is healthy. Credit is still rising by 7 percentage points of GDP each year, pushing the debt ratio ever further into the danger zone. It will be 270 per cent by next year.
But China is not in immediate crisis. The Reserve Requirement Ratio for banks is still 18.5 per cent. The PBOC can slash this to 6 per cent - as it did in the late 1990s - flooding the system with $US3 trillion of liquidity.
The time to worry is when China has exhausted this last buffer. This August scare is a false alarm.
The Telegraph, London
The Telegraph, London
What the China bears are missing
  • PETER CAI
  • BUSINESS SPECTATOR
  • AUGUST 21, 2015 2:23PM



[b]For many investors and analysts, the world’s second largest economy is in deep trouble. The last month’s sharemarket crash wiped as much as $US3.5 trillion off the Shanghai stock exchange — that’s about double the size of Australia’s GDP.[/b]
While people were still recovering from the shock of the sharemarket crash, China’s central bank decided to allow the market to play a bigger role in setting the country’s exchange rate. The result has been devastating for emerging market currencies and commodity prices. For pessimists, this is a clear sign that Beijing is on its last legs and it has been forced to turn to devaluation to boost its stalling export industry.
Perhaps more importantly, investors and analysts have started to question whether China can even manage to grow at 7 per cent this year. An official target set by the central government. For decades, Beijing has always managed to beat the official goal and often by a wide margin. The fact that the market has started to question whether it will achieve the target this year is an ominous sign.
Though government statisticians declared the country’s growth rate during the second quarter to be 7 per cent, many people didn’t believe the official data. Analysts point to weak manufacturing, industrial growth, electricity consumption and freight movements as evidence that Beijing is manipulating the data to suit its own narrative.
Don’t blame them; the Chinese premier Li Keqiang was sceptical of his country’s own data when he was in the less illustrious post of party boss of Liaoning province, the rust belt of the country. In 2007, he told the US ambassador he preferred to look at railway freight, electricity consumption and loans disbursed by banks to gauge the true state of the economy.
In short, pessimism about China is gaining ascendancy and one might even say it is pretty much the mainstream view right now. According to a new Bank of America Merrill Lynch survey of global investors, 52 per cent of them now regard a Chinese recession as the biggest ‘tail risk’ for the world, replacing the never-ending Greek crisis.
Are we overplaying the bad situation in China?
Nicholas Lardy, one of the foremost experts on the Chinese economy, certainly thinks so. Lardy thinks many analysts are looking at the wrong indicators in China and are misinterpreting the central bank’s decision to introduce a more flexible exchange rate regime.
First, let’s address the issue of overstating the GDP. Critics point to the country’s weak industrial production, export and investment figures as proof that the country is fudging its number. Lardy, a senior fellow at the Peterson Institute of International Economics, points to a salient fact that many people choose to ignore: the biggest contributor to the country’s GDP is now the services industry.
“ … the sceptics have taken insufficient notice of China’s progress in transitioning to its new model of economic growth, one less dependent on expanding industrial output, investment, and exports and more dependent on expanding private consumption expenditure”, he says.
Between 2011 and 2014, the size of the service sector as a share of GDP rose by about 4 percentage points to 48 per cent and, at the same time, the share of the industrial sector dropped to 43 per cent of GDP. This is a marked change from a decade ago, when the industrial sector accounted for 47 per cent of the GDP while the service sector only accounted for 41 per cent of the economy.
Considering the size of China’s economy — it’s a $US10 trillion behemoth — the transition is even more impressive. Many services are booming in China, the e-commerce sector grew by 31.4 per cent in 2014. The entertainment sector has been growing at an average of 17 per cent a year between 2010 and 2015. In health care, McKinsey predicts the growth in spending will grow from $US357 billion in 2011 to about $US1 trillion in 2020.
If you pause for a moment and think about the growth momentum in these sectors, the grim situation in China looks a bit less frightening. The consumption trend is also backed by sustained wages growth. The country’s disposable income has been growing at a double-digit rate for more than a decade and factories are now paying more than 100,000 yuan ($21,000) in annual wages to skilled workers.
Nicholas Lardy believes one of the reasons that sceptics are overlooking the positive story in China’s development is there are no high frequency data to support the analysis above. “At best these data are quarterly, some are annual and some are released with a very long time lag. The rising demand for a real-time analysis of the Chinese economy and growth performance has led to overreliance on industrial and investment data, which has been published monthly,” says the veteran China watcher.
This was a reasonable approach in the 2000s when industry was the main driver of China’s growth, but not today when the sources of growth have evolved.”
Though China’s economic growth story is far from perfect or even healthy, it is wrong to focus exclusively on data from the industrial sector that is no longer the main driver of the country’s GDP.
Commentators and analysts invented the ‘Li Keqiang Index’ as a way of gauging the true state of the Chinese economy, it’s about the time we started to dig into Alibaba data, box office figures and sales of medicine in order to better understand the true dynamics of this rapidly changing economy.
China manufacturing tumbles to six-year low
The weaker-than-expected numbers add to growing concern over the health of the world's second-largest economy
[Image: chianexports_1293687b.jpg]Workers assembling toys on a production line at a toy factory in Shantou, in China's eastern Guangdong province.  Photo: AFP



By AFP
7:42AM BST 21 Aug 2015
[Image: comments.gif]8 Comments

A key indicator of China's manufacturing activity slumped to a 77-month low in August, an independent survey showed Friday, fuelling concerns of further deceleration in the world's second-largest economy.
The preliminary reading of Caixin's Purchasing Manager's Index (PMI) came in at 47.1 this month, the Chinese media group said in a joint statement with Markit, a financial information services provider that compiled the survey.
The figure, which fell from July's final reading of 47.8, was the worst since a reading of 44.8 in March 2009, according to Markit's data.
It was also significantly weaker than the median estimate of 48.2 from a poll of economists by Bloomberg News.
The index, which tracks activity in factories and workshops, is seen as a key barometer of the country's economic health. A figure above 50 signals growth, while anything below indicates contraction.
"There is still pressure on the front of maintaining growth rates," He Fan, an economist at Caixin Insight Group, said in the statement.
"To realise the goal set for this year, the government needs to fine tune fiscal and monetary policies to ensure macroeconomic stability and speed up the structural reform."
Beijing earlier this year set the annual target for economic growth at "around 7pc".
China's economy, a key driver of global growth, expanded 7.4pc last year, its weakest since 1990, and has slowed further this year, growing 7pc in each of the first two quarters.
Nomura economists said Friday's PMI data suggested growth momentum had weakened in the July-September period.
[Image: china_2660807b.jpg]The Chinese dragon is losing its fire  Photo: Alamy
"We expect monetary policy easing to continue," they said in a note.
Authorities accept the need to steer China's growth lower to make it more sustainable and driven by consumer demand rather than investment, but have taken stimulatory measures to put a floor under the slowdown.
Chinese stocks - which have been extremely volatile in recent months - extended falls after the figures came out, with the benchmark Shanghai Composite Index down 3.04pc.
Julian Evans-Pritchard, an analyst with research firm Capital Economics, blamed the disappointing August PMI reading on last week's massive explosions in the northern port city of Tianjin, which killed at least 114 people and caused more than a billion dollars in financial losses.
Factory closures in Beijing and surrounding areas to ensure blue skies above the notoriously polluted city for a huge military parade next month commemorating victory over Japan in World War II were another factor, he said in a report.
"We still think the downside risks to short-run growth are now overstated," he said, adding the government "has plenty of policy ammunition" and will not allow growth to slip much further.
In a bid to boost activity, the central bank has cut interest rates four times since November and has also lowered the reserve requirement ratio - the amount of money banks must put aside - three times.
It said Wednesday that it has also made $17bn available to 14 financial institutions to maintain liquidity in the banking system to support growth.
But the People's Bank of China's sudden devaluation of the yuan last week, which fell nearly 5pc over a three-day period, has raised concerns China's economy is growing more slowly than thought.
The bank said the cut was part of reforms to make the exchange rate system more market-oriented, although it was widely seen as a move to help stimulate stalling exports by making them more competitive.
The PMI sub-index for new export orders decreased at a faster pace in August, indicating the impact of the yuan's falls was yet to kick in.
"The positive effect of RMB depreciation on exports will more likely to be felt in next year," said Nomura analysts.
Japan 2.0 coming, just a matter of time now...

sent from my Galaxy Tab S
(22-08-2015, 08:11 AM)BlueKelah Wrote: [ -> ]Japan 2.0 coming, just a matter of time now...

sent from my Galaxy Tab S

told u whole world is bankrupt... financial institutions are bankrupt... nowhere is safe...

Now financial mkts are forcing world leaders to come up with new strategy...

Basically no one is safe...