China’s stock market falls 14 percent in one week
Monday, 16 June 2008.
Panicky mood of speculators is a sign of tougher times ahead
Vincent Kolo, chinaworker.info, Hong Kong
“This month has seen an earthquake in the stock market. It will be very hard for confidence to revive,” a Shanghai-based securities analyst told the South China Morning Post (13 June, 2008). China’s stock market slid 13.89 percent during the last week, imitating in a more extreme fashion, the falls on most global bourses. This was its worst weekly performance since 1996. Another Chinese analyst commented, “Investors worry that the market may have entered a long-term slump that could last well after the Olympics” in August.
Of the world’s 20 largest stock markets, China’s has suffered the biggest losses in 2008. The Shanghai stock market’s main measure, the Shanghai Composite Index, has plummeted 53 percent since its peak during October’s five-yearly conclave of the ruling ’communist’ party. On 16 October 2007, the index was a ’heavyweight’ 6,092.1 points, while last Friday’s close saw it stripped down to a 2,868.8 point weakling. As Bloomberg News (10 June) reported, ”the rout has wiped at least $1.31 trillion from China’s stock market” – this is four times the amount global banks have so far lost on the subprime meltdown.
Struggling with inflation
Last week’s slide was blamed on new measures to tighten monetary policy by the central bank, People’s Bank of China, as it tries to rein in inflation, which is at a 12-year high. Although the consumer price index (CPI) slowed to 7.7 per cent in the year to May from and 8.5 per a month earlier, there are fears this may not represent a turning point. The effects of the Sichuan earthquake on food prices (the province produces ten percent of China’s pork) plus the effects of higher oil and fuel prices can push inflation up further in the year ahead. Also, data this week showed that producer price inflation – the price of goods leaving factories – rose to 8.2 per cent, exceeding consumer inflation.
The central bank therefore raised banks’ reserve ratio requirements, the fifth such increase this year, to a record 17 percent, rising again to 17.5 percent on 25 June (this is how much capital banks must hold in reserve as a proportion of their loans). Many especially smaller and medium sized companies are now facing a credit crunch as it becomes harder to obtain fresh loans.
The central bank is unwilling to raise interest rates – a traditional method to fight inflation – because this would widen the gap still further between its one-year lending rate of 7.47 percent and rates in the US that have been slashed to just 2 percent under the impact of the banking and credit crisis. Higher interest rates would lead to even faster appreciation of the renminbi which has risen by 20 percent against the US dollar since July 2005. Yet capitalist agencies are calling on the People’s Bank of China to raise rates pointing out that with consumer price inflation at 7.7 percent, real interest rates are ’negative’.
As the dollar slides, China is suffering from an inward flood of so-called ’hot money’ seeking to profit from the rising renminbi. Some economists believe that these capital inflows are now bigger than China’s earnings from foreign trade. In April, a record $74 billion entered China from overseas. China’s trade surplus and foreign direct investment only accounted for one-third of this sum, leaving $50.16 billion unaccounted for. This is purely speculative capital, which is betting on the continued rise of the renminbi. This inflow in no way benefits economic development – it doesn’t create jobs or products, but in a number of different ways it does stoke inflation. It is related to the phenomenon of speculation in oil and other commodities on global markets, which is pushing up prices to record levels, although, like all bubbles, this too will eventually burst and give way to falling prices.
The central bank has to ’sterilise’ these capital inflows through a complex process whereby it first buys the foreign exchange and then, to prevent the money supply from growing too fast, which is the main cause of inflation, it must mop up the additional yuan notes by issuing local currency bonds upon which it pays interest. This is a loss-making affair for the Chinese state and people. Goldman Sachs have estimated that the People’s Bank of China is losing roughly 103 billion yuan ($15 billion) per month by holding foreign exchange (which is going down in value) rather than yuan assets (going up). 103 billion yuan is more than all the funds set aside for reconstruction in the Sichuan earthquake zone (80 billion yuan) for the whole of 2008, and this sum is spent every single month! No wonder there is a growing body of opinion in government and central bank circles for a one-off revaluation of the currency, by perhaps 10-15 percent, followed by re-pegging the currency to the dollar at the new higher level.
Bursting bubble
Clearly, China’s stock market, like its property and banking sector, are in full-blown bubble mode. This year’s spectacular retreat from stocks is one sign the bubble may finally be bursting. Warning signs are emerging in the property sector as well, although the picture is not so uniform there. House prices are falling in many coastal cities but there is still an upward trend in poorer inland regions. Chinese banks, meanwhile, are not yet in the same mess as their international counterparts as they pay for the speculative excesses of the last 10-20 years. But if corporate profits shrink and hugely inflated property values collapse, the next link in the chain – as in the United States and other western economies – will be an explosion of non-performing loans that can plunge China’s banks into the red. A loan is classified as ’non-performing’ when it is in default or earning no income for the bank.
Some capitalists commentators are already sounding the alarm about China’s property bubble. Fitch Ratings, a financial watchdog, recently warned that, ”The real concern is overcapacity in the property sector; there is just so much development that is empty. This could turn out to be dormant non-performing loans.” [South China Morning Post, 4 June, 2008] In Shenzhen, China’s richest city, average house prices are down 5.8 percent on their level one year ago. Some sectors of the city’s new housing market, however, have fallen by as much as 30 percent. There are reports of property developers offering to pay half of prospective buyers’ down payments – isn’t this the sort of financial trickery that created the subprime crisis?
In the corporate sector there is already strong evidence that profits will be lower this year, as they are squeezed by sluggish export growth and rising prices for oil and raw materials, but also hemmed in by the falling stock market. Market speculation and share trades contributed between one-fifth to one-third of all company profits last year.
All this is not just bad news for China. China’s banks are the world’s largest and, for the moment, the most profitable. Crisis-hit western banks and their government protectors are looking towards deals with Chinese banks and financial institutions to keep them solvent as they continue to be mauled by the credit crisis. A banking crisis in China, triggered by a property slump and the inability of companies to repay the loans that have financed this decade’s double-digit economic growth, would open a new and scary front of the global financial crisis.
Vincent Kolo, chinaworker.info, Hong Kong
“This month has seen an earthquake in the stock market. It will be very hard for confidence to revive,” a Shanghai-based securities analyst told the South China Morning Post (13 June, 2008). China’s stock market slid 13.89 percent during the last week, imitating in a more extreme fashion, the falls on most global bourses. This was its worst weekly performance since 1996. Another Chinese analyst commented, “Investors worry that the market may have entered a long-term slump that could last well after the Olympics” in August.
Of the world’s 20 largest stock markets, China’s has suffered the biggest losses in 2008. The Shanghai stock market’s main measure, the Shanghai Composite Index, has plummeted 53 percent since its peak during October’s five-yearly conclave of the ruling ’communist’ party. On 16 October 2007, the index was a ’heavyweight’ 6,092.1 points, while last Friday’s close saw it stripped down to a 2,868.8 point weakling. As Bloomberg News (10 June) reported, ”the rout has wiped at least $1.31 trillion from China’s stock market” – this is four times the amount global banks have so far lost on the subprime meltdown.
Struggling with inflation
Last week’s slide was blamed on new measures to tighten monetary policy by the central bank, People’s Bank of China, as it tries to rein in inflation, which is at a 12-year high. Although the consumer price index (CPI) slowed to 7.7 per cent in the year to May from and 8.5 per a month earlier, there are fears this may not represent a turning point. The effects of the Sichuan earthquake on food prices (the province produces ten percent of China’s pork) plus the effects of higher oil and fuel prices can push inflation up further in the year ahead. Also, data this week showed that producer price inflation – the price of goods leaving factories – rose to 8.2 per cent, exceeding consumer inflation.
The central bank therefore raised banks’ reserve ratio requirements, the fifth such increase this year, to a record 17 percent, rising again to 17.5 percent on 25 June (this is how much capital banks must hold in reserve as a proportion of their loans). Many especially smaller and medium sized companies are now facing a credit crunch as it becomes harder to obtain fresh loans.
The central bank is unwilling to raise interest rates – a traditional method to fight inflation – because this would widen the gap still further between its one-year lending rate of 7.47 percent and rates in the US that have been slashed to just 2 percent under the impact of the banking and credit crisis. Higher interest rates would lead to even faster appreciation of the renminbi which has risen by 20 percent against the US dollar since July 2005. Yet capitalist agencies are calling on the People’s Bank of China to raise rates pointing out that with consumer price inflation at 7.7 percent, real interest rates are ’negative’.
As the dollar slides, China is suffering from an inward flood of so-called ’hot money’ seeking to profit from the rising renminbi. Some economists believe that these capital inflows are now bigger than China’s earnings from foreign trade. In April, a record $74 billion entered China from overseas. China’s trade surplus and foreign direct investment only accounted for one-third of this sum, leaving $50.16 billion unaccounted for. This is purely speculative capital, which is betting on the continued rise of the renminbi. This inflow in no way benefits economic development – it doesn’t create jobs or products, but in a number of different ways it does stoke inflation. It is related to the phenomenon of speculation in oil and other commodities on global markets, which is pushing up prices to record levels, although, like all bubbles, this too will eventually burst and give way to falling prices.
The central bank has to ’sterilise’ these capital inflows through a complex process whereby it first buys the foreign exchange and then, to prevent the money supply from growing too fast, which is the main cause of inflation, it must mop up the additional yuan notes by issuing local currency bonds upon which it pays interest. This is a loss-making affair for the Chinese state and people. Goldman Sachs have estimated that the People’s Bank of China is losing roughly 103 billion yuan ($15 billion) per month by holding foreign exchange (which is going down in value) rather than yuan assets (going up). 103 billion yuan is more than all the funds set aside for reconstruction in the Sichuan earthquake zone (80 billion yuan) for the whole of 2008, and this sum is spent every single month! No wonder there is a growing body of opinion in government and central bank circles for a one-off revaluation of the currency, by perhaps 10-15 percent, followed by re-pegging the currency to the dollar at the new higher level.
Bursting bubble
Clearly, China’s stock market, like its property and banking sector, are in full-blown bubble mode. This year’s spectacular retreat from stocks is one sign the bubble may finally be bursting. Warning signs are emerging in the property sector as well, although the picture is not so uniform there. House prices are falling in many coastal cities but there is still an upward trend in poorer inland regions. Chinese banks, meanwhile, are not yet in the same mess as their international counterparts as they pay for the speculative excesses of the last 10-20 years. But if corporate profits shrink and hugely inflated property values collapse, the next link in the chain – as in the United States and other western economies – will be an explosion of non-performing loans that can plunge China’s banks into the red. A loan is classified as ’non-performing’ when it is in default or earning no income for the bank.
Some capitalists commentators are already sounding the alarm about China’s property bubble. Fitch Ratings, a financial watchdog, recently warned that, ”The real concern is overcapacity in the property sector; there is just so much development that is empty. This could turn out to be dormant non-performing loans.” [South China Morning Post, 4 June, 2008] In Shenzhen, China’s richest city, average house prices are down 5.8 percent on their level one year ago. Some sectors of the city’s new housing market, however, have fallen by as much as 30 percent. There are reports of property developers offering to pay half of prospective buyers’ down payments – isn’t this the sort of financial trickery that created the subprime crisis?
In the corporate sector there is already strong evidence that profits will be lower this year, as they are squeezed by sluggish export growth and rising prices for oil and raw materials, but also hemmed in by the falling stock market. Market speculation and share trades contributed between one-fifth to one-third of all company profits last year.
All this is not just bad news for China. China’s banks are the world’s largest and, for the moment, the most profitable. Crisis-hit western banks and their government protectors are looking towards deals with Chinese banks and financial institutions to keep them solvent as they continue to be mauled by the credit crisis. A banking crisis in China, triggered by a property slump and the inability of companies to repay the loans that have financed this decade’s double-digit economic growth, would open a new and scary front of the global financial crisis.
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