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Sancho Panza

China Dwarfs U.s. In Monetary Stimulus

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New York Times 15/1/14

'HONG KONG — Move over, Janet Yellen and Ben Bernanke. Step aside, Mario Draghi and Haruhiko Kuroda. Compared with Zhou Xiaochuan, the longtime governor of the People's Bank of China, they are all lightweights when it comes to monetary stimulus.The latest data released by China on Wednesday shows that the country's rapid growth in money supply has continued. Mr. Zhou and his colleagues have only begun the difficult and dangerous task of reining it in —– a task that still lies ahead of the United States Federal Reserve as it begins its own gradual taper this year.

China's money supply, broadly measured, has now tripled the money sloshing around its economy since the end of 2006. That dwarfs the indirect effects of quantitative easing in the United States, where the broadly measured money supply rose only 55 percent from 2006 through the end of November.

China's tidal wave of money has driven asset prices through the roof. Housing prices have soared, feeding fears of a bubble while leaving almost everyone else feeling poor.

16yuan-chart-articleLarge.jpgLaunch media viewer The rapidly expanding money supply also reflects a flood of loans from the banking system and the so-called shadow banking system that have kept afloat many inefficient state-owned enterprises and bankrolled the construction of huge overcapacity in the manufacturing sector.

Cao Maolan, a real estate broker in Nanjing in east-central China, helped a young woman buy her first apartment seven years ago, a 650-square-foot unit for which she paid the equivalent of $60,000. The young woman sold the apartment in less than two years for a 50 percent profit, Ms. Cao said, and has traded up to a bigger apartment every year since then, now living in a 2,150-square-foot apartment for which she paid $985,000, mostly in cash with the profits from previous deals.

"Everyone who bought property has done really well," Ms. Cao said.

But young college graduates, whose numbers have quintupled in the past decade as China's universities expand rapidly, worry that they may never be able to afford to buy a new home.

Zheng Yilong, a 22-year-old college graduate in Wuhan, an industrial hub of 10 million people in central China, earns $575 a month in a low-level banking job with limited opportunities for raises. But he has found that even a 540-square-foot apartment on the outer edge of the metropolitan area, with a long commute, costs $98,400, or 14 years' pay.

"I cannot even begin to imagine how I can earn and save enough to buy even a small unit here in Wuhan, so I don't think about it — there is no solution," he said in a telephone interview Wednesday.

The money supply and credit data released Wednesday morning show that the central bank has begun to tackle the problem, but slowly. The broad measure of money supply, known as M2, grew 13.6 percent last year, barely less than its increase of 13.8 percent a year earlier, the Chinese central bank said in a news release.

This means the money supply is still charging well ahead of inflation-adjusted economic growth, which has been about 7.6 percent; the exact figure for the fourth quarter of last year is scheduled for release on Monday.

Growth in M2 almost reached 30 percent at the end of 2009, when China was using monetary policy to offset the effects of the global financial crisis. China has reduced the pace of money supply growth since then, but kept it well above the pace of economic growth throughout, which means it has done little to sop up the extra cash issued during the crisis.

The question now is whether the central bank can further slow the growth of credit and the money supply without causing a slump in housing prices or a sharp slowdown in the credit-dependent corporate sector. Even the very modest slowdown in money supply growth so far has already contributed to two sharp but short-lived increases in interbank interest rates in June and December, which roiled markets in China and around the world.

Corporate lending rates are already approaching 10 percent a year, the highest in any of the world's largest economies. Many businesses are struggling for more loans to repay previous borrowing.

China's central bank "is in a very difficult situation; it needs to tighten but the whole system is not used to tightening, they are used to money printing," said Shen Jianguang, a China monetary economist in the Hong Kong office of Mizuho Securities, a Japanese investment bank.

M2 encompasses money in circulation, checking accounts, savings accounts and certificates of deposit. It is the main money supply indicator watched by the People's Bank of China in trying to balance the need for economic growth with the dangers of inflation.

M2 has grown so fast in China not just because the central bank has been issuing a lot of renminbi but also because the state-owned banking system has lent and relent those renminbi with encouragement from the government, creating a multiplier effect.

China has also undergone financial liberalization in the past five years that has accelerated the pace of lending. An extensive and loosely regulated "shadow banking" system has emerged, partly because of the willingness of regulators to allow banks to classify loans to new financing companies not as corporate loans but as interbank loans, for which little capital needs to be reserved.

The Federal Reserve has actually stepped up much more rapidly than China its injections of money into the financial system. But the broadly measured money supply has increased more slowly in the United States than in China because American banks have been much slower to lend and relend the extra money.

Broadly measured money supply plays an important role in the pace of economic growth as well as inflation. Consumer inflation has not yet become a big problem: Falling commodity prices and widespread manufacturing overcapacity held down consumer inflation to 2.6 percent last year in China.

But asset price inflation, notably the country's soaring real estate prices and corresponding decline in housing affordability, has been a constant worry for the authorities.

To be sure, one reason M2 in China is so much larger than in the United States is that the United States relies heavily on bond markets to finance economic growth, and bonds are not included in M2. China relies much more on bank lending, which is indirectly reflected in M2.

But that difference in financial system structure does not explain why China's M2 money supply has soared so much faster in percentage terms since 2006 compared with the money supply in the United States.'

Rock meet hard place.

Edited by Sancho Panza

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Some very nice economists on the TV categorically state that money printing does not lead to hyperinflation...

When the Chinese finally turn the taps off we'll have the mother and father of deflations.

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As hugh hendry said, the chinese have taken 20 years to build up levels of debt it took us 200 years to accumulate.

Browns 'end to boom and bust' is possibly the most dangerous economic ethos'es the world faces. China needs a massive bust to put an end to massive malinvestment.

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China would be a great place to do large scale hemp cultivation imo. Fuel, plastics and food etc. Bonus is that it's labour intensive so could be used to eliminate unemployment problems.

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I don't think China is going to face hyperinflation.

Their problem is malinvestment and loan delinquency and its only going to get worse and distort the economy into stasis. This is why so many Chinese are desperate to get their money out of the country, because they know that rather than stop the stimulus the government will take the more authoritarian route - because they can.

Certainly, the future of China is going to be a big headache for the rest of the world.

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I don't think China is going to face hyperinflation.

Their problem is malinvestment and loan delinquency and its only going to get worse and distort the economy into stasis. This is why so many Chinese are desperate to get their money out of the country, because they know that rather than stop the stimulus the government will take the more authoritarian route - because they can.

Certainly, the future of China is going to be a big headache for the rest of the world.

Super exponential growth in the money supply suggests they've been hyperinflating since 2005, the year of peak conventional oil and the start of the US housing slide. Ties things up nicely. The Chinese stepped in to the void to keep the global Ponzi upright, now they're bankrupt too. Look out below!

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Super exponential growth in the money supply suggests they've been hyperinflating since 2005, the year of peak conventional oil and the start of the US housing slide. Ties things up nicely. The Chinese stepped in to the void to keep the global Ponzi upright, now they're bankrupt too. Look out below!

I agree with you. Only I think the deflation monster can eat more than they can print.

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I agree with you. Only I think the deflation monster can eat more than they can print.

Deflation's the threat alright. In China, the US, Japan, the UK and Europe. Persistent, intractable and suffocating. The headlines that greeted yesterday's 2.0% inflation print with cheers couldn't have been more misplaced - the only consumer inflation the UK's seen in the last five years has been imported with our colossal trade deficit. An experience the Japanese have latterly begun to share. Carney must be white with fear.

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Zheng Yilong, a 22-year-old college graduate in Wuhan, an industrial hub of 10 million people in central China, earns $575 a month in a low-level banking job with limited opportunities for raises. But he has found that even a 540-square-foot apartment on the outer edge of the metropolitan area, with a long commute, costs $98,400, or 14 years' pay.

...

The question now is whether the central bank can further slow the growth of credit and the money supply without causing a slump in housing prices or a sharp slowdown in the credit-dependent corporate sector.

What is it with reporters? Can't they see that a "slump in housing prices" is EXACTLY what people like Zheng Yilong (who has a high level banking job, ffs!) need?

Mind you, if you've been brainwashed to believe that house prices are a sacred cow that must be protected at all costs, this is the sort of schizophrenic article you'd produce.

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I don't think China is going to face hyperinflation.

Their problem is malinvestment and loan delinquency and its only going to get worse and distort the economy into stasis. This is why so many Chinese are desperate to get their money out of the country, because they know that rather than stop the stimulus the government will take the more authoritarian route - because they can.

Certainly, the future of China is going to be a big headache for the rest of the world.

Agreed. But rather than turn their guns on their own people first, they'll distract them by picking on neighbouring countries, as they are already gearing themselves up for. Very easy to control your own populace when at war or threat of war.

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Deflation's the threat alright. In China, the US, Japan, the UK and Europe. Persistent, intractable and suffocating. The headlines that greeted yesterday's 2.0% inflation print with cheers couldn't have been more misplaced - the only consumer inflation the UK's seen in the last five years has been imported with our colossal trade deficit. An experience the Japanese have latterly begun to share. Carney must be white with fear.

One thing that really puzzles me is the claim that the way out this is higher productivity- surely the more efficient and productive we are the more downward pressure there would be on prices- a deflationary effect?

On the face of it our system seems to have an embedded contradiction- the forces of competition drive a deflationary engine that represents a clear threat to the debt that was created in part to fund that very engine.

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How relevant is this ?

China has 4x the population of the US and 1/2 the economy.

It is also a developing economy whereas the US is mature.

You raise a valid point but one must remember that a vast majority of the Chinese population are not very involved in the economy, subsistence farming etc.

Even for a developing country they are increasing the money supply way to quickly and not for the right reasons either.

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You raise a valid point but one must remember that a vast majority of the Chinese population are not very involved in the economy, subsistence farming etc.

Even for a developing country they are increasing the money supply way to quickly and not for the right reasons either.

Plus, the Chinese Ponzi isn't just confined to the mainland.

Is Singapore set for an Icelandic-style crash?

A stinging commentary warning that Singapore is facing an Icelandic-style economic crash has provoked much debate amongst industry commentators and yielded an official response from the Monetary Authority of Singapore.

According to Jesse Colombo, an economist and columnist for Forbes magazine, the wealthy Southeast island state of Singapore is displaying similar characteristics to Iceland in the run up to its spectacular economic collapse in 2008, amid the rapid expansion of its banking sector overseas and an influx on hot money from abroad.

(Read More: When will Singapore roll back property curbs?)

Colombo argues that Singapore is subject to a ballooning credit bubble that is driving economic growth and creating the illusion of prosperity. A bubble he says has been fueled by ultra-low interest rates encouraging explosive growth in mortgage and commercial loan borrowing.

The economist points to a plethora of bubbly characteristics in the Singaporean economy, including a high ratio of household debt to gross domestic product (GDP), sky-high property prices and a potential banking crisis if non-performing loans increase once interest rates normalize.

Edited by zugzwang

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