China will not inflate in 2012

China Has No Plan For Large Stimulus To Counter Slowdown

Pumping in government money to achieve growth targets is “not sustainable” and China will instead focus on encouraging private investments in railways, infrastructure, energy, telecommunications, health care and education, the story said.

Wen repeated his call for stabilizing growth and reiterated that the economy faces increasing downward pressure, according to remarks published today by the Hunan Daily, citing a speech the premier gave on May 25 in the southern province.

The National Development and Reform Commission may be accelerating construction approvals as part of China’s response, with the planning agency last week saying that Baosteel Group Corp. and Wuhan Iron & Steel Group won permission to build 134 billion yuan ($21 billion) of new factories. The NDRC had delayed approving the two steel projects in 2009, citing industry overcapacity.

This must be understood within the political context. A major stimulus plan would funnel money to the state owned companies and delay China's economic transition. Simply put, the stimulus plan was "Bo Xilai" style, and Bo isn't around anymore. The area where you will see stimulus is tax reform and tax cuts. Reagan-style massive tax cuts will come next year (maybe announced late this year), but between now and then there's the leadership transition, which is why things will remain turbulent for the bulk of 2012.

China considers another stimulus plan

China Likely to Introduce New Stimulus Measures

On June 30, a source who attended the seminar revealed its tone to the EO: "Everyone is worried about the next half of the year's economy."

In an interview with the EO, Yin Zhongqing, vice director of the Finance and Economic Committee of the National People's Congress said, "It is possible for China's macro-economy to rise drastically in 2010, but it also has the risk of decreasing drastically."

Due to concerns over the recent decline in economic indicators such as the purchasing manager index, urban fixed-asset investment, and real estate and automobile sales numbers, China is likely to launch a new round of economic stimulus measures.

People are no Longer Optimistic About the Second Quarter

After entering the second quarter, economic indicators have experienced a slight drop from the first quarter's development trend. With that in mind, officials at the National People's Congress Finance and Economic Committee and ministries and commissions expressed their concerns about the economy of the next half year.

The decline was first reflected in the purchasing manager index (PMI), an indicator for economic activity. According to the China Federation of Logistics and Purchasing (CFLP), compared with April's PMI, the PMI in May dropped 1.8 percentage points. Of the eleven PMI sub-indicators, ten presented a drop.

In addition, according to June's PMI released by the CFPL, the purchase price index decreased drastically from last month, especially the price index of raw materials stockpile which dropped to below 50 percent.

Furthermore, the indicator of added-value for large-scale industrial enterprises also slowed. The indicator's growth rate in May was 1.3 percentage points lower than April's; April's indicator was 0.3 percentage points below March's.

In addition, the urban fixed-assets investment in the first four months had a year-on-year decrease of 4.4 percentage points; the urban fixed-assets investment of the first five months were 0.2 percentage points below the first four month of this year.

What is more worrying is that the recent sales volumes of real estate and automobiles began to decrease. According to statistics released by the China Index Academy, of the 35 big cities monitored, housing sales in 14 cities decreased in May, and the sales of automobiles in May dropped 7.5 percent compared with April's sales.

Meanwhile, the degree of support from overseas demand to China's economic growth weakened. The trade surplus in the first four months of this year fell 78.6 percent from a year earlier, and the trade surplus in the first five months experienced a year-on-year drop of 69.9 percent.

However, the trade surplus did rebound in June.

CHINA'S trade surplus widened to the highest this year and exports climbed more than estimated to a record in June, adding pressure on the government to let the currency gain after the US said the yuan ''remains undervalued''.

The gap increased 140 per cent to $US20.02 billion ($A22.8 billion) from a year earlier, China's customs bureau said on its website. That compares with the $US15.6 billion median estimate of 24 economists surveyed by Bloomberg. Exports surged 43.9 per cent and import growth moderated for the third month, rising 34.1 per cent.

Sounds like a recipe for conflict, as the Americans press China on the currency and the Chinese try to raise economic growth, with currency appreciation near the bottom of the list of priorities.

Chinese Home Buyers Walk Away

You may have read about the growing phenomenon of "walking away" in the U.S., where underwater homeowners (who owe a lot more than their house is worth) default on their mortgage and let the bank take the house. This isn't a good strategy in all states, since some allow the banks to go after homeowners for the difference between the mortgage and the home. But where banks cannot go after the homeowner, it means that many people are able to get out from high mortgage payments and rent a very similar house, sometimes on the same street, for far less money.

In China, a different situation has developed. Due to recent changes in home finance regulations, some Chinese buyers are starting to walk away from their deposits on purchase agreements.
Buyers defaulting on price-fall fears (subscription required)

The exodus of buyers that has followed could see deal volumes in the secondary market tumble 50 per cent this week, said estate agents, while prices could fall up to 20 per cent.

"These are the most draconian measures I have ever seen. The unexpected shutdown of credit for some buyers immediately drove them away from the market," said Kenneth Pak Kei-yuen, senior general manager in the Beijing office of Midland. "We have no business today and more and more buyers are talking about walking away from deals they have already signed."

A client who had agreed to buy a 60 sqmetre apartment for 1.2 million yuan and put down an initial deposit of 50,000 yuan two weeks ago had already defaulted, he said. "After the tightening of the mortgage conditions, she decided to cancel the deal because she was worried that prices would decline."

Although the State Council's announcement did not include a start date for the new policy measures, banks had reacted immediately by freezing all uncompleted mortgage applications, Pak said. "Buyers who had just agreed to purchase homes in the past two weeks are now in panic because they worry they will have to fork out extra money as banks have also lowered loan-to-value ratios when granting mortgages," he said.

Some buyers are hanging on though, because they basically believe this is a head fake and that the bubble will continue to blow. Meanwhile, Caing reports: Gradual Wind-Down for Economic Stimulus

Brakes on new construction were applied with particular force in recent months as central and local governments sought to reduce overheating risks. For the first three months this year, total investment for new construction projects jumped more than 34 percent to about 300 trillion yuan. But the quarter-on-quarter growth rate for the same period last year topped 87 percent.

Following last year's peak for government-supported construction projects, this year's nationwide investment is slated to shift from "active expansion" to "passive continuation," which will still demand considerable capital. The 153,700 stimulus-financed projects under way in the first quarter represented a total 2.79 billion yuan in investment – an increase of 30.4 percent compared to the same period last year.

Yet the investment curve started turning downward with a slowdown in the pace of central government spending initiated by the National Development and Reform Commission (NDRC).
NDRC has yet to release details on the slowdown in central government investment. It's only public information released so far concerned the allocation of about 2.2 billion yuan from the central government for 10 energy-saving projects as part of the 11th Five-Year Plan.

Caixin learned from several local NDRC branches that, since the end of March, the agency has invested in a variety of civilian infrastructure projects including low-rent housing, water control projects, wastewater treatment and refuse processing facilities.

For example, a Gansu Province NDRC official told Caixin that the central government allocated 1.3 billion yuan for construction of low-rent housing in his province. The investment level and the construction scale are expected to rise this year, although the official added that "there will be no central government investment in other fields."

My hunch is that renminbi revaluation is unlikely to be tossed into this stew of policy action, unless the government is planning a simultaneous strategy with the property, stimulus and currency policies. Instead, the government may wait to see the impact, which could be relatively quick in the property market, and only then revalue the currency.

And then there's the IMF's view—no bubble.