Thursday, July 31, 2008

Here is my latest post on RGE Asia EconoMonitor

Restructuring inside the PBOC
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Victor Shih | Jul 31, 2008

China Securities Times just reported that the PBOC will add a new department (si) in its organization to manage foreign exchange. It will be called the department of exchange rates (汇率司). At this point, its main duties will be to formulate recommendations on foreign exchange rates, monitor fx movements in and out of China, monitor world fx markets, and formulate regulations for China's own fx market. On the plus side, it shows that the organization inside the PBOC is finally catching up to the reality that exchange rates play a major part in monetary policy. I also think it makes a certain amount of sense to consolidate parts of SAFE, parts of the financial markets department (the part in charge of the interbank fx market), and parts of the monetary department together into its own department.

At this point, I can see two consequences which may or may not be good. First, this will create some bureaucratic rivalry between the monetary department, which formulates all monetary policy, with the new entity. This kind of conflict is less severe within a single agency, especially if the governor directly oversees both departments. In the Chinese bureaucracy, the minister and the vice-ministers typically each oversee a couple of departments within a ministry. It would be foolish to have different governors overseeing the monetary and exchange rates department. For example, it would not be good to have prolonged bargaining sessions on how much PBOC notes to issue in order to sterilize the latest inflows...etc. On the major issues, it's not as if the PBOC can actually decide on interest rates and exchange rates without State Council approval, so even if there is severe rivalry, it should not affect the major decisions too much.

This new department will further make SAFE a vessel of the PBOC. Under Hu Xiaolian, we already see very little autonomy in SAFE, but with the planning and policy parts of SAFE moving over to the new department, we will see even less. Of course, SAFE and its regional offices will continue to have discretion over how fx policies, especially capital control, are implemented. The one big unknown at this point is the extent to which the new department will control SAFE investment strategies. I suspect they will get heavily involved in any event.

For outside observers, we can look forward to a nice quarterly report on the fx market and fx policy, which will be great. It will also be easier to identify the big players in fx policies, since most of them will now reside in this department. The press is reporting that vice head of the monetary department Wang Yu will become the head of this new entity. We still need final confirmation on this one, however.

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Wednesday, July 09, 2008

Dear All, this is my latest post on RGE Asia Monitor

Michael is right: policy priority shifted
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Victor Shih | Jul 9, 2008

This short commentary basically echoes Michael Pettis' last post. Over the weekend, Wen Jiabao, Vice President Xi Jinping, and Vice Premier Li Keqiang took trips to the southern and eastern provinces to "inspect" exporters. They assured manufacturers that they will not be squeezed between tightening monetary policies and rising RMB valuation. In official announcements, the priority now is "preventing the major ups and downs of the economy" rather than fighting inflation. This is despite the fact that PPI is almost certainly going to creep up further.

What we see today is nothing new, and as my book points out, has occurred repeatedly in the past 20 years. Even Li Yining's call for "acceptable inflation" is not new. He made exactly the same argument in 1988 when inflation was nearly 30%. The problem is that Hu Jintao now has many followers serving as provincial party secretaries, and they are lobbying Hu not to squeeze money supply so hard. Thus, unlike a few years ago, when Hu supported Wen's inflation fighting effort, Wen now fights inflation alone. I think this is a very dangerous situation for future inflation trends in China.

Besides allowing inflation to get even more serious, loosening monetary policy, even if it specifically targets exporters, would create even more risks in the system. Let's say the government relaxes lending restrictions or lower interest rates for small and medium enterprises that export, they will get relatively cheap money. Currently, the Wenzhou curb market in which exporters are lending export receipts to desperate real estate developers is paying anywhere from 30% to 100+% in annual interest rates. What is the rational course of action for exporters who obtain easy credit from the official banks? Yes, they would turn around and lend to real estate developers, which actually would continue to boost the supply of housing and depress the market. Although these high interest loans tend to be short-term (less than 90 days), when the music stops and someone defaults, the chain of defaults can ultimately lead back to the state banks.

Of course, first half performance of the state banks is better than ever. This is because housing prices only began to fall seriously in March. More and more people in southern China are trapped in negative equity, but banks are colluding with borrowers to keep official NPL figures low. A loan has to be 90 days behind in payment before it even becomes special mention loans, and banks are classifying loans as current if the borrower pays once every 90 days. Because these loans are not securitized, the fall-out may unfold slowly over time until NPLs cannot be hidden any more. It could take until the first half of next year before any serious problem becomes apparent in the banks. However, that may not be such a blessing because people know about this potentially giant risk hanging over everyone's head, and until the exact magnitude of the fall-out is known, a cloud will continue to hang over China.

Hey Victor,

A bit off topic, but nevertheless interesting...

"...banks are colluding with borrowers to keep official NPL figures low."

There's a bill working its way through Congress designed to force such behavior among US banks while Chinese banks do it voluntarily. :-)

Greg A.
Any thoughts as Lou Jiwei consolodates his power?
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Thursday, July 03, 2008

For those of you who are interested in the macroeconomy in China, one of the most important reports for the next few months just came out. It is the monthly Shenzhen housing sales report. Basically, my argument for this report is that this is the only report authored by the local government which contradicts NDRC figures on housing sale prices. This report has consistently reported more pessimistic figures than NDRC figures for Shenzhen. I suspect NDRC is being overly optimistic for much of the country. If the discrepancies between NDRC and actual figures generally are as great as those in the case of Shenzhen, China is in pretty big trouble. Basically, we will see NPL ratios go up, and part of the foreign exchange reserve will have to be used to recapitalized banks again. Well, you can read the report (I also recommend past reports) and judge for yourself.

Meanwhile, we are getting sparse information about other cities. Wuhan, for example, provides the following short paragraphs. Nonetheless, it is quite telling. According to this bare report, there is 23 million sq meter under construction in Wuhan. In the mean time, between January and May, 2.66 million sq meter of real estate was sold in the city. At this rate of sale, it would take Wuhan roughly three and half years to sell the real estate under construction, and this is not counting the inventory of new housing.

http://bj.house.sina.com.cn 2008年07月04日07:37 汉网--长江日报

  本报讯 今年1月至5月,我市商品房销售面积266.05万平方米,同比下降30%。昨日,市统计局发布前5个月全市经济运行状况时透露这一数据。


  统计专家分析,90平方米以下住宅投资和施工面积增幅分别超过100%和200%,显示未来一段时间我市住宅市场中小户型房源将大量增加。 (吴光振 应小莉)

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