China: Hot Weather, Cold Market

For the past few weeks Beijing weather has been either hot and drizzly or, even worse, ferociously hot.  Friday we got a little bit of variation by interspersing ferociously-hot with the occasional tropical downpour.  I really hope things get better before the Olympics or else soon enough we are going to have a lot of very bad-tempered out-of-towners running around the city monopolizing all the taxis.

 

At least the gloomy weather more or less matches the mood of the stock market.  The market was up 2.0% Thursday and down 1.2% Friday to finish the week just over 2.3% down, at 2670.  Banks are surprising on the upside with better-than-expected profits, but higher oil prices drove most of the rest of the market down.

 

Meanwhile the RMB dropped 0.116% Friday to 6.859.  The PBoC, as even little children are now widely aware, is trying to curb speculative inflows by adding dollops of “uncertainty” to the RMB’s upward trajectory.  Unfortunately, the fact that everyone knows what the PBoC is doing and why they are doing it isn’t likely to make this measure particularly effective.

 

We will probably see the currency fairly flat over the next couple of weeks before it shoots up again.  Even the daily newspapers are saying this.  I have had this discussion many times on this blog, so I don’t want to reignite it, but I am afraid that the net effect of all this “uncertainty” is likely to be nothing more than that people who were very eager to bring money into China as quickly as possible may be, if they really believe that the trajectory is slowing down for a week or two, in a little less of a hurry.  Some of the June inflows, in other words, will show up only as July inflows.  This isn’t going to make much of a difference.  I think the last time they did this was in April, during which month reserve accumulation, at $75 billion, hit at an all-time world record.

 

One final thing, I was discussing with my students over coffee the effect of the new export-management controls on inflows announced Wednesday night (and discussed in Thursday’s entry).  We agreed that if these measures are at all effective in seeking out hidden hot money inflows, the monitoring period would probably add a few weeks to the time between when foreigners pay for an exported good and when the cash is actually disbursed to the Chinese exporter.  One of my students, whose uncle is a Southern-province-based exporter, told me that he believed (he wasn’t sure) that typically exporters would need to find financing for this period, and since most of them are excluded from commercial bank financing, they would need to take short-term loans from the informal banking sector.  This sounds pretty plausible.

 

I have heard that short-term loans are going for 5% a month, and my friend Victor Shih tells me that he has seen even higher rates for “prime” borrowers.  That means that if we assume that disbursals are two weeks later than payments for export shipments, the cost of production, including financing, for many Chinese exporters will go up by a minimum of 2-3%.  Given razor-thin margins in many of the export sectors, I wonder how exporters are going to deal with this.

 

My guess is that after a few weeks of this we are going to see a lot of pressure by exporters to roll back the measures announced Wednesday, or else many of the provinces, especially Guangdong and nearby provinces, will quietly let the monitoring process slip.