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China's Li: GDP needs to grow a minimum of 7.2%.

  • China needs to maintain GDP growth of 7.2% in order to create 10M jobs a year and prevent the urban unemployment rate from exceeding 4%, Premier Li Keqiang has said.
  • However, Li warned that the government couldn't further loosen policy, especially with the M2 money supply twice the size of GDP at 100T yuan. "To print more money may lead to inflation," Li said.
  • He reiterated that China remains on course to achieve it 2013 growth target of 7.5%, although he cautioned that weak exports are a risk.
  • The People's Bank of China has also warned about inflation, saying that "upwards pressure on prices still exists," and that the foundation for price stability is "not solid."
  • The PBOC said it will look to rein in speculative property demand, while it expects China's economy to undergo a long deleveraging process.
  • The Shanghai composite rose 0.35%.
  • ETFs - Stocks: FXI, GXC, PGJ, YAO, FCHI, PEK, CAF, YXI, XPP, FXP, MCHI, YINN, YANG, TCHI, CHXF, KFYP, HAO, ECNS. Bonds: DSUM, CHLC. Currency: CNY, CYB, FXCH
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Comments (5)
  • al roman
    , contributor
    Comments (9718) | Send Message
     
    The second point shows discipline,China has goals.
    5 Nov 2013, 07:15 AM Reply Like
  • Mike Holt
    , contributor
    Comments (1627) | Send Message
     
    What differentiates a "long deleveraging process" from the bursting of an asset bubble and ensuing debt crisis? Is Peking Duck Restaurant #1 about to add Black Swan to its menu?

     

    Half of China's $8 trillion GDP consists of Fixed Asset Investment spending. This accounts for 55% of global demand for cement and 1/3 of all new building throughout the world. It has also translated into a surge in debt, much of it in the form of short-term high-yielding Wealth Management Products that Chinese banks have either kept off their balance sheets, or contorted through a series of financial engineering techniques into Inter-Bank Loans that require only 1/4th as much Capital as would be required for direct corporate loans.

     

    By definition construction activity is non-recurring in nature, so what happens when this $4 trillion of construction activity that has already led to empty cities, bridges to nowhere, and excess capacity in many industries "gradually slows" (or comes to an abrupt halt)? Other sectors of the Chinese economy, particularly the non-subsidized (or less subsidized) SMEs (Small to Medium Size Entities) that don't enjoy the same access to credit from the mostly State-Controlled Banks as the large SOEs (State Owned Enterprises) are already struggling with soaring accounts receivables and their need for borrowing also helps to explain the surge in high-yield Wealth Management Products. Banks have written off some of this debt and have increased their Loan Loss Reserves, but may also have jettisoned some of their bad loans from their balance sheets through the issuance of Wealth Management Products that are in such high demand among a population that otherwise directs most of its savings into banks savings accounts subject to a government regulated interest rate of 3.5%. Most avoid the stock market, preferring the risks at the casinos in Macau instead, but some invest in real estate because this has historically been denied them. In fact, hundreds of millions of Chinese are still prevented from buying real estate because their hukou (work permits) register them as residents of other parts of the country and real estate can only be purchased by residents in that same area.

     

    Land Reform is one of the issues being considered by the new members of the CCP's Central Committee that is holding its Third Plenum this weekend in which they will decide upon their policy priorities for the coming decade. Li and Xi, the President and the Premiere, have promised that their reforms will be as significant as those introduced by Deng Xiaoping during the Third Plenum of his tenure in 1978. While many of these reforms are welcomed because they are so urgently needed, this opens the door to potential policy mistakes due to the Law of Unintended Consequences. For example, if farmers, rather than the local governments in which they live, are allowed to own their homes and farms directly, and to freely transfer their ownership interests to anyone they choose, what happens to the value of properties in other areas that were held out for rent to these hundreds of millions of migrant workers? What will become of the $2.5 to $5 trillion of Wealth Management Products (nobody even knows how much of this form of debt is outstanding) when the CCP introduces deposit insurance on bank deposits thus differentiating them from the WMPs that so far have been assumed to be implicitly backed by the government to the same degree? Where will all the financing then come from, including questionable loans that may be rejected if they must undergo more scrutiny if conducted through conventional channels and then carried directly on bank's balance sheets?

     

    A fortune cookie at Peking Duck Restaurant #1 might read as follows: "The canary in the coal mine may be a Caterpillar." Earnings for Caterpillar (CAT) took a swan dive last week, although the company management stated that mining activity has been steady; its only orders for new mining equipment (which has been its biggest source of revenues) that have fallen.

     

    Rather than focusing on the Chinese PMI, investors should begin paying more attention to data on bank's Non-Performing Loans (NPLs) and the manner and rate at which they may be removing bad loans from their balance sheets through continued issuance of Wealth Management Products.
    5 Nov 2013, 08:05 AM Reply Like
  • al roman
    , contributor
    Comments (9718) | Send Message
     
    It's all about Taiwan Sir,& history.China survived antiquity.
    5 Nov 2013, 08:17 AM Reply Like
  • Mike Holt
    , contributor
    Comments (1627) | Send Message
     
    Al, I'm more concerned about the survival of investors' portfolios. Their investment time horizons generally don't extend for thousands of years.
    5 Nov 2013, 12:10 PM Reply Like
  • al roman
    , contributor
    Comments (9718) | Send Message
     
    Keep them out of China,American Blue chip Aristocrats.
    If we ever get out of China with our shirts,remind me not to go back.
    Thank you.
    5 Nov 2013, 12:16 PM Reply Like
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