China’s Rattled Rat Catchers
Chinese bank shares continued to languish even as monthly lending topped RMB 1 trillion in March, as regulators demanded further disclosure on broker and investment fund exposure and arrested suspected “rat traders” including a prominent executive who may have skimmed money in the interbank bond market. With local governments tapping the channel bonds now account for one-quarter of credit activity which is “out of control” according to a major local auditor. Fitch Ratings puts their debt at 25 percent of GDP, and the recent sovereign downgrade to AA was attributed to the load although the CDS spread remained relatively unchanged at 80 basis points. Property loans also continue unabated with an almost 15 percent quarterly increase at the end of 2012 as investment was up 20 percent in Q1 on an annual basis with new taxes readily circumvented. House prices rose in 70 cities according to the latest statistics as half of developers have negative cash flow. Under official prodding risky small business lending has spurted as total new financing mainly in the shadow “social category” reached $1 trillion sending credit/GDP to 200 percent. With bank supervisors struggling to devise and enforce curbs the National Reform Commission has stepped into the breach on the interbank bond scandal, with the charge led by a veteran of the post-Asian crisis GITIC collapse where malfeasance was discovered but foreign creditors were also stiffed. The influential Academy of Social Sciences has called for bond-market unification and default procedures, as the central bank head recognized modernization needs as he previewed a wider exchange rate band at the IMF-World Bank spring gathering. International reserves have soared to almost $3.5 trillion with restored capital inflows as the current surplus should settle at 3 percent of GDP this year. The economic growth pace has stayed under 8 percent as the PMI reading tries to keep above 50. Fixed outlays and retail sales continue double-digit gains but industrial output is sluggish with flat power generation and steel production. Inflation was just 1 percent in March as lower Chinese demand dents the entire commodity complex.
Food price relief should aid the region generally and allow for modest interest rate reduction, while diminished energy imports may help BRIC pole India in particular as it copes with a singular current account gap. In Australia mining projects have been shelved and local dollar inflows are off on the reversal although the 3 percent GDP growth forecast is intact on real estate and construction stability. In Japan consumer sentiment at its highest in five years could be further boosted at the margin although nuclear reactor shutdown had created an indefinite power premium. The yen meanwhile last sank against other currencies by the same magnitude two decades ago as a precursor to emerging Asia’s financial meltdown. The G-20 in a summit communique however supported “Abenomics” reflation intent as members behind the scenes expressed exchange rate target reservations when cornered.
