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Thursday, April 15, 2010

China Heating Up... Consumer Style

We've (U.S. officials) been clamoring for years for the Chinese to shift from their export dominated economy to a more balanced economy with greater internal demand (which in theory would help the U.S. trade balance by increasing our exports to the nation). In fact, many economists have been hopeful that increased consumption by China's private sector would help offset any potential slump in demand from the developed world (i.e. U.S., U.K., and Europe). It looks like this may actually be happening.

Per the First China Invest (via FT Alphaville):

After the government succeeded in sustaining fixed asset investment, and therefore GDP growth, last year by doubling bank lending, this year it is the turn of the consumer. The one area of new lending which is still seeing significant growth this year is consumer financing, which accounted for 50% of new lending in March. As a result, new consumer lending may overtake new consumer deposits for the first time since 2007.
Good news right? Showing that nothing is easy in this world... not so fast.

After the government tightened lending to the property sector, the data seems to indicate that the Chinese consumer is tapping the consumer loan market (and even credit card balances) to not only consume goods, but also to acquire properties. This in turn is driving up home prices dramatically, which can be seen from the following data.

  • We’ve just seen Chinese GDP rise 11.9 per cent in Q1.
  • And urban house prices increased 11.7 per cent in March.
  • And retail sales are up 17 per cent.
Lets put that 11.9% rise in year over year GDP in perspective.

Nothing the revaluation of the Yuan can't cure right?

Perhaps not.

Morgan Stanley's Andy Xie in the China Daily (via The Mess that Greenspan Made):

Actually, Xie believes that growing expectation of the yuan’s appreciation in financial markets is the most important reason for China’s vast property bubble. Massive hot-money inflows would spark excessive liquidity and speculation, fueling China’s property bubble. According to Xie, in a normal economy, currency appreciation cools inflation by decreasing import prices. However, China imports mainly raw materials, equipment, and components. A modest currency appreciation would do virtually nothing to curb inflation.
In other words, an increase in the value of the Yuan may just allow China to purchase MORE commodities, thus actually adding fuel to the already hot economy.

Interesting times...

Source: Bloomberg