China is avoiding a massive liquidity injection in the hope that smaller, target injections will prevent the economy from going into freefall. But there still remains a pitched bureaucratic battle between the PBOC and other arms of government about how deep – and controlled – the stimulus will be.
Investors trying to figure out if China plans to restimulate its economy should be aware that a debate is occurring among China’s top economic policy makers. The pro-‐ and anti-‐ stimulus camps disagree over fundamental issues of taxation, capital allocation, and whether there is a property bubble. This disagreement came to light in a series of articles published recently by two officials at the People’s Bank of China (PBOC).
Recently, People’s Bank of China Governor Zhou Xiaochuan said China would liberalize interest rates for consumer deposits within two years, a surprisingly frank timeline on a controversial subject. Liberalized interest rates would cause a chain reaction of problems in the financial system, all because of the government’s decision to keep the value of Renminbi in a tight range.
China’s largest bank, ICBC, formally declared it would not support a 3 billion yuan bankrupt trust investment product the bank sold through its branches. The Wealth Management Product (WMP), called the “Credit Equals Gold No. 1,” raised funds for a coal mine and is due for repayment January 31. The announcement brought a mild panic to China’s financial community and among overseas investors. Whether the Gold Trust defaults or not, here are five reasons why a financial crisis caused by a trust default is unlikely.
Investors have been worrying about the potential collapse of the Trusts in China. They should be paying attention to the bank failures in the rural areas.
ICBC Gold Product – Bank Collapse or Isolated Case?
Here are five reasons why a financial crisis caused by a trust default is unlikely.
Yangzijiang Shipbuilding is an example of how large firms, state owned and private, are recycling bank loans into the Shadow Banking Market, and earning significant profits from what is essentially regulatory arbitrage.
Premier Xi Jinping has surprised everyone by how aggressively he has taken charge. A year ago, analysts looking at China post-leadership transition were interested in only one thing: would the new leaders continue the economic stimulus. Now, Xi is racing past stale assumptions of the glacial pace of change and quickly launching new reform policies. What are the politics he is facing?
Early in the debate on China, the most vehement bear was probably Jim Chanos, who in a Fortune Magazine article called China “Dubai Times 1000.” Most analysts in this debate — along with the Chinese government — are focusing on the property market. While many of the broad arguments are well known — overlending, property as proxy for savings, rising interest rates — my belief is that analyzing China’s property market using macro data provides only part of the picture. Many of the most pressing issues are really best understood as an issue of the extent of local debt.