Following the self-congratulatory joy of its 90th birthday, the Party was brought back down to earth with a bump this week as forecasts for the consumer price index continue to mock its target of keeping inflation below 4% for 2011. Investment bank China International Capital Corp projected that the figure would climb to 6.2% in June from 5.5% in May, and other projections rarely strayed below 6%. The real figure will not be issued until July 15, but some confirmation came when the central bank, perhaps knowing what we only can guess, hiked interest rates by 25 basis points on Wednesday. What is certain is that China is now between that metaphorical rock and a hard place. Prices are continuing their merry charge upwards, while the government’s fiscal tightening is drying up liquidity for business, impacting the manufacturing and service sectors. The Purchasing Managers’ Index, which reflects activity among producers, fell for both sectors last month. Despite the voice from above urging us to remain calm, it won’t be easy for authorities to keep prices stable and maintain growth.
Harbingers of doom were abundant this week, as a series of negative announcements shook the middle kingdom. The first of this week’s votes of no-confidence came from Moody’s, who on Tuesday revealed that China’s municipal debt was – shock horror – likely much higher than Chinese statistics suggested. The ratings agency added the not-insignificant sum of US$541 billion to the not-insignificant existing sum of US$1.65 trillion in debt. Given this scenario, non-performing loans could potentially hit 8-12%. The situation is complicated by the probability that a great slice of local government debt was spent on real estate, which is now in danger of falling in value, with prophecies of potential doom from the Wall Street Journal. The second vote of no-confidence this week saw Singaporean sovereign wealth fund Temasek Holdings sell off US$3.62 billion of shares in Bank of China (BoC) and China Construction Bank (CCB). While the fund claims this was part of portfolio rebalancing, it is hardly a positive signal, and managed to knock 3.6% and 3.2% from the share value of BoC and CCB, respectively. In a final sign that the end may well be nigh, the short-selling vultures have traversed the Pacific, and are circling in Hong Kong.