In the last week, China has continued to make a series of targeted moves designed to bring growth under control. Particular subjects of attention are IPOs and residential real estate. In terms of housing, The China Banking Regulatory Commission is putting pressure on third mortgages to target speculators. Bank of China (BoC) the smallest of China’s largest four state-owned banks, appears to be leading the charge to compliance with central government directives. BoC called for an across-the-board increase of mortgage rates on Monday; today, the bank also said it will decrease discounts borrowers can receive on mortgage rates. All of this is intended to preserve BoC’s capital adequacy ratio, which it intends to hold above the required threshold of % for the upcoming year. Assuming other banks climb on board – and they almost certainly will, provided BoC’s experiment doesn’t prove disastrous, we should see an easing of upward price pressure in 2010. All to the good.
In terms of equities, the picture is more mixed. While Chinese markets dropped radically on first news of tightening measures, they recovered quickly – and developing country indexes followed them. This indicated that the markets seem to believe the initial reaction was overdone. The Shanghai Composite is back with a bang, recovering (temporarily) over its key support level of after its queasy slide in late January. However, the recovery is driven in part by positive performance in US housing prices, which have created an overall surge of optimism unrelated to China’s fundamentals. So much for decoupling.
Stronger markets aren’t helping demand for initial public offerings, but a series of subpar IPOs is not stopping Huatai Securities, a mid-level Chinese brokerage, from taking a swing at a US$ billion issue. Despite predictions that securities regulators will continue to revise IPO pricing rules to ameliorate investor exhaustion with certain absurdly high valuations, Huatai is looking to benefit from expected changes in other securities regulations, in particular the anticipated revisions that will allow margin trading and short selling, which will increase business for mainland brokerages. Even so, given other IPOs still in the pipeline, analysts say Huatai’s valuation must be "realistic," which is another way of saying relatively low.
Depending on the premises, wading into the Chinese markets at present may or may not be a good idea. A rising US tide will certainly lift all boats, but there are plenty of reasons to believe a double-whammy recession is lined up for the US. The sloppy nature of its stimulus package, the incredible amount of debt it is taking on and the increasingly weakened position of the Obama administration all bode ill for sustainable recovery. And then there’s the looming trade war. If the US and China can’t get the currency issue sorted, the Obama administration will have little to lose politically by bowing to the growing constituency that wants China labeled a currency manipulator. And if China sanctions US firms over the Taiwan fracas, the US will almost certainly enact anti-dumping legislation on Chinese exports.
The best solution is one in which China adjusts its currency ahead of its interest rates, as one government economist has recommended. In exchange, Obama leaves the Dalai Lama hanging. Everybody gets political cover: Beijing can say it is changing the currency to prevent greedy foreigners from flooding the Chinese market with hot money (certainly not because of US pressure), and Obama will have an economically valuable concession to take to American voters – as opposed to the empty emotional satisfaction of meeting with the Dalai Lama.
It’s not all about the US though. Domestically, some genuine green shoots are appearing. Socio-economic disparity may be decreasing, says an OECD report – but the report also calls for Beijing to increase social spending, reduce government savings and (drumroll) revalue the renminbi. Even so, the government can give itself a pat on the back for successfully improving the economies of interior provinces, to the extent that firms on the east coast are now experiencing employee shortages as many workers laid off on the coast managed to find work back home. That is a fundamental improvement, and will do much to encourage more balanced domestic consumption patterns. If China can handle the asset bubbles, continue to spur domestic spending through improvements to living standards, and at the same time provide support to the US out of enlightened self-interest, 2010 could end up being a decent year all ’round. Unfortunately, alternative scenarios are equally likely, and much more unpleasant.