manage certain economic problems, which are part of the rapidly growing process by which China has leaped into the 21st century. In the last couple of years, China’s central bank had been tightening via interest rate increases along with the required reserve ratio, or RRR, which governs the amount of cash commercial banks must keep in reserve. China has also been tightening only credit and lending to property buyers to reduce speculation and inflation, so it’s attempting to dampen its property sector, which is vastly overheated. Now China faces the effects of the global economic slowdown, mostly from Europe, on its own economy.
China’s Central Bank
A Tightened Economy
It isn’t as if China has somehow hidden or even tried to hide these problems. China has raised its RRR from 15.5 percent to 21.5 percent in a year and a half of hikes which ended in June. This has had the effect of removing roughly $650 billion from its economy. Inflation was running at times over 6 percent, well over the target goal of 4 percent. With the recent slowdown in the economy and forecasts for GDP growth to possibly fall under 9 percent for 2012, the government’s economic policy makers are having to scramble to meet the latest in changing conditions. Inflation has fallen, but so has growth; perhaps too far, too fast. China’s concerned also that the yuan doesn’t rise too fast. With its major trading partner, Europe, mired in its sovereign debt crisis, one of the main markets for China’s bristling export business is decidedly less robust.
Money supply, particularly M2 supply growth was growing at a tremendous rate in 2009. Now the problem is that without adjustment, M2 is projected to grow closer to 12 percent in 2012 instead of the 14 percent that is more in the target range which would be in line with an 8 percent or 9 percent GDP growth. So, a 50 basis point cut in the reserve rate in November put about $50 billion in the banking system back into circulation. More reserve rate cuts may be in the offing, perhaps several which would take the reserve rate down to about 18.5 percent.
While China’s leadership doesn’t appear to want to lower main interest rates yet, holding back that tool of monetary policy, it has expressed concern about the plight of small businesses getting credit. Some critics, however, say that the small and medium enterprises, or SMEs, which are a vital part of China’s manufacturing and economy, are not being assisted fast enough. On the other side of the credit issue, the government wants to continue to discourage the rampant speculation that’s taken place in the property market in major cities, so to that end has continued to tighten the requirements on loans for property purchases as well as enacting rules limiting the number of purchases of homes to prevent speculation. So China’s task is admittedly difficult, tightening some parts of the economy while loosening others.
Foreign capital outflows, which according to central bank foreign exchange rate information showed an outflow of $8.3 billion in October and November, have reversed their usual direction. This is in contrast to the $40 billion per month in foreign capital inflows China has been absorbing for over seven years. China is now attempting to encourage more Qualified Foreign Institutional Investors, or QFII, to bring in capital for inbound investing. To do that, China will loosen quotas which had seen the lowest inbound investment since 2007. The Qualified Domestic Institutional Investor quotas which allows for outflows, have been lower in the last quarter. Beijing is expected to accelerate raising of QFII quotas for inflows.
China Currency, The Yuan
An Adjusted Economy
To this point, China’s economy rather than a bubble bursting or a calamity heading off a cliff, is a complex mix of forces pulling in different directions, which Beijing has been trying and within reason seems to be succeeding at making adjustments to. The Chinese approach to both its long-term economic and social reform has always angered critics: it is decidedly gradualist, seeking to create a relative stability and avoid wrenching changes. But if China is able to continue to steer its gradualist course, its stock market may also rebound. Legendary hedge fund manager Julian Robertson of Tiger Global Management fame mentioned that investors will be able to make money in China. He says invest with caution, a prudent approach China’s leadership might applaud.
Related: China Real Estate ETF (NYSEARCA:TAO), iShares FTSE China 25 Index Fund (NYSEARCA:FXI), ProShares UltraShort FTSE China 25 ETF (NYSEARCA:FXP), iShares MSCI Emerging Markets Index (NYSEARCA:EEM), Vanguard MSCI Emerging Markets ETF (NYSEARCA:VWO).
Jim Trippon, founder of Trippon Financial Media, Inc., is a maverick that has dedicated his investment career to helping investors make smarter financial and stock selection decisions. Trippon, an internationally recognized expert on global and value investing, has a deep passion for finding hidden value in global equity markets. Trippon started his career as a financial statement examiner with Price Waterhouse which allows him to dissect a public company’s financial picture and better identify hidden gems. Trippon’s savvy approach to investing and personal finance makes him in high demand by major media who seek his unique perspective on stocks and global economics. He has been featured in top publications both in the US and abroad including Bloomberg, Investor’s Business Daily, The New York Times, The International Herald Tribune, Stock Futures and Options Magazine, The Bull and Bear Financial Report and he regularly appears on broadcast television including as an on air contributor to CNBC, CNN, Fox Business, and Fox News.
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