Gary Duncan
Today’s ominous warning from Kenneth Rogoff, the IMF’s former chief economist, of continued peril from the credit crunch, is a timely admonition to unwary investors that in weighing the likely toll on America they should follow one of that country’s favourite rejoinders and “wake up and smell the coffee”.
Professor Rogoff, a distinguished macro-economist now at Harvard, is not the first, and is unlikely to be the last, to caution against a rash assumption that we are close to seeing the end of this crisis, or even the beginning of the end. In recent weeks, similar advice has been proferred by the IMF as well as several other prominent observers.
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Yet the professor’s assessment that we may not yet be even halfway through this crisis, that there may be worse upheavals to come and that these could yet claim a “whopper” among US banks as the latest casualty is another, much-needed dose of realism. It comes at a time when at least some investors had begun to be lulled into a misplaced sense of complacency by a rally in banking stocks — albeit one that had already run out of steam.
There are plenty of good reasons to believe that the professor’s prognosis is almost certainly correct. For one thing, the amount of fresh capital, some $400 billion (£216 billion) raised by banks since the crisis began, is still outstripped by the losses they have suffered. Many big institutions remain frail, in dire need of further infusions of funds, and exposed in an environment in which many banks remain reluctant to lend to each other.
Moreover, the danger is growing of a self-reinforcing downward spiral as banks’ plight leads them to curb further lending, further undermining the real economies of Western industrial nations, leading to more loan defaults and mortgage market woes, and yet another wave of credit tightening.
That risk remains very substantial in the US, where the housing slump persists, and may yet claim more victims among the banks. It is also still elevated in the UK, where, as David Miles of Morgan Stanley recently noted, banking groups remain more exposed than some of their international rivals.
It was Professor Rogoff who made it fashionable to quote the American poet Robert Frost’s apocalyptic visions of the world ending in either fire or ice as a way of capturing the conflicting dangers from flagging growth and rising inflation besetting the world economy. It seems the professor has now been reading another of Frost’s verses, where the poet alludes to woods that are “dark and deep”. As Professor Rogoff argues, we are very far from out of the woods.
Thursday, August 21, 2008
Monday, August 11, 2008
The dream is over as China wakes up to global downturn
The stock markets are falling and exporters are going to the wall
Michael Sheridan in Shenzhen (11 Aug 2008)
IT IS RARE to see an estate agent running out of his office after a prospective client, but the young man pursuing me down the main street in Shenzhen had that fixed smile of desperation on his face.
As Chen Li intercepted me and offered his business card, there was a certain irony in the surrounding posters inviting people to rejoice in the 2008 Olympic Games, which opened this weekend.
Property developers have thrived in this dizzying boom town next to Hong Kong for as long as anyone here can remember. But now the days of easy money have gone, ended by mortgage curbs, tighter credit, slumping Chinese stock markets and the closure of thousands of local export factories that have been ruined by a strong yuan and falling global demand.
The slowdown is so sharp that Chinese leaders allowed the yuan, which had risen 20% against the dollar since 2005, to decline for the past week against other currencies. That spells trade trouble with Europe and America.
“Any time of day or night we can show you wonderful properties,” Chen beamed. “They are much cheaper than in Hong Kong.” Then he paused, as if about to confide one of China’s numerous state secrets: “And owners are ready to negotiate.”
In truth, many prospective purchasers are walking away from mortgages they cannot afford. Property prices are crumbling and banks are getting nervous. It is the same story in Shanghai and even in the capital. The New Beijing Daily reported the plight of Lin Sheng, a buy-to-let landlord who has lost a million yuan (£75,000) and stopped paying his mortgages after six interest-rate rises.
Asking prices for flats around the “Bird’s Nest” national stadium, scene of the Olympics opening ceremony, are said to be down 20%.
This was supposed to be the great year of China, crowned by the prestige of the Olympics, a time when many Chinese investors presumed that the state would ensure that property and stock markets stayed effervescent.
That was before China faced a revolt in Tibet, a costly earthquake in Sichuan, oil prices of more than $140 a barrel, the American sub-prime credit crisis, a resurgence of inflation and the contraction of global trade.
The benchmark CSI 300 index, which tracks the Shanghai and Shenzhen stock markets, is down 45% on last autumn’s record levels. Analysts thought a correction was inevitable but millions of retail investors are furious.
For business people, China’s year of troubles also included heavy snowstorms that wrecked power lines, persistent electricity cuts, higher raw-material costs and wage demands by workers trying to keep up with the soaring price of pork and other staples.
The Olympics — sometimes said to be a growth generator — have had the opposite effect in souring the political climate and putting off visitors. Heavy-handed security and restrictions on business visas led many buyers and inspectors to cancel visits and orders.
Beijing hotels have thousands of empty rooms — although many four and five-star hotels are clinging to the illusion that last-minute Olympics enthusiasts will pay £500 a night to stay. The tell-tale airline reservation websites show that there has been a collapse in business travel over the summer.
That may be one reason why manufacturing in China contracted in July for the first time since a purchasing managers’ survey of more than 700 firms began in 2005. New orders also fell.
Production is weakening fast and the government has hastened to raise export subsidies to give a break to makers of textiles and clothes.
More than 5,000 small companies have gone bankrupt this year in the world’s biggest commercial town, Yiwu, according to the China Business Daily.
Zhang Jixiong, chairman of the city’s Taiwan Business Association, blamed deflationary monetary policies and an abrupt reduction in visas for buyers from the Middle East because of the fear of terrorism at the Olympics.
In Hong Kong, a manufacturers’ group has warned trade leaders that 20,000 factories in southern China — mostly makers of cheap toys and sweatshops turning out plastic junk — will shut up shop by the end of this year.
That will come as no surprise to experts at China’s own ministry of commerce who found in a recent survey that furniture factories, a key export earner, were operating on profit margins of only 1.1%.
The net result is that for the first half of 2008 China’s trade surplus with the rest of the world fell by 12% to about £50 billion.
Some analysts predict that the surplus for all of 2009 will be about the same figure. Standard Chartered Bank forecasts that export figures, adjusted for inflation, will actually decline next year.
It is bad news for Shenzhen, one of those Chinese miracle towns that hurled its ambitions skyward in countless office blocks, shopping malls and sleek condominiums rising out of the rice paddies of Guangdong province.
Most of the people here, like the eager estate agent, seem to be under 25 and almost all hail from other parts of China. Every taxi driver growls in the slurred accent of Mao Tse-Tung’s native Hunan province.
Here was the first great experiment of Deng Xiaoping’s reforms, a great steaming metropolis in which the lures of capitalism, from shark-fin soup to prostitutes, competed for attention with beggars and migrants sleeping on the streets.
Growth rates raced into double digits, the local stock exchange rivalled Shanghai, and foreign investors, many from Hong Kong and Taiwan, piled into everything from internet start-ups to the inevitable golf courses and property scams.
If energy and enthusiasm were the only criteria for success, estate agent Chen and his fellows would be set fair to reap the next generation of fortunes from China’s raw capitalism.
Shenzhen is not immune to the outside world, however; far from it. The Chinese economy, fuelled by export growth and pumped up by immense flows of foreign investment, has proved more sensitive to global market conditions than many had thought. The Chinese media are suggesting that people at the top are now having second thoughts.
A group of influential economists recently called on senior leaders to rein in reform and liberalisation of the currency to reduce speculative flows in and out of the country, according to the 21st Century Economic Report.
“Since the fourth quarter of 2007 the stock market has been in continuous decline, credit markets are rattled and the property market seems stalled,” they were quoted as saying.
The yuan fell in foreign- exchange trading after publication of the report and some traders say the currency’s futures prices — implying a 10% appreciation against the dollar by 2010 — now look overvalued.
Last week there were signs that the government had, indeed, changed course. New regulations to tighten control over the inflow of speculative capital were accompanied by an official statement referring to “excessive growth in currency reserves”.
The People’s Bank of China, the central bank, marked down the value of the yuan for seven days in a row, with no sign of intervention.
The rewards for Chinese policymakers are that a stable or weakening yuan would help exporters and reduce political tensions at home.
In the outside world, politicians and trade negotiators might complain. However, overseas markets could benefit from outward investment as Chinese money flowed into blue-chip listed companies and private-equity funds.
Michael Sheridan in Shenzhen (11 Aug 2008)
IT IS RARE to see an estate agent running out of his office after a prospective client, but the young man pursuing me down the main street in Shenzhen had that fixed smile of desperation on his face.
As Chen Li intercepted me and offered his business card, there was a certain irony in the surrounding posters inviting people to rejoice in the 2008 Olympic Games, which opened this weekend.
Property developers have thrived in this dizzying boom town next to Hong Kong for as long as anyone here can remember. But now the days of easy money have gone, ended by mortgage curbs, tighter credit, slumping Chinese stock markets and the closure of thousands of local export factories that have been ruined by a strong yuan and falling global demand.
The slowdown is so sharp that Chinese leaders allowed the yuan, which had risen 20% against the dollar since 2005, to decline for the past week against other currencies. That spells trade trouble with Europe and America.
“Any time of day or night we can show you wonderful properties,” Chen beamed. “They are much cheaper than in Hong Kong.” Then he paused, as if about to confide one of China’s numerous state secrets: “And owners are ready to negotiate.”
In truth, many prospective purchasers are walking away from mortgages they cannot afford. Property prices are crumbling and banks are getting nervous. It is the same story in Shanghai and even in the capital. The New Beijing Daily reported the plight of Lin Sheng, a buy-to-let landlord who has lost a million yuan (£75,000) and stopped paying his mortgages after six interest-rate rises.
Asking prices for flats around the “Bird’s Nest” national stadium, scene of the Olympics opening ceremony, are said to be down 20%.
This was supposed to be the great year of China, crowned by the prestige of the Olympics, a time when many Chinese investors presumed that the state would ensure that property and stock markets stayed effervescent.
That was before China faced a revolt in Tibet, a costly earthquake in Sichuan, oil prices of more than $140 a barrel, the American sub-prime credit crisis, a resurgence of inflation and the contraction of global trade.
The benchmark CSI 300 index, which tracks the Shanghai and Shenzhen stock markets, is down 45% on last autumn’s record levels. Analysts thought a correction was inevitable but millions of retail investors are furious.
For business people, China’s year of troubles also included heavy snowstorms that wrecked power lines, persistent electricity cuts, higher raw-material costs and wage demands by workers trying to keep up with the soaring price of pork and other staples.
The Olympics — sometimes said to be a growth generator — have had the opposite effect in souring the political climate and putting off visitors. Heavy-handed security and restrictions on business visas led many buyers and inspectors to cancel visits and orders.
Beijing hotels have thousands of empty rooms — although many four and five-star hotels are clinging to the illusion that last-minute Olympics enthusiasts will pay £500 a night to stay. The tell-tale airline reservation websites show that there has been a collapse in business travel over the summer.
That may be one reason why manufacturing in China contracted in July for the first time since a purchasing managers’ survey of more than 700 firms began in 2005. New orders also fell.
Production is weakening fast and the government has hastened to raise export subsidies to give a break to makers of textiles and clothes.
More than 5,000 small companies have gone bankrupt this year in the world’s biggest commercial town, Yiwu, according to the China Business Daily.
Zhang Jixiong, chairman of the city’s Taiwan Business Association, blamed deflationary monetary policies and an abrupt reduction in visas for buyers from the Middle East because of the fear of terrorism at the Olympics.
In Hong Kong, a manufacturers’ group has warned trade leaders that 20,000 factories in southern China — mostly makers of cheap toys and sweatshops turning out plastic junk — will shut up shop by the end of this year.
That will come as no surprise to experts at China’s own ministry of commerce who found in a recent survey that furniture factories, a key export earner, were operating on profit margins of only 1.1%.
The net result is that for the first half of 2008 China’s trade surplus with the rest of the world fell by 12% to about £50 billion.
Some analysts predict that the surplus for all of 2009 will be about the same figure. Standard Chartered Bank forecasts that export figures, adjusted for inflation, will actually decline next year.
It is bad news for Shenzhen, one of those Chinese miracle towns that hurled its ambitions skyward in countless office blocks, shopping malls and sleek condominiums rising out of the rice paddies of Guangdong province.
Most of the people here, like the eager estate agent, seem to be under 25 and almost all hail from other parts of China. Every taxi driver growls in the slurred accent of Mao Tse-Tung’s native Hunan province.
Here was the first great experiment of Deng Xiaoping’s reforms, a great steaming metropolis in which the lures of capitalism, from shark-fin soup to prostitutes, competed for attention with beggars and migrants sleeping on the streets.
Growth rates raced into double digits, the local stock exchange rivalled Shanghai, and foreign investors, many from Hong Kong and Taiwan, piled into everything from internet start-ups to the inevitable golf courses and property scams.
If energy and enthusiasm were the only criteria for success, estate agent Chen and his fellows would be set fair to reap the next generation of fortunes from China’s raw capitalism.
Shenzhen is not immune to the outside world, however; far from it. The Chinese economy, fuelled by export growth and pumped up by immense flows of foreign investment, has proved more sensitive to global market conditions than many had thought. The Chinese media are suggesting that people at the top are now having second thoughts.
A group of influential economists recently called on senior leaders to rein in reform and liberalisation of the currency to reduce speculative flows in and out of the country, according to the 21st Century Economic Report.
“Since the fourth quarter of 2007 the stock market has been in continuous decline, credit markets are rattled and the property market seems stalled,” they were quoted as saying.
The yuan fell in foreign- exchange trading after publication of the report and some traders say the currency’s futures prices — implying a 10% appreciation against the dollar by 2010 — now look overvalued.
Last week there were signs that the government had, indeed, changed course. New regulations to tighten control over the inflow of speculative capital were accompanied by an official statement referring to “excessive growth in currency reserves”.
The People’s Bank of China, the central bank, marked down the value of the yuan for seven days in a row, with no sign of intervention.
The rewards for Chinese policymakers are that a stable or weakening yuan would help exporters and reduce political tensions at home.
In the outside world, politicians and trade negotiators might complain. However, overseas markets could benefit from outward investment as Chinese money flowed into blue-chip listed companies and private-equity funds.
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