Slamming on the brakes in China

In order to curb investment frenzy, China mandates a lending freeze.

Chinese authorities are slamming the brakes on bank lending, in their latest attempt to curb the runaway investment threatening to overheat what is soon to be the world's third-largest economy.

In recent weeks, regulators have quietly ordered China's commercial banks to freeze lending through the end of the year, according to bankers in several cities. The bankers say that to comply, they are canceling loans and credit lines with businesses and individuals.

Over the past few years, Chinese authorities have repeatedly sought to rein in investment in sectors such as property development, where they deemed it was becoming excessive. But even in China a blanket edict to halt lending growth is unusual.

Tthe lending freeze shows how the slowing U.S. economy may be complicating Chinese policy making. Lower interest rates in the U.S. give Beijing less room to push up rates without creating a ripple effect.

By raising rates further China could risk boosting the value of its currency, the yuan, too much for the comfort of its exporters, a critical part of the Chinese economy. A stronger yuan would make Chinese exports less competitive in world markets.

Just last week, the government said fixed-asset investment in factories and property expanded nearly 27% in the first 10 months of 2007 from a year earlier, one of the highest rates in recent years.

Credit Crunch Chinese Style

One day after the mandated freeze is announced, reports came in that a Credit "heart attack" engulfs China and Korea.

Yields on three-month deposits in China and Korea have plummeted to near 1pc in a spectacular fall over recent days, caused by panic withdrawls from money market funds and credit derivatives.

"This is a severe warning sign," said Hans Redeker, currency chief at BNP Paribas. "Asia ignored the credit crunch in August but now we're seeing the poison beginning to paralyse the whole global economy," he said.

Jerry Lou, China analyst for Morgan Stanley, said the Shanghai bourse -- already down 15pc -- was now the word's "biggest valuation bubble". "Lessons from Japan in the late 1980s show that once the stock market starts to head down, earnings and multiple contraction can together crush the market like a market rolling downhill," he said.

With this pair of reports you can now kiss goodbye the theory that Asia and Europe would carry the global economy.

And in the wake of falling US demand and a stagnating Europe, China was forced to act. So now the credit crunch has truly gone global.

US slowdown threatens Chinese export growth

So much for Paulson's quip about the strong global economy. Rampant credit expansion does not equate to "strength".

The world is about to find that out in spades as a US slowdown threatens Chinese export growth.

China’s commerce ministry warned on Thursday that a slowing US economy would trigger a drop in Chinese exports that would mark a “turning point” for China’s rapid economic growth.

A global economic slowdown stemming from problems in the US subprime mortgage market and the resulting credit squeeze “will be the biggest challenge to China’s economy next year”, a report from the ministry’s policy research department said.

Huang Yiping, chief Asia economist for Citigroup, said: “I agree with the government that a marked slowdown in the US would be very bad for China.

“We haven’t seen overcapacity or a so-called hard landing in China because it has been able to export all its excess capacity until now.”

The ministry’s report was pessimistic about the chances of avoiding a US and global slowdown, pointing out that although central banks in the US, Europe and Japan had taken numerous steps to alleviate the credit crisis, the situation had continued to deteriorate and “panic in the credit market remains”.

Asian Crisis II and US$ repatriation ahead?

My friend BC pinged me with these comments:

One can only imagine the extent of the bad loans that will now pile up in the Chinese banking system hereafter.

How many US and Japanese firms investing in China will want their deposits at risk in Chinese banks? How soon before these firms repatriate tens of billions of US$'s out of China and into US$- and Yen-denominated assets? Consider what effect this will have on the US$ over time as liquidity preference and flight to safety increase. Consider the extent to which this will affect commodities prices going forward.

On that note I offer the idea that the love affair with the Renminbi, especially in regards to Chinese assets is likely to come to a screeching halt.

In addition, sentiment against the dollar vs. nearly every currency could hardly be more extreme. Watch what happens when the ECB unexpectedly starts to cut rates to fend off the credit crunch in Europe. In the UK, there were two dissents voting to cut rates at the last BOE policy meeting. Will the pound hold up when the UK starts cutting?

A massive unwind of the carry trade is now building and it will be best not to stand in front of that tsunami when it picks up speed.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List