China And Starting From Entirely The Wrong Position

ChnapropertyBy John Richardson

THE majority of  people analysing data on China’s economy are still getting it wrong.

They think that the worst the numbers get, the more likely it is that the government will panic. Predictions are widespread, therefore, of  an interest rate cut and a reduction in the bank reserve requirement later this year.

But, to repeat again, based on the Chinese government’s own estimates, in 2007, each dollar of debt raised added 83 cents to GDP growth.

This year, for every dollar of debt added, only 10 cents will be added to GDP growth.

China’s leaders are neither stupid nor short sighted, unlike certain politicians elsewhere. You do not have to have a PHD in economics to realise that adding to oversupply in high-end real estate and low-value manufacturing will soon start to subtract from GDP growth.

So they have  reversed course and are firmly heading in the opposite direction, away from the wrong kind of investment. There is no turning back and so any interest rate cut and change in the reserve requirements will be small potatoes. What really matters is the big shock to the economy being delivered by a big reduction in the growth of credit growth. We could see the direction that China was heading on lending back in February.

Hence:

  • In July, month-on-month, property prices fell in 64 of 70 cities surveyed by the National Bureau of Statistics.
  • “It is almost impossible for home prices to rise in the second half [of 2014],”  said Tan Huajie, board secretary of China Vanke Co, the nation’s biggest developer. This serious questions over the forecasts made in June of a H2 real-estate rebound.
  • Foreign direct investment fell by 17% in July from  the same month in 2013, said the Ministry of Commerce.
  • This follows last week’s release of July’s credit-growth figures. In that month, credit growth was at its lowest since the global financial crisis.

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