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China is on buying spree
With $ 2.85 trillion foreign exchange reserves and counting, China has been on a buying spree in the past few years. From 2007 to first half 2010, China has acquired over 400 firms overseas, or $86 billion, according to Rand Corp.’s Wolf.
China has the urgent need to diversify its investment of its foreign assets since the US dollar is on steady decline. One way of spending the huge foreign reserves is through purchase of natural resources and advanced capital equipment, the latter of which will benefit China via technology spillover, boost China’s labor productivity growth.
For sure, this state-led investment will be inferior to individual-firm’s investment decisions, inevitably bringing some bad returns. China will need eventually relax its control on capital account and bring its surplus of balance of payment account to a more reasonable level.
Dealing with a more assertive China
The following is a more sensible interview with former US Ambassador to China, Admiral Prueher.
Making sense of China
Martin Jacques explains the three building blocks in understanding China, and how China is fundamentally different from the West.
This is one of the videos worth watching, and I’d highly recommend it. Although I am not a believer of those grand projections into the future, Martin got his facts about China very right.
Andy Xie on China’s inflation outlook
Interview of Andy Xie, former Morgan Stanley Chief China economist.
Pay attention to his view that raising interest rate will have limited effect on containing inflation because it may prick the housing bubble. This is especially true when considering local governments’ huge stake in keeping housing and land prices high.
I expect Chinese government will resort more to raising bank reserves and administrative measures to contain inflation.
Three other things are also likely to happen:
1) Chinese government may distort official inflation numbers, i.e., more human smoothing.
2) Accelerate Yuan’s appreciation, which I think is most likely. In fact, Qing Wang of Morgan Stanley expects the RMB to appreciate from currently 6.64 to 6.2 by Dec. 2011. Marty Feldstein, in my earlier post, echoed the similar view.
3) tighter capital control to prevent inflow of hot money.
More broader picture is that the super easy monetary policy by the Fed is propping asset bubbles everywhere in the world, especially in the fast growing emerging economies (carry trade factor). Besides China, Brazil also faces grim inflation outlook, and Brazilian interest rate is already above 10% and expected to rise further.
Commodity prices are already high and fast rising. But given the debasement of paper currency across board, and the grim inflation outlook in emerging markets, it’s reasonable to believe commodities are set to rise further.
Higher volatility is ahead of us; expect to see more booms and busts; and China is facing another real challenge.
Locate China’s housing bubble
Housing market tends to be local. It’s rare to see a nationwide price decline. The recent US housing bubble is an exception and often considered a black swan.
People have been talking about China’s housing bubble for a few years now (see my previous post on China’s housing bubble debate), but where exactly is the bubble located?
The recent NBER research sheds some light on the issue. The graph below shows the price-to-income ratio of China’s eight major cities, from 1999 to Q1 of 2010.
(click to enlarge, source: NBER w16189)
Beijing and Shenzhen are clearly in bubble-shape — the typical and familiar parabolic surge in price, and they are followed by Shanghai and Hangzhou.
Now, let’s have some comparative perspective. How the same ratio compares to the major cities in the United States.
The graph below (courtesy of Infectious Greed) shows the price-to-income ratio of US cities. San Francisco, Los Angeles, Seattle were among the highest.
(click to enlarge)
At the peak of the housing bubble between 2006-07, the same ratio for San Francisco, the highest among all US cities, was around 11. In contrast, Beijing has a ratio of 18, and Shenzhen at astonishing 22.