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China's economy feels the heat

A record surge in Chinese property prices has added new tension to China's high-wire act of maintaining the economic growth required for social stability while warding off overheating and at the same snubbing demands from the United States that the government allow the Chinese currency to appreciate.

Property prices rose at a record pace in March, up almost 12% from a year earlier, according to the National Bureau of Statistics on Wednesday. This represents a considerable short-term acceleration after housing prices in 70 major cities rose only 1.5% in 2009, according to official data.

Prices for homes and other assets such as stocks have surged since the government announced a 4 trillion yuan (US$562 billion) stimulus package in November 2008 to head off the impact of the financial crisis then spreading around the world from the US. The money was targeted mostly at building infrastructure to take up the slack of lost jobs on declining overseas demand for Chinese-made products. In the event, cash has been diverted to the property and stock markets, driving up valuations.

At the same time, the stimulus measures have boosted demand for imports, notably commodities such as iron. Combined with rising global commodity prices, this has turned the country's usual trade surplus into a deficit.

China’s trade balance for March registered its largest deficit in over six years, as imports rose by two-thirds in comparison with March 2009, while exports were up only one-quarter. The deficit's absolute level came in at over US$7.2 billion following a surplus slightly larger than that the previous month.

Chinese and foreign analysts say the deficit is a blip that is also partly attributable to seasonal factors and should be reversed as soon as April figures are published. Even so, it may help to persuade the government to increase the value of the yuan, a move that the US and other trade partners of China have long demanded as they seek to reverse their own trade imbalances. President Barack Obama added his voice to the clamor this week, saying the US believes China's currency to be "undervalued".

A higher value of the yuan would make imports priced in US dollars cheaper, while making Chinese exports less competitive, threatening factory jobs, particularly those involved in making lower value-added products.

Any appreciation of the yuan is likely to be gradual to avoid undue traumatic effects on the economy and especially upon factory output and jobs, say analysts. A one-step yuan appreciation is unlikely to happen though a widening of the daily trading band is possible, an official with China's monetary authorities said in comments published Monday in China Business News.

Even so, internal pressure to revalue the yuan to help cool the economy may grow amid estimates from economists polled by Bloomberg that GDP may have expanded as much as 11.7% in the first quarter from a year earlier, the fastest pace in almost three years. The gain was10.7% in the previous three months. The statistics bureau will release the data in Beijing on Thursday.

The Chinese economy still runs the risk of overheating despite the trade deficit, according the Zhuang Jian, a senior economist with the Asian Development Bank quoted by Xinhua, "If GDP growth in the first quarter is in double-digits," he said, "the government should adopt a more prudent monetary policy."

The government has held its overnight interest rate steady at 5.31% since January 2009. Other data to be released on Thursday will show that lower-than-expected loan and money supply growth in March "indicates that monetary authorities’ measures to curb liquidity are effective," Bloomberg reported, citing Zhu Baoliang, chief economist at Beijing-based State Information Center. "The possibility of a near-term rate increase is diminishing."

The recent performance of the Shanghai Stock Exchange Composite (SSEC) may support his claims. The SSEC has picked up to around 3,160 from near the 2,900 mark early last month. Even so it remains below its post-crisis peak of 3,471 reached last August and is stuck at the top of its 2,850-3,150 trading range.

Hot money had concentrated in the mainland Chinese markets for much of last year; for the past three to four months, however, it has been rotating in and out of Japan, South Korea, Taiwan, India, and Singapore, preventing the region overall from suffering any significant collective retracement.

The government has already moved to slow the real estate market through higher mortgage rates and required down payments and the re-introduction of sales taxes.

The ministry of housing and urban-rural development has said it intends to crack down on price speculation in the property market and curb attempts to hoard land. Measures being considered include requiring a down payment of 40% on second residences, this in a country where some 25-year-olds are reportedly contemplating retirement after several good real estate deals reminiscent of the condominium "flipping" in the United States during the excesses of the past decade.

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URL:  http://www.robertcutler.org/blog/2010/04/chinas_economy_feels_the_heat.html
First published in Asia Times Online, 15 April 2010.

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