You wouldn’t want to be a Chinese local government official, just now:
(Reuters) - China will link local officials’ performance appraisals to the level of debt held by local governments, state media reported Monday, an apparent move to cap borrowing and address worries that possible defaults could damage China’s economy.
Hmm. And then there’s this, from Bloomberg:
China’s finance ministry failed to sell all of the three-year debt offered at an auction on behalf of local governments as a cash crunch curbed demand.
The ministry sold 23.9 billion yuan ($3.7 billion) of bonds at a yield of 3.93 percent on behalf of 11 provinces and municipalities, falling short of its 25 billion yuan target, said a trader at a finance company required to bid at the auction. The Shanghai interbank offered rate, or Shibor, for three-month yuan loans, was fixed at 6.24 percent today, near a record high of 6.46 percent reached on June 28.
One thing’s for sure — it was certainly an interesting June in China. Inflation was up a lot – even if it was mainly due to the price of pork.
As Soc Gen noted:
Though, that’s not to downplay it — pork is a popular food, and food prices are a sensitive issue.
But more to the point is the fact that China’s import growth slowed, something which creates a very tricky dilemma for policymakers. Not only do they have to deal with the cumbersome inflation issue, they’re now also facing a stagflation follow-through.
You certainly wouldn’t want to be one of them.
Société Générale highlights the problem:
Given the status of the developed economies, China’s export growth is likely to remain relatively soft in coming months.While we don’t expect much upside of imports, downside willprobably be limited. Destocking may not continue much longer,as commodity inflation pauses. We also expect Chinesepolicymakers to take action to reduce the probability of sharp slowdown in consumption and investment. However, the production and investment data for June (due on 13 July)would disappoint.
Or, as Ian Bremmer of Eurasia wrote in the Wall Street Journal at the weekend:
The financial crisis made clear that China’s dependence for growth on the purchasing power of consumers in America, Europe and Japan creates a dangerous vulnerability. Those who insist that it’s possible to map the precise arc of China’s rise seem to assume that China’s leaders can steadily shift the country’s growth model toward greater domestic consumption, by transferring enormous reserves of wealth from China’s powerful state-owned companies to hundreds of millions of new consumers.
He goes on:
That’s quite an assumption. Despite the best efforts of policy architects in Beijing, the share of household consumption in China’s economic growth last year actually moved in the other direction, in part because there are political powerbrokers within the elite who have made too much money from the old model to fully embrace a new one.
Still. It makes a change from focusing on Europe, doesn’t it?
Related links:
About that Chinese inflation rate – FT Alphaville
Chinese stagflation, and what it means for investors – Forbes