China re-enters the currency war

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Courtesy of Also Spracht Analyst.

By now we all know about the burst of the Chinese real estate bubble. We also know that land sales are an important source of local government revenue. It comes as no surprise, then, that as the real estate market cools and as trouble for real estate developers deepens, one rational thing for them to do is to slow land purchases.

As a result of that, China News is reporting that land sales revenue in 20 of the biggest cities have hit a 3-year low. For May 2012 alone, land sales revenue for the top 20 cities counted to RMB2.7 billion, the lowest since March 2009, with 294 pieces of land transacted. And with 5 months passed for the year 2012, total land sales revenue year-to-date for these 20 cities amounted to just 21.3% of total land sales revenue of 2011 for the full-year. Not only have prices fallen, developers are also less interested in bidding, with more than 12% of land apparently receiving no bids above reserve.

I maintain that the Chinese economy has not seen the worst of the impact of the burst of real estate bubble. Don’t be surprised that the recent pick-up in residential transaction volume is a dead cat bounce, and developer failures continue to happen. Which raises the question how China will continue to grow at its targeted rate.

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The answer to that has been the subject of some controversy in recent weeks as Western source have been crawling all over themselves in anticipation of a new 2008/09 sized stimulus. But a Reuters’ report later yesterday quoted Xia Bin, the head of the financial institute of the State Council’s Development Research Centre, saying that China is not yet a in a situation to stimulate the economy massively. Essentially, he thinks the rest of the world wants China to stimulate so they can speculate on stocks, but China won’t be so stupid as to fall into that trap, apparently:

Xia, who was a member of the central bank’s monetary policy committee until March, said a hard landing would bring a sharp rise in both banking sector risks and unemployment, posing a threat to social stability.

In contrast to the global financial crisis, China’s labor today is tight as firms struggle to fill vacancies. Non-performing bank loans are around 1.1 percent – far below international averages.

Meanwhile there is room for the central bank to cut lending rates to help deal with the risks to growth and corporate profits but excessive policy action should be avoided, Xia said.

“Americans and Europeans like it. Investors like it because they want to speculate on stocks. The whole world is hoping China will relax policy,” Xia told Reuters.

“We will fall into a trap if we do. We will not be that stupid,” Xia said, adding that the government should only stimulate economic growth in a “balanced and modest” way, while forging ahead with structural reforms to sustain growth over the longer term.

However, there is one area that China has already decisively moved to stimulate: in exports. How, you might ask, can China do so? By re-entering the global currency war.

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Ever since last year, I have maintained that if the Chinese economy experienced a hard landing, one of the tools that the Chinese government will deploy is a falling yuan.

With the macro data from China coming on the weak side in April and with the European economy in a deep recession, it is now obvious that that is precisely what we are seeing. The yuan is falling fast, reaching the 6.37 level almost overnight:

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