CHINA IS NOT DIFFERENT

since the end of november, the chinese stock market has risen 15%, while the dow jones has fallen 15%.

this has prompted many investors, foreign and chinese, to start believing that china will be less affected by the crisis than other countries, and might even save the world. a bit like a jackie chan flying through the air, defying gravity.

we would be better off reminding ourselves that except in chinese movies, people walk and stumble to the ground in china pretty much the same way as they do everywhere else.

in addition, year-on-year, the dow has lost 40% while the shanghai index has lost 48%.

andy xie, former chief economist at morgan stanley asia, in yesterday's south china morning post editorial, lays out the reasons why we should not be fooled by the apparent strength of the chinese economy. a lot of it has to do with the basic health of the chinese real estate market, which i have written about earlier on this blog.

andy's article is subscriber content, so for those who do not subscribe to the south china morning post, here are a few excerpts:

"Liquidity has been inspiring hope lately. The mainland's banking system is flooded with liquidity, and lending has increased massively since December, mostly in the form of discounted bills. The liquidity boom has inspired hope that a quick and vigorous recovery will follow. Instead, it could be a trap, leading to stagflation. China's problem is not liquidity, but household demand. Reform, not liquidity, can bring back prosperity. (...)

The lending, however, won't turn into demand any time soon. Most industries, especially capital-intensive ones, face overcapacity. The steel industry, for example, may have 30 per cent overcapacity. The shipbuilding industry is seeing massive defaults in orders; many shipbuilders are facing bankruptcy. Most developers cannot sell their properties and, if given money to build more, would only dig a deeper hole for themselves. The mainland's supply side has too much capacity. It is unlikely that more business loans would spark an economic recovery. (...)

A big drop in exports, following the bursting of the global credit bubble, and the popping of the property bubble are the sources of the shortfall in demand. (...)

To clear the property inventory (now equivalent to one-third of existing housing stock) the cost per square metre should be cut. In some cities, the average price per square metre is three times the average monthly salary - or higher. This should be halved. That is not low by international standards. (...)

Some people hope greater liquidity will improve the economy by inflating asset markets - that is, by creating another bubble. This is what then-US Federal Reserve chairman Alan Greenspan did after the tech bubble burst in 2000. Of course, his glory has become today's nightmare. But creating another bubble to deal with the consequences of a burst bubble would be irresponsible - even if it could be done, which I doubt. Some of the liquidity did flow into the mainland stock market in December and January. At its recent peak, the market had risen 40 per cent in three months. But, it is extremely hard to manufacture a stock market bubble in a difficult economy because speculators are quicker to take profits than when the economy is booming.

Further, it is virtually impossible to inflate the mainland property market by encouraging speculation (by making it easier for people to obtain funding and keeping interest rates low). The current inventory is unprecedented; it is probably the biggest overhang per capita of physical properties completed or under construction in history. It will take three years to clear even with the best policymaking. Re-inflating the bubble with liquidity is just a pipedream."