The property and stock markets are driven by investors whose only experience is two decades of rising markets, little understanding of the differences between the two markets, and with virtually no comprehension of the impact of an economic bust.
With millions of domestic investors across the spectrum of China population, any hint of a problem will create panic on an unprecedented scale and the real potential for widespread civil unrest.
Inflation
Relying on different philosophies but lacking adequate oversight, unrestrained lending and poor credit management by China's banks to meet stimulus package targets, Beijing created its own problem for China similar to that by the financial institutions of the US.
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Unlike the US and developed nations, China has failed to implement social reforms to develop the level of consumer demand that can assist in softening economic blows. With no option but to restrain inflation, Beijing still believes that a softer approach will work.
Bank lending restrictions will affect property market values. Because of the level of speculation and extent of unsold property, banks will face the real risk of carrying high risk loans. Banks will move quickly to recover what they can. That in turn will trigger a ripple through the financial institutions holding those securities.
Reliance of China's notorious "rubbery figures," has the potential to generate its own financial tsunami and civil unrest backlash.
What does it all mean?
The central government of China is:
- the major buyer of its own steel products;
- reliant on long term repayments and counter trade on much of its steel exports;
- missing out on revenues from taxation on SOE profits; and
- building infrastructure capability that exceeds domestic and global demand.
When completed, China's immense infrastructure, steel and energy programs will have created capacity on an unprecedented scale that has the capability to exceed combined domestic and global demand. Recovery of the huge debt that funded that construction will become a priority.
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Factoring in the cost of amortising construction and ongoing maintenance of such colossal capacity, begs the question of the source of such massive demand. Well before the end of 2010 China must lock in that revenue. China also must find new markets for the immense capacity of its restructured steel industry, at the same time, reducing debt and find employment for redundant steel and coal workers.
Where is the money coming from?
Beijing appears to have conveniently overlooked critical economic inputs:
- the huge SOE's that built this capacity that launched GDP back into double digit growth, are reliant on subsidies to survive and do not produce the tax revenues relative to turnover necessary to fill taxation coffers;
- there is also the matter of continuing crucial subsidies for future survival;
- finding the revenues to recover the outstanding debt, maintenance and operating costs of the huge infrastructure;
- running parallel is China's property and stock market debt as well as state banks and local government exposure to both;
- Beijing will be pressed to find solutions to the redundancies flowing from restructuring of the General Steel and General Coal; and
- Hu Jintao may face serious and unprecedented criticism in the forthcoming NPC on two crucial issues:
• the possibility that his anti-inflationary measures will undermines the property market and jeopardises some local government's solvency; and
• the effects of unemployment in provinces where restructuring is decimating the local steel and coal mining operations will impact on regional economies and civil unrest.
China's relations with developing nations are reliant on China maintaining growth and global economic influence and credibility. Any question on that growth and credibility will have a resounding negative impact in confidence in China's future role as a global power and future political realignments.
There may be good reason for growing paranoia in the Zhongnanhai.
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