Wednesday, August 19, 2009

China - Anstalt?

(Merrily we rhyme along. -AM)

The Credit-Anstalt Crisis of 1931
Author: Aurel Schubert

Austria played a prominent role in the worldwide events of 1931 as the largest bank in Central and Eastern Europe, the Viennese Credit-Anstalt, collapsed and led Europe into a financial panic that spread to other parts of the world. Managerial and regulatory deficiencies led to the collapse of the bank; the subsequent currency crisis was not an irrational and unexplainable panic by a confused public, but rather a rational response to inconsistencies in policy; and the reactions of the largely unprepared authorities - in Austria as well as abroad - did not help to resolve the crisis quickly.

FT Alphaville
Posted by Izabella Kaminska on Aug 19 10:14.

Standard Chartered analyst Stephen Green has been pondering the meaning of the People’s Bank of China (PBoC)’s declaration that monetary policy was undergoing a ‘moderate adjustment’”

As he writes on Wednesday:

Was the small July loan growth number the result of banks being quietly restrained, or just exhaustion on the part of loan officers after the blow-out in June? When will ‘moderate adjustment’ evolve into something public and substantive like raising the deposit reserve requirement and/or interest rates? The market is concerned and confused. As a result, A-shares have sold off some 18% from their peak. 52% of investors surveyed by the ‘Economic Observer’ newspaper (经济观察报) said last week that ‘moderate adjustment’ would have a big impact on their markets. That might not be the only thing they have to worry about.

Which brings him to the fast diminishing effects of the fiscal stimulus…

China’s fiscal stimulus has peaked, and its effect now seems to be fading. After a massive shot of spending hit the economy at the end of last year, the Ministry of Finance (MoF) is now dialling things back.

So why is the fiscal stimulus fading? According to Green there are two reasons: first, spending growth is slowing and second, revenue growth is picking up. And herein lies the problem. As Green explains:
We run into one of the classic problems with China’s macro-management style: the tyranny of targets. While most economists would be counseling tax cuts and other measures to lighten the load for business, the MoF is doing its level best to hit its 8.2% total revenue target for 2009, causing a fair amount of misery for the corporate sector. Compounding the problem, the targets tend to rise as they are transmitted down to local governments. According to the ‘Economic Observer’, many city and district governments are being asked to hit an 11% y/y revenue target this year, just so that their superiors can be sure to hit their target.

We are not sure to what extent companies are actually paying unpaid taxes — or are just contributing funds from their current revenues out of patriotic duty. There are certainly anecdotal reports of the latter. So while the government wants companies to invest in theory, the funds they need in order to do so are being taken. This is the way China’s stimulus ends. Not with a bang, but with a whimper.

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