China: bank IPO’s, money supply growth, and inflation

We are not at the moment positing a causal relationship, since we really have not investigated adequately, but we note that China has been taking steps to privatize and add capital to its banking sector, which has harbored hundreds of billions of dollars in bad loans, as we have written. Big banks, big dollars, and big underwriters are involved (via Reuters):

Morgan Stanley was one of the three joint global coordinators of China Construction Bank Corp. (0939.HK), which raised US$9.2 billion in the world’s largest IPO in four years. Nevertheless, Morgan Stanley’s inclusion is a major coup for the Wall Street giant, which had not been invited to pitch for the business despite its China banking prowess and Chief Executive John Mack’s close ties to Beijing….

The list of underwriters is notable for the absence of Goldman Sachs , which is part of a consortium investing $3.78 billion in ICBC and has long been a top China deal maker. Goldman Sachs, which was left out along with HSBC Holdings and JPMorgan , is working on Bank of China’s $8 billion IPO for this year and many insiders voiced conflict of interest concerns if Goldman won ICBC as well. The share sale of the top Chinese bank, on track to be the world’s largest since AT&T Wireless raised US$10.6 billion in 2000, is expected to follow rival Bank of China, which aims to list in Hong Kong around May.

One of the things a country definitely does not want to do when floating bank shares is cause a bank crisis. The easiest way to do that is to have an expansionary monetary policy, and boy howdy, China has surely done that, with M2 up almost 20%, via People’s Daily:

The growth of China’s money supply was accelerated in January due to the booming deposit and cash flow around the new year holiday, said the People’s Bank of China (PBOC), the central bank, Tuesday. By the end of January, the broad measure of the money supply, M2, which covers cash in circulation and all deposits, grew 19.2 percent year-on-year to 30.35 trillion yuan, or 4.9 percentage points higher than that of the same period in the previous year.

This rate of growth of M2 is even faster than the 17.6% recently reported, and seems somewhat out-of-control compared with the 15% target we reported on last year. Unsurprisingly, when you get money growth substantially in excess of the real growth of the economy like this, you get inflation, which is exactly what the FT reported last week:

The competitiveness of China’s manufacturing industries has suffered serious erosion over the past year, according to one of the world’s largest trade sourcing companies. Hong Kong-based Li & Fung group, which manages a $7.1bn a year trading business, said price rises crept back into the Sino-US and EU supply chains last year, after at least six years of often “severe deflation”. William Fung, Li & Fung managing director, reported an average 2-3 per cent increase in the once unbeatable China price its US and European clients were willing to pay. He pointed to a “double-digit” rise in Chinese labour costs, the revaluation of the renminbi and higher oil and energy costs for the shift.

“China’s costs are all going up,” Mr Fung said. “It is no longer the most cost-effective country in the region…Anything [sourced] from China has a higher inflation component than from other places around the world.”….Li & Fung, which used to buy 90 per cent of its non-apparel products from China, has seen 25 per cent of this “hardgoods” business migrate to cheaper locations in south and southeast Asia. It sells about 70 per cent of its sourced goods in the US, and another 20 per cent in Europe.

We have been predicting a correction in China for a long time, and we have been 100% wrong so far. With money supply expansion in an unsustainable range and inflation beginning to hamper China’s major competitive advantage as an exporter, we are closer to that blip than we have been previously. (HT: Bruce Kesler)

UPDATE

China’s problems pale in comparison to those of Europe. Its unfunded liabilities are totally out of control, as this chart shows; moreover, with government spending outrageously high as a percentage of GDP (we have written of France’s crazy 57% level), raising taxes and revenue won’t work — only benefit cuts will and so far these are politically unacceptable.

EN Liabilities.gif

Check out this excellent post in Brussels Journal for the whole story.

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