China’s Economic Problems Unlike Those Elsewhere

So many speculators want to move money into China that its biggest problem has been how to keep them out.

In the United States, the European Union and Japan, central banks have struggled with hangovers from past housing bubbles, anemic or no economic growth and even deflation, in the case of Japan. In China, a possible housing bubble is still going strong.

The central bank is keeping interest rates low partly to discourage speculators from pushing even more money into China. But low mortgage interest rates — as little as 5.2 percent, in an economy with consumer price inflation running at 2 to 4 percent a year — have set off further surges in home prices.

After a sharp slowdown last summer, economic growth rebounded vigorously last winter in China. But an unexpected weakening of growth in recent weeks has created a problem that the People’s Bank of China, the central bank, is just starting to acknowledge.

Further monetary stimulus — which might seem to be the answer for a slowing economy — could drive housing prices even higher. Rising home prices are a source of tremendous anxiety across China, because very few young people can afford to buy an apartment when even an 800-square-foot unit can cost 35 times a young college graduate’s first-year salary.

China’s banking system has been awash with credit for years, with one result being that financing has been provided for even seemingly uneconomical projects like skyscrapers in third-tier cities or high-speed train lines to economically depressed areas. But the government’s response to economic weakness in recent weeks has been to encourage the state-controlled banking system to engage in another round of heavy lending at low rates.

“It’s very disappointing; this splurge in credit creation has taken off again,” said George Magnus, a senior economic adviser to UBS. “What you need to put this genie back in the bottle is quite a stern application of oversight and supervision.”

In its recent quarterly report on monetary policy, the People’s Bank of China warned against being “blindly optimistic” that inflation was under control, given continued brisk growth in lending and the money supply. The central bank has allowed lending to race ahead while pursuing an unexpected approach to trying to limit inflation: letting the renminbi appreciate gradually against the dollar, which makes imports less expensive and helps them compete on price with domestic goods.

The renminbi has climbed 1.3 percent against the dollar, mostly since the start of April.

Chinese central bankers face another puzzle that their Western and Japanese counterparts have not had to worry about: mysterious mass deaths of pigs and their effect on inflation.

Video of thousands of dead pigs floating in a river near Shanghai in March temporarily made pork much less appetizing for tens of millions of Chinese. The occurrence of a new form of bird flu in the same area several weeks later turned many people away from chicken.

Because meat makes up one of the largest slices of household spending, the abrupt national experiment in something approaching vegetarianism — beef and lamb are much less popular in China — has sharply slowed consumer price inflation, to 2.4 percent in April.

That has made it hard for the central bank to argue that inflation is a problem. But no one knows — not veterinarians, not the World Health Organization and certainly not the central bank — how long livestock will continue to be infected, much less how much longer Chinese families will be put off chicken or pork.

Article source: http://www.nytimes.com/2013/05/29/business/global/chinas-economic-problems-unlike-those-elsewhere.html?partner=rss&emc=rss