China/japan Slumping

All those people who still believe Australia won't dip into recession in 2009, as the IMF, OECD, Federal Treasury and Reserve Bank, should think again.

China, whose 'solid' demand for our resources was supposed to help keep us out of recession in 2009, is getting worried.

So worried that it slashed interest rates Wednesday night by the biggest margin in 11 years, once again it proving that it pays to watch what central banks do, not what they say.

Bloomberg reported yesterday that a senior Chinese economic official had warned that "Some economic indicators in China showed a “faster decline” in November, the nation’s top economic planner said, underlining the urgency of government measures to support growth and employment."

“Some economic indicators weakened further in November, showing a faster decline,” Zhang Ping, chairman of the National Development and Reform Commission, told a briefing in Beijing.

“Employment is being impacted by factory closures and many migrant workers are returning to their home towns.”

China's State Information Centre lowered its growth forecast to 8% for this quarter from 9% last quarter, a significant decline from the double digit growth of 2007's 11.9%.

"The global financial crisis has not bottomed out yet," Zhang Ping said.

Just as the bank of England dropped rates by 1.5% at the start of this month, and our central bank has cut rates by 2% in almost three months, with a 1% surprise slash in October, China's central bank got out the axe and rolled four of its normal 0.27% trims into one big hack of 1.08%.

China's economy is slowing, slowing much faster than thought. The World Bank this week picked up on it and was mostly ignored by the media.

The World Bank reckons China's economy will grow at 7.5% next year, the lowest rate in around 19 years, the IMF says 8.5%, the OECD, 8%.

The cut by the People's Bank of China of 1.08% shows the central government is far more concerned about the level of slowing growth in the economy, than even the most pessimistic commentator.

It was the 4th rate cut in just over three months: rates have now been cut a total of 1.89% in an easing almost unprecedented in China in recent years.

The key one year lending rate falls to 5.58% and the deposit rate will fall by the same amount to 2.52% percent. The changes are effective from yesterday.

The latest cut is designed to support the 4 trillion Yuan ($US586 billion) spending plan announced two weeks ago, just after the previous rate cut.

The central bank also cut the reserve requirement for the biggest banks to 16% from 17%, effective a week from today.

That's an equally significant change: the central bank had been tightening that requirement for over two years now, interspersed with the odd rate rise.

There are reports China's banking regulators also want banks to boost their capital levels by year's end:

Doing that and lending more to business don't sit easily: something will have to give. The plunge in the property sector is said to be behind the directive to banks to put aside more capital.

The reserve asset requirement for smaller banks will fall to 14% from 16%, but again they are exposed to property loans in smaller towns and cities. .

The central bank said in a statement the rate and reserve cuts were aimed "at ensuring sufficient liquidity in the banking system, and to promote steady loan growth so that monetary policy can play an active role in supporting economic growth.

While China's economy grew 9% in the third quarter, it was the slowest pace in five years and marked the fourth quarter in a row that growth had eased. Just over 15 months ago growth was more than 12%; it averaged 11.9% in 2007.

Exports remained OK in October, as did retail sales and domestic investment, but a slowdown in orders, rising company failures, and more importantly, a plunging real estate market, are eroding the drive in the economy.

More worrying was the sharp fall in industrial production in October to a seven year low. Thousands of people are being laid off as factories close. Riots and protests are being reported from industrial cities on the coast and in the south, a pointer to the Government's campaign to tell everyone how bad things are becoming.

Property prices and sales are falling in major cities and construction contracted in September by the most since the 1990s, according to some commentators, a point acknowledged by the World Bank in its latest forecasts

"Weakness in the real estate market, partly reflecting an earlier tightening in macroeconomic policies, is now feeding through to several “upstream” industries such as cement and steel.

“Looking ahead, private sector investment is likely to be weighed down by the unfavorable external prospects and continued weakness in real estate," the World Bank said.

"Private consumption growth is likely to soften in 2009, but will receive some support from fiscal policy."

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Meanwhile the situation in Japan seems to worsening with political instability starting to interfere with economic policy, which if it continues could see the economy of our biggest trading partner slide further into recession.
The Japanese government this week said it was putting off legislation required to finance a promised stimulus package until next year, just as the country's central bank lowered its assessment of the economy.

Prime Minister Taro Aso said the supplementary budget needed to pay for a stimulus package unveiled in October would only be put to a parliamentary session starting in January, rather than to the current session.

He and his Liberal Democratic Party are presently locked (as were his two predecessors) in a battle of wills with the Opposition parties in Japan, a situation that has brought parliamentary activity to a standstill.

The prime minister indicated that there were administrative difficulties in presenting the bills to the current session of the Japan’s parliament, but the opposition accused the government of failing to make economic recovery its top priority.

Spending of more than $US100 billion is apparently caught up in the impasse.

The delay was announced as the Bank of Japan said economic activity was likely to slow further and funding conditions had deteriorated.

“The increased sluggishness in Japan’s economic activity will likely persist over the next several quarters as the slowdown in overseas economies becomes more evident,” the bank said in its monthly report (See below).

The Japanese economy is now in recession: figures published last week showed the world’s second largest economy had fallen into recession for the first time in seven years, exports have slumped, a trade deficit has emerged, thanks in part to still solid imports.

And the stronger yet has hit exporters, especially the car giants like Toyota and Honda.

Mr Aso’s decision to delay supplementary budget legislation has fuelled concerns that the government’s economic stimulus measures are unlikely to prevent Japan from falling into a deeper recession.

The country runs the biggest risk among the industrialised nations of falling into deflation next year, the Organisation for Economic Co-operation and Development, the think-tank, said on Tuesday.

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Here's what the Bank of Japan said in its monthly update this week. It's an English translation from Japanese, it's less than optimistic.

Japan's economic activity has been increasingly sluggish due to the effects of earlier increases in energy and materials prices and the decrease in exports.

Exports have decreased. Business fixed investment has also declined, mainly due to the deterioration in corporate profits.

Private consumption has been relatively weak, mainly due to sluggish growth in household income and the increase in prices of energy and food.

Housing investment has been more or less flat. Public investment, meanwhile, has been sluggish. Reflecting these developments in demand both at home and abroad, production has continued to decrease.

The increased sluggishness in Japan's economic activity will likely persist over the next several quarters as the slowdown in overseas economies becomes more evident.

Exports are expected to continue decreasing due to the slowdown in overseas economies and the appreciation of the yen.

Domestic private demand is likely to remain relatively weak, due to the decrease in corporate profits and real household income. Public investment, meanwhile, is projected to be on a downtrend.

With these developments in demand, it is likely that production will continue decreasing and the pace of decrease will be faster in the immediate future.

On the price front, the three-month rate of change in domestic corporate goods prices has become negative, mainly due to the setback in international commodity prices.

The year-on-year rate of increase in consumer prices (excluding fresh food) is currently around 2.5 percent against the background of the increase in prices of energy and food.

Looking at price developments for the time being, domestic corporate goods prices are likely to continue decreasing, mainly due to the setback in international commodity prices.

The year-on-year rate of increase in consumer prices is expected to moderate reflecting the declines in the prices of petroleum products and stabilization in the prices of food.

In the midst of the ongoing turmoil in global financial markets, the yen appreciated rapidly and stock prices plunged toward the end of last month.

Since then, the yen has depreciated and stock prices have recovered slightly, but they have continued to be volatile. In money markets, since the Bank of Japan changed the guideline for money market operations, the weighted average of the overnight call rate has remained at around 0.3 percent.

However, interbank rates on term instruments and JGB repo market rates have remained high, indicating increased risk aversion among market participants.

Meanwhile, yields on long-term government bonds have been around the same level as last month.

Financial conditions in Japan have become less accommodative on the whole, as the financial positions of small firms have deteriorated and an increasing number of large firms have faced a worsening in funding conditions in the markets.

The overnight call rate has been at a low level relative to the state of economic activity and price developments.

However, funding conditions in the markets have deteriorated, as suggested by the fact that credit spreads on CP and corporate bonds have widened and an increasing number of firms have postponed issuing them. As a result, the amount outstanding of CP and corporate bonds issued has fallen below the previous year's level.

Large firms have increased their borrowing from banks to cover the decline in the issuance of CP and corporate bonds, although credit demand for working capital has stopped increasing due to the drop in materials prices.

As for small firms, an increasing number of these firms have reported that their financial positions are weak and lending attitudes of financial institutions are severe.

Not a glimmer of light anywhere.

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