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  • Apr 21, 2014
  • Updated: 6:51pm
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CHINA

China's factories slow down as credit squeeze and holiday disruption kick in

Indexes measuring manufacturing and new orders dip ahead of Lunar New Year holiday

PUBLISHED : Sunday, 02 February, 2014, 4:27am
UPDATED : Sunday, 02 February, 2014, 5:50am

A key measure of manufacturing activity fell to a six-month low last month as output and orders slowed amid government efforts to rein in excessive credit.

The Purchasing Managers' Index was 50.5, the National Bureau of Statistics and the China Federation of Logistics and Purchasing said yesterday.

"The economy has lost some momentum," said Wang Tao, chief China economist at UBS in Hong Kong, who previously worked at the International Monetary Fund.

Credit growth slowed in the second half and "that impact is being felt", she said.

Estimates for the official PMI from 31 economists ranged from 50 to 50.9.

The benchmark Shanghai Composite Index fell 0.8 per cent on Thursday, capping the worst start to a year since 2010, on fears the economy is slowing as the US Federal Reserve cuts stimulus. China's markets are closed until Thursday for the Lunar New Year holiday.

A gauge of output in January fell to a four-month low of 53 from 53.9, while the new-orders index declined to a six-month low of 50.9 from 52.0, according to government data.

The survey suggested manufacturing jobs are shrinking at a faster pace, with a gauge of employment declining to 48.2, the lowest since last February.

"Growth may continue to slow in the next couple of quarters due to generally tighter credit conditions, amid government efforts to contain local government debt and regulate shadow banking," said Ding Shuang, senior China economist at Citigroup in Hong Kong.

The data suggests that a "gradual deceleration of economic activity continued at the beginning of the year", Ding said.

The government-sponsored PMI has a stronger representation of large companies and state-owned enterprises that serve the domestic market than the one prepared by Markit and HSBC, according to Louis Kuijs, chief China economist at Royal Bank of Scotland Group in Hong Kong.

The decline in January's PMI was mainly due to the approach of the Lunar New Year holiday, Zhao Qinghe, of the statistics bureau, said.

He said the operating environment for production would improve this year.

Bank of America analysts urged reading the January and February PMI figures "with a grain of salt" because of production slowdowns related to workers returning home for the week-long festival.

"We do not think a notable growth slowdown is evident at present," Hong Kong-based economists Xiaojia Zhi, Ting Lu and Sylvia Sheng wrote in a January 29 report.

Citigroup's Ding said the decline in January's official PMI was "partially seasonal" because of the holiday, whose timing shifts every year.

Last year, the PMI fell to 50.4 in January and 50.1 in February, when the holiday fell.

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The banks can then use the municipal bonds, or Local Government Safe-Bonds (LGSB), as collateral, to issue two securities.
The first security, the LGSBies, would be composed of the senior tranche of the bond portfolio, and would serve as the “safe asset,” to be sold to the pension funds, insurance companies, mutual funds, and (later) the foreign sovereign wealth funds, while the second, risky security would be sold to the banks’ wealthy depositors or other high-risk-taking investors.
The money thus raised by the banks can be lent out at lower interest rates to the SMEs or SOEs.
(Adapted from ‘Squaring the Eurozone’s Vicious Circle’, Project Syndicate)
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I’m no bond expert but let’s see whether the following arrangement works or not.
Now it’s time to replace all the debts in the financing vehicles of the local governments, and their other debts, with formal municipal bonds, which are to be issued by the local governments, backed up by the local governments’ assets, tax revenues, land proceeds, and the full faith and (implicit) guarantee of the central government, fairly rated by the credit rating agencies, priced according to the assigned credit ratings, with a quota that is reset every year, and whose accounts are to be fully disclosed to the public at the end of the fiscal year.
The cheaper longer-term municipal bonds can better match the returns and maturities of the local locality’s investment projects than the costly short-term debts in the shadow banking system.
The policy banks are expected to be the main buyers of the municipal bonds, as part of their required capital under Bazel III.

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