Chinese Factory Output Reading Fell to Record Low

Bejing, July, 2: World second largest economy is losing their steam as Chinese factory output reading in June at its record low in 28 months, Chinese economy is facing the pinch of monetary tightening and reduced global demand amid weakness in developed world.

The official purchasing managers' index (PMI), which is structured to give a snapshot of conditions in China's vast manufacturing base, fell to 50.9 in June from 52 in May, the China Federation of Logistics and Purchasing said.     

    

The number was weaker than market expectations of 51.3, based on a Reuters poll. But it was the 28th straight month that the official PMI has stood above the 50 that is critical indicator that demarcates expansion from contraction. The recent data indicating that the future economic growth rate may continue to fall.

However the de-stocking has played important role in the recent slide in the PMI, the de-stocking will be short-lived and the slide led by de-stocking will not going to sustained in near future but other component like inflation and global demand can play their rile in decline.

Global situation are not good at all as the world number one U.S. economic recovery loses momentum and Europe struggles with a sovereign debt crisis .Being a export economy this is not a good news for the China.

The sub-index of new export orders fell to 50.5 in June from 51.1 in May, reflecting persistent weakness in global demand.

  

Despite such issues most of the economists in China believe that Chinese economy, underpinned by the relentless urbanization, is in no danger of a hard landing.

The People's Bank of China is desperate to put a lid on price rises, so they lifted the reserve requirement ratio for banks nine times and raised interest rates four times since October 2010. 

To control the situation the Chinese government is expected to forge ahead with further tightening measures to combat the price rise that is running near three-year top, but most economist feels the current regulator tightening will end by December 2011. 

Earlier this week, Chinese Premier Wen Jiabao indicated for the first time that country would struggle to meet its 4 percent inflation target in 2011, underlining expectations that interest rates will rise further.

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China Credit Bubble is Maturing

Bejing : Global markets are eyeing over the Greece's debt woes, but the world second biggest economy China's debt situation is not that much different from Greece game.

Chinese banks are also witnessing pain in their books as the balance sheet of  banks are not giving rosy picture because in there off-balance sheet lending, very few facts and a lot of fears is visible.

The amount of Chinese bank credit book has doubled from December 2007 to May 2011, which is the perfect textbook example of a credit bubble in the system.

Despite the fact that the loan growth rate in China has been halved to 15% over the last 2 years, the value of lending extended during that time which is prime concerns for them. 

Total outstanding of Chinese bank loans stood at USD 6,500 per capita in 2010 with respect to GDP per capita of USD 4,400, which is not going to sustain in near future.

There is an overhang though of the excesses those were booked in the previous 2 years on the book of banks. When they mature over the coming 2, 3 years, the will certainly see defaults. In China non-performing loans (NPL), which at 1% of total loans, are bound to increase going forward.

Some analysts are even estimating that this could increase to 6% of loans, 10% of loans, and even 15% of loans within a few years’ time. However as per general consensus NPL of Chinese bank are inching to get double in 3 year.

The worsening situation in China will create big storm in world economy as China is not much transparent and once the bubble will burst will derail the global growth.

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China Allows Overseas Raised Yuan for FDI

Beijing : China, the world's fastest-growing major economy, formalised rules allowing foreign firms to use overseas raised yuan to make investments in the country. This is a measure initiative to boost its currency to internationalize.

According to the China Business News, trial scheme will permit overseas companies to use Chinese currency raised offshore to set up companies, make acquisitions, increase stakes in subsidiaries and provide loans.

According to central bank statement, companies will be banned from investing in certain industries without providing details. The statement appeared to have been removed from the central bank's website on Wednesday.

The statement marks the first time China has issued specific rules on yuan denominated foreign direct investment (FDI) in the country and hope it would encourage wider use of the currency overseas.

"This policy on yuan-denominated foreign direct investment is a significant stride towards making the yuan an international currency," Deutsche Bank economist Ma Jun was quoted saying.

The rules are expected to accelerate the issue of yuan-denominated bonds and other forms of yuan financing in Hong Kong, a semi-autonomous Chinese territory, Ma added.

Investors have started piling yuan in a bid to capitalise on the currency's expected appreciation, but there are limited investment outlets for the cash.

The People's Bank of China will review yuan-denominated foreign investment projects on a case-by-case basis, the report said.

Beijing in recent years has relaxed limits on the convertibility of the yuan in its push for greater use of the currency abroad.

The country has signed currency swap arrangements with several nations and launched trials for yuan trade settlement with a number of mainly Southeast Asian countries.

Yuan-related financial products have also boomed in Hong Kong, which has been acting as a test bed for Beijing's ambitious goal to turn the unit into a global currency.

In 2009, China, second largest economy of the world after U.S., approved using the yuan to settle cross-border trade with Hong Kong and last year it relaxed rules to allow non-financial foreign firms to issue yuan-denominated bonds.

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China Social Unrest Getting Out of Control

Chinese police forces have managed for now to control the social unrest in the southern manufacturing city of Zengcheng after the workers set fire to government buildings and installation over the weekend.

The event is seen as the warning sign as the economist says the discord is more pain for markets than the china’s soaring inflation."I think that any amount of cracking down is going to be a little bit like in Syria," Enzio Von Pfeil, CEO of the Economic Time Bond Fund told on CNBC. "You've put out the flame in one section of the kitchen but then another flame erupts in another section of the kitchen."

The reactions were sparked after a pregnant woman was manhandled to the ground by security force who tried to remove her food stall in Zengcheng, located in Guangdong province of China.

The primary issue is that such minor incident should not led to massive protest, but it happening and happening with mass participation so this is the sign of worry in the region.

The problems such as endemic corruption and the lack of rule of law were heightening concerns amid rising prices, is becoming intolerable, the spread of this news on social networking sites is further propagating the unrest.

Von Pfeil believes the problems are also aggravated by the household registration system, known as Hukou, which provides social benefits only to registered residents of a city and discriminates against migrant workers. "People are getting caught between having migrated to a new job, not getting the job, and then not having the social benefits."

The toe current is gaining momentum and the Middle East issues are further fueling; possibility burst can’t be rule out amid worsening economy in China.

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Ozone layer over Arctic Region Becoming Thiner

 As per the report of UN weather expert’s ozone layer over the Arctic region is in critical stage. The layer that protects Earth from harmful ultraviolet (UV) rays is getting thinner and thinner because of the excessive use of harmful chemicals in day to day life.

In order to protect the ozone depletion, in year 1887 a treaty was signed after notifying a hole over Antarctic to reduce the uses of the chemicals like Halons and Chlorofluorocarbons. But, the harmful chemical which was already released into the atmosphere continued to degrade the protective ozone layer for decades.

The World Meteorological Organization (WMO) has revealed that the region over the Arctic region has registered a 40 per cent loss from the start of winter to the late March,2011, which is 10 per cent more that of 2010. The excessive loss was due to presence of chemicals and excessive cold winter.

The ozone layer is now thinner than ever over the Arctic and it will result in the harmful exposure of UV radiation to the areas of Greenland, Scandinavia and Siberia.

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