Chinese Economic Outlook: What's in Store in the Year of the Metal Tiger

Even now, as your weary editor sits down to pen the day’s thoughts (well after midnight on Friday night), the firecrackers can still be heard overhead. The markets in the alley next to our building were bustling late into the evening with people stocking up on essentials – fruits, meats and flowers – in preparation for this weekend’s celebrations. From tip to subtropical tip, all across this tiny island of Taiwan, locals are getting ready to party like its ’99. (For them, as of tomorrow, it is.)

All week we’ve watched with interest the goings on from our balcony. The labyrinthine corridors winding off the main roads are alive with excitement. Vendors busy themselves with final sales…children skip down the lanes alongside their parents…women scrub the windows furiously while their men prune the trees, finish up last minute renovations and generally scuttle about, making certain everything is “just so” before the celebrations begin. Even the old hunchback lady who – as far as we’ve been able to tell – collects the recyclables around our block, seems to have quickened her pace.

“Everything must be ready by weekend,” the man at our front desk told us. “It is much like…how do you say…a new slate. No…wait…a clean leaf. Well, you know, I sure.”

The Chinese New Year spectacle here in the ROC promises to be, at the very least, intriguing…but it will be nothing like what’s already underway over on the mainland. In China, as you read this column, the largest human migration on earth is taking place. During the next few weeks, hundreds of millions of people will shuffle around the country, most returning home from the pulsing cities in the east to visit their families in the countryside. Some will ride their bicycles or hitch rides with friends; others will fly for the first time ever; and still others will ride in comfort on the world’s fastest passenger train. The Ministry of Railways actually estimates that 210 million passengers – somewhere between the populations of Indonesia and Brazil – will ride the rails during the 40-day New Year travel season, a 10% increase over last year.

But aside from all the festivities, people want to know: What does the New Year, the year of the Tiger, hold for the world’s most populous nation? For the past twenty years or so the China Play has been more or less a one-way bet, albeit a rather volatile one along the way. China’s economy (as measured by GDP) doubled over the past twenty years…twice. But opinions on how it will proceed from here differ greatly. Legendary investors like Jim Rogers foresee a Middle Kingdom set to rule the world. Others, notably Jim Chanos, see China as the mother of all bubbles. “Dubai times 1,000,” he calls it.

So, what will it be?

Your editor has no idea, of course…only rough guesses and wild speculations.

(The tiger, in case you are the superstitious type, is said to be an extremely tumultuous sign. One website we read noted, “The year of the Tiger is very likely to be a volatile year, everything is taken to its limit in this big and bold year. It can also be a year of war, disasters and all kinds of disputes, it is a year for massive change…” Like we said… If you’re the superstitious type…)

When considering all things China – political, economic, social – it is near impossible to get anything right, except by accident. The numbers are big…the scale and velocity of expansion unprecedented…and the government unreliable, though predictably so. China’s hoard of Uncle Sam’s IOU notes, the world’s largest, is staggering…likewise are its strategic stockpiles of natural resources, from it’s own rare earth deposits to energy contracts around the globe to its rapidly expanding portfolio of foreign farmland. And that’s to say nothing of her swelling pile of gold…

But even if China does ascend to the heights some expect she will, the trajectory won’t be without corrections, overshoots and more corrections. Data released this past Thursday indicated a fierce acceleration in bank lending – despite the government’s prior efforts to “cool” the system – and a larger than expected bump in inflation. According to figures provided by The People’s Bank of China, lending by the nation’s banks totaled 1.39 trillion yuan ($203.5 billion) during the month of January, more than three times the 379.8 billion yuan extended in December and equivalent to almost 20% of the total target for the whole year.

Other stats, however reliable they may or may not be, showed that money supply – as measured by M2 – was up a whopping 26% at the end of January from the year-earlier month. China’s PPI (Producer Price Index) rocketed up 4.3% from the same period last year, accelerating from a 1.7% rise in December.

What does this mean? Does it suggest that the economy is overheating? Or can the increases be attributed to “outlier” events – the date the New Year festival falls on, for instance, or heavy snowfall in early January pushing up prices – as many analysts have been quick to suggest.

Again, we can’t say for sure…not with the certainty of an astrologer, in any case. But we do know that a drastic increase in the money supply leads, eventually, to a drastic increase in prices. And we’re seeing plenty of that.

The price of real estate, for one thing, is headed higher…much higher. Thursday’s same data dispatch showed that prices across the nation’s 70 largest cites rose 9.5% in January from a year earlier, quickening from a 7.8% rise in December.

Bubbling real estate prices, coupled with the aforementioned inflation figures, prompted China’s central bank late Friday to introduce further measures designed to curb bank lending. Large banks are now required to park 16.5% of their total deposits in the central bank. Smaller banks are already ordered to keep 14% of their deposits in the same coffers.

Will it work? Who knows?

Perhaps China’s central planners will achieve what has eluded generations of their central planner forefathers…perhaps they will be able to control, with levers and pulleys in the basement, the perfect flow of funds to exactly the right sectors at precisely the right time.

This year is not only the Year of the Tiger, it is the Year of the Metal Tiger, something that occurs only once ever 60 years in the Chinese calendar. In fact, the last time China rang in a Metal Tiger, Chairman Mao had just taken control of the land and promptly embarked one of the bloodiest experiments in central planning in history.

Of course, everybody knows astrology is just a bunch of baloney. Now, who wants to tell the Chinese?

The Daily Reckoning