Crikey

The Chinese economy is overheating, threatening the huge resources expansion here in Australia, as well as the immediate future of BHP Billiton’s ambitions for Rio Tinto.

This week has seen:

• A record trade surplus of $27.05 billion reported for October
• This year’s 13th tightening in the loan reserves banks have to maintain, in yet another attempt to cut lending
• A rebound in inflation to a 11 year high of 6.5%
• A sharp rise in producer price inflation
• A stampede over cheap cooking oil which killed three people
• And now reports of a freeze on Chinese banks making loans on real estate and to companies in polluting industries.

The combination of these factors raises the question of whether China is heading for a crunch. The local stockmarkets remain over-heated, even though they are becoming more sensitive to moves like the tightening of lending.

The rebound in inflation last month was a major surprise, driven by a 60% rise in the cost of pork from a year ago and a 30% rise in the cost of vegetables, with also cooking oil up by more than 20%. And even if the trade surplus wasn’t $US30 billion, as many analysts had forecast, it was still a record. And if the economists are right and the lower surplus is not a one off, is this a cooling in the pace of economic activity in the country?

And if it is, why then the freeze on loans? It follows last month’s freeze on all government charges, fees and prices (at all levels) until the end of next month.

But according to the Financial Times there’s no official directive, but the government ”advises” foreign banks and companies what can and can’t be done in quarterly meetings:

Companies investing in Chinese real estate or heavily polluting industries, including some foreign companies, have been told by bankers that they cannot access credit before the end of the year because of a government order to freeze lending.

China has for some time tried to rein in the rapid increases in bank lending that have contributed to rising consumer and asset price inflation. But a renewed effort is affecting foreign banks and companies for the first time as the central bank and regulatory officials step up their “window guidance” to try to cool the overheating economy.

Executives working at locally incorporated foreign banks said they had not received formal orders from authorities. But in quarterly meetings and regular phone conversations they have been “advised” not to lend to the real estate projects or polluting industries.

The Government had to break its self imposed price controls last week to allow domestic cost of petrol, jet fuel and diesel to rise 10% to help the local oil refining and distribution companies which were facing huge losses and cash flow problems from the surging world oil price.

Now China is certainly not a basket case, but the combination of high inflation, lending pressures and still strong investment has the central government worried. The danger is it could engineer a sharper than anticipated slowdown which might produce an overshooting.

A slow down in Chinese economic growth of 5% a year would be painful for the Australian resource industry because it would produce a rapid build up in world supplies of commodities, and remove the price tension in products like iron ore, which seem to be the big story in the Rio takeover bid.

Other commodity prices are already slowing: oil, copper and gold fell again overnight even though the US dollar weakened and Wall Street jumped. Copper and zinc are down 15% in the past month; oil is up 9%, but its down $7 from last week’s peak of $US98.62 a barrel and aluminium and nickel are around 3-6% higher.

Copper and oil could be pointing to a slowdown in the US, and China next year.