With a lot of eyes focused on the PIIGS (Portugal, Ireland, Italy, Greece, Spain), especially Greece and Spain, please don't forget about China. Goldman’s O’Neill Says ‘Something Brewing’ in China on Currency.



Goldman Sachs Group Inc. Chief Economist Jim O’Neill said China may be poised to let its currency strengthen as much as 5 percent to slow the world’s fastest growing major economy.



“I have a strong opinion that they’re close to moving the exchange rate,” O’Neill said in a telephone interview from London after China’s central bank told lenders on Feb. 12 to set aside larger reserves. “Something’s brewing. It could happen anytime.”



Chinese policy makers are seeking to restrain credit growth after their economy grew the fastest since 2007 in the fourth quarter. Banks extended 19 percent of this year’s 7.5 trillion yuan ($1.1 trillion) lending target in January as property prices climbed the most in 21 months.



O’Neill, who coined the term “BRICs” in 2001, anticipating the boom in the emerging economies of Brazil, Russia, India and China, said China may allow the yuan to rise as much as 5 percent in a one-off revaluation and to then trade within a bigger band or against a larger basket of currencies. That would help counter international pressure, he said.



Record lending last year and a 4 trillion yuan stimulus package helped China lead the recovery from the deepest global recession since World War II. Investors’ concern about investment bubbles in China, and what action the government may take to prevent or deflate them, has mounted this year.

Traffic Signal With No Red Light

50% Office Vacancy Rate In Beijing

Beijing’s office vacancy rate of 22.4 percent in the third quarter of last year was the ninth-highest of 103 markets tracked by CB Richard Ellis Group Inc., a real estate broker. Those figures don’t include many buildings about to open, such as the city’s tallest, the 6.6-billion yuan ($965 million) 74- story China World Tower 3.



Empty buildings are sprouting across China as companies with access to some of the $1.4 trillion in new loans last year build skyscrapers. Former Morgan Stanley chief Asia economist Andy Xie and hedge fund manager James Chanos say the country’s property market is in a bubble.



“There’s a monumental property bubble and fixed-asset investment bubble that China has underway right now,” Chanos said in a Jan. 25 Bloomberg Television interview. “And deflating that gently will be difficult at best.”



A glut of factories in China is “wreaking far-reaching damage on the global economy,” stoking trade tensions and raising the risk of bad loans, the European Union Chamber of Commerce in China said in November.



The risks are so great that a decade of little or no growth, as Japan experienced in the 1990s, can’t be dismissed, said Patrick Chovanec, an associate professor in the School of Economics and Management at Beijing’s Tsinghua University, ranked China’s top university by the Times newspaper in London.



“You have state-owned enterprises using borrowed funds from the stimulus bidding up the price of land -- not even desirable plots of land -- in Beijing to astronomical rates,” Chovanec said. “At the same time you have 30 percent-plus vacancy rates and slumping rents in commercial property so it’s just a case of when you recognize the losses -- or don’t.”



China’s lending surged to 1.39 trillion yuan in January, more than in the previous three months combined.



“The liquidity bubble last year went to the property market,” said Taizo Ishida, San Francisco-based lead manager for the $212-million Matthews Asia Pacific Fund, in a phone interview. “I was in Shanghai and Shenzhen three weeks ago and the prices were just eye-popping, just really amazing. Generally I’m not buying Chinese stocks.”



Chanos, founder of New York-based Kynikos Associates Ltd., predicted that China could be “Dubai times 100 or 1,000.” Real estate prices there have fallen almost 50 percent from their 2008 peak as the emirate struggles under at least $80 billion of debt. The economy may shrink 0.4 percent this year, Shuaa Capital, the biggest U.A.E. investment bank, says.



The commercial property space under construction in China at the end of November was the equivalent of 6,800 Burj Khalifas -- the 160-story Dubai skyscraper that’s the world’s tallest.



Overcapacity may be looming in manufacturing as well. China’s investments in new factories and properties surged 67 percent last year to 15.2 trillion yuan, more than Russia’s gross domestic product. Excess steel capacity may have reached about 132 million tons in 2009, more than the 87.5 million tons from Japan, the world’s second-biggest producer. The Beijing- based EU Chamber of Commerce report said a “looming deluge” of extra cement capacity is being built.

Currency Inflows and Outflows

A-Tisket A-Tasket You Can't Peg To A Basket

China may allow the yuan to trade against a larger basket of currencies

Faber On Chinese Economy

China’s economy will slow down “meaningfully” and may even be at risk of a “crash” because of the nation’s excess capacity and as loan growth slows, investor Marc Faber said.



China’s fragile economy may undermine industrial commodities in the “near term,” the publisher of the Gloom, Boom and Doom report said. Faber added that he’s pessimistic on the euro as a possible bailout of Greece by other European countries increases deficits in the region.



“The economy, for sure, will slow down meaningfully this year,” Faber said in an interview with Bloomberg Television in Hong Kong. “It has the potential to crash because of the overcapacities that have developed, and when loan growth slows down, we don’t know how the economy will react.”



A possible crash in China’s economy will be “disastrous” for raw materials used in industrial production, Faber said. He instead favors commodities including wheat, corn and soya beans and also said he doesn’t see a “huge downside risk” for gold.



Something Brewing