The Money Morning reports that Chinese banks are hoarding cash.
(emphasis mine) [my comment]
Thursday, January 8th, 2009
If You Want a Forecast for China' s Economy, Ask a Hairy Crab
By Keith Fitz-Gerald
Money Morning/The Money Map Report
This is the time of year in which many investors really start to study corporate earnings, jobless statistics and all sorts of other state data in an effort to divine what's next for China.
But I simply prefer to head for the Wan Chai Street Market in Hong Kong, or the Temple Street Night Market across the harbor in Kowloon, and check on hairy crab prices as we approach the Lunar New Year.
These delectable little guys are usually served steamed, with a splash of soy sauce. When China's booming like it was in recent years, shoppers are hard-pressed to find a store that can keep them on the shelves. And at 720RMB, or $420HK (about $60 U.S.), that's no small feat for a palm-sized morsel. They're expensive, and taste great.
A hairy crab, if you've never seen one, is usually a bit smaller than the Dungeness crabs many Americans are more familiar with. These freshwater crustaceans start to fatten as soon as the autumn chill cools the Yangtze River Delta. That adds to their taste and desirability.
When China's feeling pinched, hairy crab sales drop and prices plummet. At the moment, hairy crab prices are off by more than 80%, which is a steeper drop than during the Asian Financial Crisis a decade ago, or during the SARS epidemic in 2003. After the best sales in history last year, that's significant because of what falling hairy crab sales imply about the state of China's economy at a time when it is struggling to stave off the effects of a global recession and growth may drop to the slowest pace China's seen in nearly a decade.
Since hairy crabs are a luxury both in the home and at restaurants, the falling prices suggest that people are "eating cheaper." Rather than ordering up haute cuisine - including hairy crabs - at such restaurants as Cuisine Cuisine in the International Financial Centre (IFC) Tower, or the famous Jumbo Floating Restaurant in Hong Kong Harbor, most Chinese are eating "cheap" and seem to prefer smaller, more modest places these days.
They're also apparently "shopping cheap," too. Call it a Chinese version of the "Wal-Mart Effect" (WM), but that's what's happening as savvy Chinese consumers downshift. They're still spending - as reflected by Chinese retail sales figures, which suggest year-over-year growth of 21% in 2008 - but they're spending differently.
Nowhere is this change more evident than in those stores where luxury items are sold. Shanghai and Hong Kong store managers I've spoken with recently told me privately that such big-ticket brand names as Dior, Chanel, Hermes and others aren't moving as fast as they were a year ago.
Knock-offs, of course, are still flying off the shelves.
On a related note, many Chinese merchants are actually refusing to take credit cards these days, at least from Chinese consumers. Don' t think for a minute this is limited to convenience store items, either. Big-ticket items like tours and holiday excursions that have long been paid for on credit are now cash or check only as many travel companies — like Hong Kong' s Sincere International Travel Service Co. Ltd. — look to avoid getting caught short.
Many merchants say that banks are hoarding cash and delaying payments on personal credit cards. While no banks would comment officially in response to my inquiries, it' s clear that Chinese lenders are dumping riskier credit-card holders just like their Western banking brethren. Only faster.
Unlike their Western cousins, for whom credit has been a bonanza, Chinese banks have only relatively recently gotten into the credit game after being so cash-centric that the rest of the world' s bankers viewed China' s lenders as antiquated. But now that generation of cautiousness is paying off.
Chinese banks are apparently also going the extra mile to ensure they don' t get burned. Lenders are making credit-card transactions as unattractive as possible for the merchants who process the charge slips and they' re doing so by using the most effective tool of all — delayed payments.
[delayed payments on personal credit cards are a PERFECT example of how cash hording slows down the "velocity of money"]
Only a year ago, most banks paid credit-card transactions in 14 days. But now, according to reports by CNN and other news outlets, it' s not uncommon for a merchant to have to wait 20, 40 or even 90 days to get paid. And that obviously affects cash flow at a time when luxury businesses in China are already under pressure.
This all speaks to something we at Money Morning have talked about repeatedly over the past 12 months: Investing in China is not about luxury as so many investors have mistakenly thought. It' s about the basics [agreed]. To be sure, luxury items and top-shelf brands have enjoyed a heyday in China that coincides with the dramatic growth spurt the country has experienced in recent years. But luxury brands are hardly the key to steady growth and profits over the long term.
That mantle, instead, belongs to much more basic industries, such as power-generation, railway-and-infrastructure construction, water filtration, and pollution control [agreed]. All will benefit substantially from China's $583 billion stimulus package, which is designed to fuel growth that not only benefits the economy, but also staves off social unrest, which is what Beijing's power elite fears the most. To China's Politburo, running out of power is a far more significant risk than running out of Gucci.
So for investors who are interested in grabbing the best that the Red Dragon offers while avoiding the risks there, hairy crabs are yet another harbinger of where and how to invest in China in 2009.
My reaction: A few points to take away from this article:
1) There has been a sharp drop in Chinese demand for big-ticket brands ( Dior, Chanel, Hermes, etc…) and others luxury items. In China, luxury equals European or US goods, which explains the sharp drop in Chinese imports.
2) Chinese consumers are still spending. Knock-offs and other cheap goods are still flying off the shelves. It is in the prices of these cheap goods that we will see the first signs of hyperinflation.
3) Chinese banks are hoarding cash and delaying payments on personal credit cards. Chinese banks are even dumping riskier credit-card holders "faster" then "their Western banking brethren" and are apparently also going the extra mile to ensure they don't get burned.
4) Chinese banks have only relatively recently gotten into the credit, which means they don' t have the save exposure to bad debt that Western banks have. It also means they weren't part of the credit-default-swap bubble.
1) This article confirms my suspicions that the Chinese banks are hoarding cash and that the velocity of money in China is moving at a crawl. Once money starts moving again, there will be rampant inflation.
2) This article reinforces my view that Chinese financial system was underleveraged and cash rich going into this crisis. As a result, Chinese banks will likely to pull out of this relatively unscathed, and the "deflation period" is likely to be short, if it hasn't ended already.