This entry was posted on 2/17/2010 10:19 AM and is filed under uncategorized.
China's Economy in the Fast Track
Tuesday, 16 February 2010, William Gamble, President -Emerging Market Strategies
Perusing financial newspapers lately seems toprovide an element of certainty in one area.
China is tightening. It is an article of faith among economists and investmentmanagers that China is slowing lending, removing liquidity, and putting thebrakes on its economy.
China certainly has been successfully stimulating its economy. It announced agovernment stimulus package in the fall of 2008 worth Rmb4 trillion ($585billion). Over the past year its banks have lent an astonishing Rmb9.6 trillion($1.4 trillion). Together this amounts to about 44 per cent of GDP. In contrastUnited States stimulus package was $780 billion only 6 per cent of GDP. If theUS were to emulate the Chinese, the stimulus would be over $6 trillion.
The effect of this wall of money on the Chinese economy has been predictable.The Chinese economy has now achieved a growth rate of over 10 per cent.
This has been very good news for Asia. Many Asian markets dependent uponexports to Europe or the United States have been devastated by the recession.They have been saved by China. Commodity exporting countries like Australia andBrazil are particular beneficiaries. Exports to China by other Asian economieshave grown dramatically. Chinese growth has forced the IMF to revise itsforecast for the world economy upward by 0.8 per cent to 3.9 per cent.
Of course if the Chinese stimulus ends, this could mean trouble for much of theworld where the recovery is still very much in doubt. It is hardly surprisingthat many stock markets dipped at the end of January in response to rumors oftightening. Recently China has tried to slow the growth of its lending andmoney supply.
It did so in several ways. First, it raised reserve requirement ratio that bigcommercial banks are required to keep at the central bank from 15.5 per cent to16 per cent. Second, it increased the lending rate on some government paper.Finally the authorities ordered large commercial banks to stop making any newloans at the end of January. The question is whether these actions are signs ofthings to come?
The answer is not really. The attempts to slow the economy are really only amatter of degree. The government new loan target for 2010 is a mere Rmb7.5trillion ($1.1 trillion). Maybe this is a 20 per cent decrease from the newloans in 2009, but is still 90 per cent more than the Rmb4 trillion ($585billion) in new loans extended in 2008. For the Chinese the concept of monetarypolicy is going from an insane cascade to exceptionally loose.
The problem is really structural. The issue is one of agency. Just becausegovernment officials have the authority, does not mean that all of minionsfollow directions. In game theory, agents act for themselves, often contrary tothe wishes of their principals. In a market economy there are many decisionmakers. In a command economy, there is only one. Sometimes a command works onlytoo well. This is what is happening in China.
A particularly revealing anecdote concerns a provincial governor who told aprominent Chinese economist that his greatest political achievement for 2009was that that bank lending in his province had outpaced the national average.
Turning the monetary spigot off has turned out to be much harder than turningit on. One of the reasons why the Chinese regulators suspended new loans inJanuary was because they were totally out of control. In the first two weeks ofJanuary Chinese banks lent out a total of Rmb1.1 trillion ($161billion). Thiswas 40 per cent more than the 2009 average, over three times the monthlyaverage in 2008. If the January rate continued for all of 2010, the totallending would be Rmb30 trillion, ($4.3 trillion), which would probably resultin hyper-inflation.
In fact the attempts by regulator to tighten lending did not start in January2010. They began back in February 2009, when the central bank withdrew a netRmb63.5 billion from the interbank market to soak up excess liquidity. Thecentral bank lectured bankers to slow lending again in April, May, July, andAugust 2009 to no avail. The western markets did not notice, but the Chineseones did. The Shanghai index is barely above its June high.
The cascade of money provided particular strength for the housing market. InShanghai alone mortgage lending soared 1600 per cent over 2008. Nationwide itis estimated that real estate prices have jumped 40 per cent.
With enormous amount of money flooding into the economy, fraudulent games reminiscentof the US subprime problems have begun to surface. The banks have been able toremove Rmb734 billion ($107.53 billion) of loans from their books byrepackaging them as trust products. The toxic assets in the system are notdoubt massive. The banks have not even disposed on the toxic assets left overfrom the 1999-2001 recession. A lending fraud case involving Rmb9.8 billion($1.43 billion) three times the previous record recently surfaced in Guangzhou.Certainly others will appear in the coming years.
China is now basking in its accomplishment of defeating a nasty recession.
Its system appears to be superior to those of other countries especially theUnited States which is perceived as both the source of the disease and helplessto cure it. With the amount of money China is throwing at its economy itsgrowth, the growth of Asia and the strength of certain commodities will nodoubt continue for the coming year. But there will be a terrible price which atsome point must be paid.
