China, free fall?

China economy

factory pollution

 A few weeks ago, Fitch released a report showing its concern about how seriously shadow banking could affect China’s economic growth. The lack of control over the system is the major threat.

“It is a material risk because a growing amount of credit is being extended through channels that they don’t have transparency or control over,” said Fitch Senior Director Charlene Chu. And just a few days after, the world experienced an episode of global lack of confidence on Chinese Banks, prompting a fall on China’s stock to its lowest level in the last 4 years.

Apart from this lack of credit, local governments are also piling up huge sums of debt. Furthermore, the lack of stimulus investment plans is fuelling scepticism among those who expected the Asian dragon to keep the world economy afloat. Mostly because the priority for China now is to reorient its model of growth. A few weeks ago, for example, the world’s largest polluter launched an ambitious plan to curb CO2 emissions. It is a pilot scheme that China will test first in the Southern city of Shenzhen and will subsequently expand across the country.

The emissions exchange also helps boost the Communist Party’s credibility, as it shows the commitment of the regime to curb toxic pollution rates that threaten public health. Mainly because the program is targeting companies, forcing them to take responsibility for the huge levels of Co2 emissions created by their factories.

It seems a reasonable plan for a country that emitted a total of 8 billion metric tons of CO2 in 2012. However some experts have pointed out some issues of concern since the measure will only have some results if applied at a national level. And they see too many obstacles for this to happen. One reason is China’s commitment to growth might not fit in a pilot program that will create heavy burden for companies, especially the smaller ones.

Some of the sectors concerned are already struggling with squeezing profit margins due to the economic slowdown and the halt of the construction boom.

Conversely, others see with good eyes a plan that could give the crippled local governments new ways of financing. But this alone won’t do the job. By mid-June the National Audit Office released a report unexpectedly detailing the debts of 36 local governments. It unveiled the chilling figure of 3.3 trillion dollar in debt, by the end of 2012. A 13% higher than in 2010.

The explicit report mentions dark practices, speculation and the misuse of funds as some of the main causes of its rampant debt. And the lack of mechanisms to check these irregularities prompts some to fear the emissions Exchange might become a new platform for speculation and corruption to local governments.

About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.

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