A: A WORRISOME EXCESS OF CREDIT (Antonio Sánchez-Gijón)
For Antonio Sánchez-Gijón, there are increasing signs that China is entering a new economic phase characterized by greater financial control by the Government, a more selective credit policy, and a readjustment of high investment rates that have accompanied its prodigious economic growth for more than two decades. Meanwhile, the euro zone is suffering from recession and the US Federal Reserve has announced the next moderation or end of the “quantitative easing”, which may bring a period of slow growth. China’s new leadership begins to take positions.
Last week, China’s State Council issued a statement reaffirming its control of credit policy, and announced guidelines designed to target the credit to “the real economy”, attack over-investment and support agriculture, small and very small enterprises, as well as consumption.
The perception at all levels of Chinese financial industry is that the country has taken too much credit in order to neutralize deflation exported by the economies in recession, and this has created credit bubbles in critical sectors of the economy. According to a Fitch report, floating credit in China was of 125% in 2008, and reached 200% in 2012.
As Sánchez-Gijón writes in Capital Madrid, the Chinese State Council wanted to dispel growing rumors in international markets about the likelihood of a Chinese banking crisis. The day after the meeting a piece of news first run by the Century Business Herald, spread: apparently, the Bank of China, the leading commercial bank in the country, had not met the demands of its customers due to lack of liquidity funds. Shortly after the bank denied it, and announced legal action against the authors of the news. The former President of the BdC had resigned in March.
No “strong stimulus” in the horizon
The Chinese interbank market rates have been suffering significant hikes in recent weeks. The banking sector expected a major money injection by the Central Bank of the PR, but this was, at the beginning of last week, of only 2 billion yuan ($324 million), well below expectations. The State Council had warned that monetary policy would be “very prudent”, and assured that there wouldn’t be “strong stimuli to the economy”.
The current interbank interest is the highest since 2011. In April it was at 2.9 per cent, but in May it soared to 6.4%. When a bank’s bankruptcy news spreads, there’s this rumor that others might fail too. China Everbright Bank, failed to meet a payment of 6 billion yuan on June 6. This bankruptcy caused the Industrial Bank’s. If more failures occurred, it’s because the government wanted to contain loose banking practices and control informal types of banking. There are some seasonal factors (fiscal, for example) that partly explain the credit shortage, but also there has been a demand by the regulatory authority, a more rigorous maintenance of the reserves ratio.
The credit drought may affect sensitive points of the government’s economic planning: a recent bond issue China agriculture Bank and the Finance Ministry itself was hardly covered entirely.
Overall indebtedness of the Chinese economy begins to be seen as excessive and difficult to control. The China Securities Journal estimated that the overall debt of the Chinese economic system is of 221% of GDP, a proportion that is hard to bear when the economy is not only reducing its high rates of growth, but that foreign markets are not working, as they did before by absorbing Chinese exports like a vacuum pump.
China’s new leadership must, surely, look at former leader’s financial policies more critically. The Everbright Bank, which belongs to a branch of the Ministry of finance, had benefited from various official bailouts since 2007.
The previous Government responded to the weakening of exports in 2007 and 2008 with a strong stimulation of investment. The central Government provided with the equivalent to $640,000 million, and provincial and municipal governments added other billionaire contributions. Between January 2007 and January 2008 credit grew by 50%, and between 2008 and 2010 the available reached 27 trillion yuan. Investments in infrastructure and urban development took the big share, at the expense of the small and very small companies that the State Council now puts in a preferential position.
If China’s development for almost three decades has relied on exports and new industrial Eastern urban centers along the coast, the new orientation consists in the development of the interior and the improvement of the living conditions of the vast peasant mass which did not benefit the industrial and technological development. Indeed, in the years of rapid development the overall domestic consumption declined from 47% of GDP in 2000 to 35% in 2006. The correction of this imbalance needs to be done by creating or extending a banking system that could support consumption.
But to get there one must overcome before the coalition of politicians, industrialists, exporters and bankers, all with vested interests, which today should be converted from top down, as any other industrial sector.
These purposes will test the new leadership. The delicate situation of the financial market seems to claim prudence and restraint, but also popular demands for new growth strategies can spur risky policies. Not to mention the tensions that no doubt will cause demands for hundreds of millions of workers who have not benefited substantially from the exports boom. A wage increase of 40% for the lowest wages, decreed on February 5, is trying to stop any violent social demand.
B: CHINA’S TERRIFYING NUMBERS: COLD, CALCULATED… BUT STILL COOL (Ray Kwong)
For those watching China’s money market in recent days with butts clenched, relax, says our Asian markets expert Ray Kwong.
Sure, world markets were rattled by the credit squeeze. But if you thought there was any way the planet’s second largest economy would really let all hell break loose, letting 30 years or so of stellar growth go down the toilet, I’m pretty sure any job that doesn’t involve keeping tabs on interbank lending rates is for you. Oh, and be sure to double up on your probiotics. They really help.
Truth be told, liquidity shortages are normal in China, especially when banks are moving assets around to meet capital requirements before the end of a quarter. Like around now.
When SHIBOR, the Shanghai Interbank Offered Rate, surged to 13.44 percent and the overnight repo rate hit 25 percent on Thursday, the central bank intervened, as it almost always does, this time with an injection of 50 billion yuan.
The big difference—and the reason for panic in some circles—was that the People’s Bank of China waited to the last possible moment to come to the rescue, in effect, making clear its intent to punish Chinese banks for lending too much, too fast and too willy-nilly.
FT Alphaville’s Kate Mackenzie summarized it best, saying: “It all suggests this is a very deliberate move to direct China’s credit into more effective investments—things that will actually make some kind of return, rather than requiring debt rollovers and the like.”
The implication is that China’s new government does not support artificial growth through investment stimulus.
Tighter credit and financial reform won’t slam the brakes on GDP growth, but even at 6 percent, China blows the doors off the United States and the European Union.