giovedì 16 luglio 2009

China between excessive loan growth and consumer spending revival

Rebalancing China’s ecomomy towards sharper growth in domestic consumption: this is one of the recipes suggested by the authorities following the deepening of the crisis of many major developed economies to allow a return of the world economy to a path of sustainable growth. Indeed over the last few years the Chinese economy has focused on boosting exports and expanding investment. The share of private consumption to GDP dropped from 67% in 1981 to 48.8% in 2007, while the trade balance went from negative in 1985 (- 4%) to positive in 2007 (8.9%). Rebalancing consumption is also the number one priority for the Chinese government, which aims to make the country less vulnerable to the global recession. The 26% decrease in exports for May is clear evidence that China can no longer rely on exports to bolster its economy.

"Easier said than done": this is the recent trenchant comment made by the Central Bank Governor Zhou Xiaochuan, who highlighted the need to lower the rate of household (around 20% on average) and corporate savings (to 22.9%). With this in mind, the government has recently launched a 850bn yuan plan aimed at boosting consumption and financing a healthcare reform plan by slashing taxes on new car purchases (which soared by 48% in June compared to the same period last year) and granting incentives to farmers to buy goods for their own homes. Nevertheless, large part of the fiscal stimulus (4000bn yuan) is based on investment incentives, which are “necessary to monitor to prevent them being wasted", said Zhou.

However, a major threat that has severely damaged the leading western economies over recent years is looming on the Chinese horizon: over-indebtedness. The Bank of China’s recently published data have shown that new loans have risen to 737bn yuan, an increase of over 200% over the same period last year. New loans have thus exceeded by 47% the minimum 2009 target set by the Central Bank following the government intervention to ease lending criteria with a view to limiting the impact of export collapse. The sharp increase in new lending has led to a bounce in equity markets and to a steep rise in property prices. According to some government sources quoted by China Business News, 20% of the increase in new lending granted in the period is thought to have been invested in Shanghai stock market. "The speculation on the stock market is less than a concern" wrote Michael Pettis, professor at the University of Beijing, in an article published in China Financial News, "there is at least some possibility that some of these will be repaid. I'm not sure this is true for all other loans that have been made". Voices have already risen to warn of the dangers of a too pronounced rise in indebtedness. The Chinese banking regulatory authority has warned that such rapid growth poses risks to the financial system and the ratings agency Fitch has pointed out that future loan losses may be greater than expected and has questioned whether public authorities will be able to absorb these losses.

The central bank is understood to have already embarked on a restrictive policy. After only 8 months the bank has recently returned to place 1-year government bonds. According to estimates by Isaac Meng, a senior economist at BNP Paribas, credit should slow dramatically in the second half of this year.
China is therefore highly unlikely to act as the international driving force given that a repositioning of the country’s economy towards boosting consumption has yet to materialise. Moreover, dropping a growth model based on exports would lead the government to float the yuan at a value more in line with the country’s economic fundamentals. According to a recent study by William Cline and John Williamson (Equilibrium Exchange Rates), the yuan should appreciate by more than an unrealistic 40% against the dollar to realign itself with fundamentals. Overall, China appears unlikely to act as a long-lasting and strong growth trigger for major global economies but will likely spark short-lived rebounds.

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