Tuesday 1 September 2009
China’s Exit Dilemma: Green Shooting, or Over Shooting and Hard Landing?
China’s economy is walking on the wild side. Prolonged loose fiscal policies can push the economy into uncontrollable inflation, while premature tightening of policies could stall it and topple it over into deflation. The banking sector, set off the leash by the central government, is the initiator of this cycle, but will also become its biggest victim if its profligate lending brings the wolf to the door.
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China’s Exit Dilemma: Green Shooting, or Over Shooting and Hard Landing?
He Zhicheng
01 September 2009
China’s economy is walking on the wild side. Prolonged loose fiscal policies can push the economy into uncontrollable inflation, while premature tightening of policies could stall it and topple it over into deflation. The banking sector, set off the leash by the central government, is the initiator of this cycle, but will also become its biggest victim if its profligate lending brings the wolf to the door.
Central leaders showed a cautious attitude to the macro-economy in the first half year, stating the economy had stabilized but was still very fragile, and the future was uncertain. But macro-management authorities are now displaying a stronger determination to tighten up on the flood of credit, and the banks are feeling the pressure.
It can be seen now that the first half’s macro-economic policy was too loose, and monetary policy was far from the “moderate loose model” it was claimed to be. Now, both officials and economists are saying the policy must be adjusted, but fear of an economic fall-back has them only fine-tuning it by tightening but not shutting down the banking sector.
Some listed commercial banks with good second quarter performance have gone all quiet in July and August. The new loans of Minsheng, Huaxia, CITIC, Everbright and others all showed negative growth in July, a trend that continued into August. These banks have been warned by the China Bank Regulatory Commission (CBRC) that their deposit-loan ratio had passed the “red line” marking a serious shortage of capital. Large state-owned commercial banks are also receiving “guidance” from the CBRC, warning them against huge lending between now and the end of the year. Disobedience could lead to severe punishment.
It had been expected that total lending might increase by 400-500 billion yuan in August, the most optimistic expectation being 600 billion yuan. However, in the first 27 days of the month, banks were very cautious, and lending was significantly reduced. The possibility of hitting even expected lending levels in August is slim.
A bank leader in Zhejiang says that, since July, his new loans have shown negative growth, month-on-month, and the downward trend continues in August. He says his bank had planned to increase lending, but did not due to the sudden CBRC notice. Compared with large state-owned commercial banks, many listed commercial banks have no credit facility.
The stock market is most sensitive to and affected by the sudden lending decline. The slump in August and the aborted rebound in the stock market reflect expectations. More importantly, the sudden credit slowdown will definitely affect the recovery of the real economy. Many newly-started projects will face fund shortages, and projects planned but not begun will wait longer, affecting the development of the overall economy.
Your correspondent has estimated that loans worth at least 2.7 trillion, about 400 billion per month, will be put into the market, to ensure basic liquidity and the continuous recovery of real economy.
The liquidity of the banking industry depends on the multiplier effect. The more they lend, the more they take in deposits. The sudden drop in lending will cause deposits to decrease. This would be dangerous for the liquidity of small and medium-sized banks, who depend on deposits for lending.
Although credit worth 7.37 trillion yuan entered the market in the first half, it seems that the real economy has not appreciated this. GDP growth has not reached 8%--the best month was 7.9%. The sudden braking on new loans (300 billion yuan per month may not be guaranteed) may set businesses and markets at a loss.
The market is always uncertain, but policy should not be. Adjustment is necessary, otherwise there will be big trouble, but the adjustment must be sequential and without a sudden brake. In the next four months, we must walk, not run, back out of the forest.
(The Author is an economist with the Agriculture Bank of China)
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