China heading for its own sub-prime banking crisis
Posted on 14 July 2009 with no comments from readers
China has offset the impact of a huge collapse in its exports this year by indulging in frenzied domestic lending that all past experience suggests must end in a banking crisis similar to the recent US sub-prime mortgage lending disaster.
For June new Chinese Central Bank figures show total lending doubling from the previous month to $224 billion and running at five times the level of June 2008.
This massive acceleration of lending has fueled an 80 per cent rise in the Shanghai stock market from the low of last year, and allowed stockpiling of raw materials that has spiked commodity prices, including oil, sharply higher.
Sub-prime loan assessment
Such a rapid increase in lending would appear to be coming at the price of inadequate credit assessment by the Chinese banks which are repeating exactly the same error that produced the sub-prime mortgage crisis in the US.
Banking crises always have their origins in bad lending practices by bankers under pressure to loan money from higher authorities. China now just seems to be another example.
The reasoning is obvious enough. The nine months of falling exports, down a massive 23 per cent last month, is a huge hole in the Chinese economy which only fast action to grow domestic demand could fill.
But the problem is merely postponed. Further down the line lies a day of reckoning when a realization of bank losses from bad loans will cause a collapse in banking stocks and a systemic banking crisis like we saw in the US last autumn.
How long will shareholders keep bank stocks at their current heights? Some $170 billion from bank loans is estimated to have been invested in Chinese stocks in the first five months of this year, according to a government economist cited by China Business News.
Business loans
The same paper also reported that 30 per cent of these loans have gone to fund short-term working capital for business. So when a loan contraction comes it is going to strike at the heart of the Chinese economy, and not just the stock market.
Indeed, the more you think about these banking statistics it is apparent that China is actually just a year or two behind the cyclical downturn that has sent the developed world into its deepest recession since the Second World War.
The hope that China will be the motor to drag the developed world out of its recession is therefore a false hope, although in fact the Chinese economy never looked big enough to do the job in any case.
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July 16 (Bloomberg) — China’s gross domestic product grew 7.9 percent in the second quarter as the nation became the first of the major economies to rebound from the global recession.
The figure, announced by the statistics bureau in Beijing today, exceeded the 7.8 percent median forecast of 20 economists in a Bloomberg survey and a 6.1 percent gain in the first quarter that was the slowest in almost a decade.
China, the biggest contributor to global growth, overtook Japan as the world’s second-largest stock market by value yesterday after a 4 trillion yuan ($585 billion) stimulus package spurred record lending and boosted share prices. The first-half expansion laid the foundation for meeting the year’s 8 percent growth target for creating jobs and maintaining social stability, the statistics bureau said today.
“China’s growth is getting back on track after being pulled down by the global export slump,” said David Cohen, an economist with Action Economics in Singapore. “It’s leading the turnaround in the global economy.”
The yuan traded at 6.8315 against the dollar as of 4:39 p.m. in Shanghai, unchanged from before the data were released. The Shanghai Composite Index closed 0.2 percent lower.
The foundation of China’s recovery is “not yet firm” after the economy stabilized in the first half and the government will stick to its “moderately loose” monetary policy and “proactive” fiscal stance, statistics bureau spokesman Li Xiaochao said.
China’s Contribution
China accounted for a third of global expansion last year, according to International Monetary Fund data using purchasing- power-parity calculations to account for exchange-rate differences.
The global economy will shrink 1.4 percent this year, including a 2.6 percent contraction in the U.S. and a 6 percent decline in Japan, the IMF said in a July 8 report. Emerging economies, led by China, are set to regain growth momentum in the remainder of this year, helping the world to recover from the worst slump since World War II, the IMF said.
Urban fixed-asset investment surged 35.3 percent in June from a year earlier, the statistics bureau said. The 33.6 percent gain for the first half was the biggest in five years. Industrial production increased 10.7 percent in June from a year earlier, the largest gain in nine months excluding seasonal distortions. Retail sales climbed 15 percent.
An infrastructure spending boom is helping companies from China Southern Power Grid Co. to China Merchants Property Development Co.
Falling Profits
“China still faces difficulties including shrinking external demand, falling corporate profits and declining fiscal revenue,” Li said. “We’re still facing great pressure in generating jobs.”
China’s economy is the only one of the world’s 10 biggest still expanding. The People’s Bank of China sold today one-year and three-month bills at the highest yields this year, guiding money-market rates higher to slow record growth in money supply.
The nation’s foreign-exchange reserves, the world’s biggest, rose to a record $2.132 trillion last quarter as the central bank sold yuan to prevent an appreciation that would make the country’s exports more expensive.
Tim Condon, chief Asia economist at ING Groep NV, said the central bank may raise the one-year lending rate as early as the first quarter of next year.
“China’s recovery is on track and growth may accelerate to near 9 percent in the third quarter and 10 percent in the fourth quarter,” said Lu Ting, an economist at Bank of America-Merrill Lynch in Hong Kong. “The government won’t tighten policies too early but it should tell banks not to lend without limit.”
Faster 2010 Growth
Morgan Stanley, JPMorgan Chase & Co., HSBC Holdings Plc, Royal Bank of Scotland and UBS AG raised growth forecasts for China today. The economy will expand 9 percent in 2009 and 10 percent in 2010, Morgan Stanley said in an e-mailed note.
China is targeting faster growth to maintain stability after the loss of millions of migrant workers’ jobs and ahead of the 60th anniversary of Communist Party rule in October. Ethnic riots in Urumqi in the northwestern Xinjiang province on July 5 left at least 192 people dead.
The rebound in GDP snaps a two-year run of progressively slower growth. Shanghai’s benchmark stock index has climbed almost 90 percent from last year’s low, with PetroChina Co. and Industrial & Commercial Bank of China Ltd. contributing the most.
The economy grew 7.1 percent in the first half from a year earlier. Consumption contributed 3.8 percentage points and investment accounted for 6.2 percentage points, with a decline in the trade surplus shaving off 2.9 percentage points, the statistics bureau said.
China shouldn’t ignore the danger of future inflation as loans surge and global commodity prices rebound, the statistics bureau’s Li said at today’s briefing.