China’s Loose Credit Spurs Economy
Wall Street Journal : China had 7.1% GDP growth in the first half of 2009 and is projected to have 9% in the third quarter of 2009, the real reason for this success is an aggressive, behind-the-scenes bank lending binge to the tune of some 7.4 trillion yuan and counting.
China’s loose credit strategy delivers immediate growth, but medium- and long-term results are seriously at risk. If all goes according to Beijing’s plan, China will eventually lead the world economy with a stronger, more consumer-driven economy. But if not, the world is in for a deeper recession as this white knight trips on a banking crisis of its own.
China remains overwhelmingly investment-driven, not consumer-driven, and that will take a long time to change. This raises questions of financial and environmental sustainability. Second, the rapid increase in investment is driven by aggressive credit policies, not healthy risk-taking appetite. Credit is not necessarily bad, as long as it is channeled toward investments with sustainable positive returns; but there is reason to doubt that is happening. Third, there is huge demand for credit in China’s best growth engine–its small and medium-sized sectors–but formal credit is not reaching them fast enough.
China’s government is experimenting with new financial institutions including village banks, guarantee companies, and small loan companies to meet SME [Small Medium sized Enterprises] credit demand. While village banks have attracted major players, including HSBC and Standard Chartered, their regulation is too stringent for most investors. Guarantee companies and small loan companies, which are loan-only companies and cannot legally take deposits, have been more explosive. By the end of 2007 there were over 3,700 guarantee companies according to an industry report from consultancy Research and Markets
Geithner: U.S., China agree on rebalancing measures
China will try to get chinese citizens to shop more:
“China will rebalance toward domestic demand-led growth and increase the share of consumption in GDP (gross domestic product),” Geithner said in a prepared statement. Beijing will do this by building a stronger safety net, improving health care and pensions, and by increasing aid to the poor, the Treasury said.
The US agreed to get citizens to shop less and save more and for the government to have smaller deficits:
The United States “will take steps to sustain and reinforce” recent evidence of rising U.S. savings rates and improvement in its balance of trade with the rest of the world, he added. The United States pledged to cut its budget deficit to a more sustainable level by 2013
China’s economy was forecast to grow by 8.9 percent in the third quarter year-on-year, according to the report released by the National School of Development under the Peking University Monday on its Web site.
Some segments will surely continue to benefit from the stimulus. One of those areas is domestic transportation.
“We expect four regional railway hubs to emerge, covering 80% of the population and 87% total China GDP. The railways should regain share of the transportation system on the back of mass investment in new line expansion and upgrades,” said Morgan Stanley analysts Kate Zhu, Bin Wang and Kevin Luo.
New vehicle sales in China, for example, jumped 36.5% in June from a year earlier, marking the fourth straight month that vehicle sales have topped 1.1 million units, according to data released earlier this month
Yale’s View of China’s Economy and the Global Economy
* China has the wherewithal to lead the global economy out of its doldrums
China’s domestic demand is not weak.
If domestic demand were rising as share of GDP, imports would pull the balance of payments towards a smaller surplus, runs the argument. But it is falling. The World Bank predicts China’s surplus will fall to 8.3 percent of GDP in 2010 and 7.2 percent in 2011 from the 11 percent in 2007.The argument also overlooks the dramatic fall in commodity, food and energy prices: if the economy were unchanged, imports would have gone down, boosting the surplus further (they account for 28.8 percent of total import). Persistent domestic demand, holding up much better than exports and by doing so limiting the fall in imports, seems to be the best explanation for a falling, not rising surplus. Of course, the reported stockpiling of commodities by China’s large state-owned corporations could have played a role too.
Secondly, the composition of China’s imports suggests domestic consumption is changing. Parsing the data, when one separates imports used to produce exports primarily for the US from imports destined for domestic demand an interesting dynamic emerges. Imports for production of exports fell much sharper than imports for domestic demand. The fact that this trend has persisted over almost two years – since mid-2007 – implies China’s economy is being restructured.
Thirdly, recent figures suggest that real household spending is nine percent higher than a year ago, resulting in a hike in private consumption’s share of total demand. Retail sales are rising even more –15 percent year on year – though this includes government purchases. On this basis it is plausible to assume that household spending together with government programs should prevent a fall in China’s GDP growth below the six-to-eight percent bracket.
The US is running a deficit estimated at 13.2 percent of GDP and Japan looks forward to as much as 11 percent according to the pessimists. In the end, the world cannot expect the US to lead the way out of recession and rebalance the global economy.