{"id":967,"date":"2013-07-11T14:01:03","date_gmt":"2013-06-26T08:55:12","guid":{"rendered":"http:\/\/shehuizhuyizhe.com\/?p=967"},"modified":"2013-08-23T07:57:18","modified_gmt":"2013-08-23T07:57:18","slug":"chinas-credit-crunch-causes-global-shockwaves","status":"publish","type":"post","link":"https:\/\/chinaworker.info\/en\/2013\/07\/11\/967\/","title":{"rendered":"China\u2019s credit crunch causes global shockwaves"},"content":{"rendered":"

Credit explosion \u201cunprecedented in modern world history\u201d behind financial volatility<\/strong><\/p>\n

Vincent Kolo, chinaworker.info<\/p>\n

World financial markets have been rocked again in recent days. First came the US Fed\u2019s announcement last Wednesday (19 June) that it could start to unwind its cheap credit policy of \u2018quantitative easing\u2019 by year-end. The following day financial markets were stunned as a liquidity crisis gripped China\u2019s state-owned banking system, with major banks all but refusing to lend to each other. This \u2018credit crunch\u2019 reflects growing fears over the unsustainable surge in debt levels across the Chinese economy, and its growing reliance on the opaque and unregulated shadow banking sector.<\/p>\n

The Washington Post saw \u201can unnerving parallel to the first days of the US financial collapse,\u201d as China\u2019s money markets froze, with the overnight interbank lending rate shooting to record levels. \u201cUntil a few days ago, the notion that China might face an imminent financial crisis was a prediction that only the bravest of bears dared make,\u201d commented Simon Rabinovitch, Shanghai correspondent of the Financial Times (21 June 2013). \u201cBut when short-term money market rates soared to 28 per cent on Thursday, forecasts of a crisis no longer seemed so outlandish,\u201d he added.<\/p>\n

While subsiding from this peak, following central bank intervention, the cost of interbank lending remained at punitive levels on Monday 24 June, unleashing new steep falls on global stock markets. The Shanghai stock market slid by 5.3 percent on 24 June, making for a market slump of almost 20 percent over the past four weeks. Steep drops were also recorded on global bourses. China\u2019s economy has been the main engine for global growth in the past five years, supporting high world prices for energy and commodities and offering a counterweight to the recession in older industrialised countries.<\/p>\n

Downgrading GDP forecasts<\/strong><\/p>\n

Since the onset of the global crisis five years ago, capitalism on a world scale has become dependent on an unprecedented flood of cheap credit for \u2018life support\u2019. The prospect of central banks now reining in this monetary stimulus has panicked financial markets. The latest financial turmoil in China follows weeks of bleak economic data confirming an accelerating economic slowdown in the world\u2019s second-largest economy. All major forecasters, including the IMF most recently, have downgraded their estimates for China\u2019s GDP growth this year. Last year\u2019s GDP growth of 7.8 percent was the slowest for 13 years, but figures for the first half of 2013, to be published later this week, are likely to show a further softening. Many analysts now doubt China will reach the government\u2019s target of 7.5 percent GDP growth in 2013. Volatility in the banking sector adds far greater uncertainty to this picture, with potentially dire implications for the global capitalist economy.<\/p>\n

Several factors explain the liquidity crisis that sent interbank interest rates shooting upwards. Banks in China are scrambling to dress up their balance sheets for end-of-quarter audits. In addition, around 1.5 trillion yuan worth of so-called wealth management products come due by the end of June. These complex and in many cases \u2018subprime\u2019 financial products have proliferated in recent years as banks have invented new ways to get around government credit limits. The central bank refused on this occasion to come to banks\u2019 rescue by increasing liquidity in the system.<\/p>\n

While this situation appears to have been engineered by the government and central bank (PBOC), in what the BBC called \u201ca kind of state-sponsored credit crunch\u201d, the question is why such a drastic approach has been adopted? \u201cChinese leaders seem to be trying to prevent a disaster by basically popping the bubble, a kind of controlled mini-collapse meant to avoid The Big One,\u201d noted Max Fischer in the Washington Post (20 June 2013). In particular the government has taken several measures recently to try to rein in the growth of wealth management products, a major category of shadow financing, now estimated to be worth 13 trillion yuan (US$2.1 trillion).<\/p>\n

If so, the PBOC has adopted a high-risk strategy. While this is not entirely analogous to the collapse of Lehman Brothers in 2008, which triggered a worldwide credit crunch and financial crash, that too was caused by politicians and central bankers refusing a \u2018bailout\u2019 in an attempt to instil discipline in financial markets. As Craig Stephen of the Wall Street Journal commented on Beijing\u2019s stand, \u201cAt the very least, this appears a reckless way to instil market discipline: It risks one default or rumour triggering unintended, wider systematic problems.\u201d The Economist described it as \u201ca terribly clumsy way to curb credit growth\u201d.<\/p>\n

The notion that China\u2019s \u2018communist\u2019 (CCP) rulers are \u2018in control\u2019 has been dealt a serious blow. As Rabinovitch of the Financial Times also noted, \u201ca third conclusion from the ructions of the past week is that Beijing is far from omnipotent in its management of the Chinese economy.\u201d<\/p>\n

In the past ten days, China\u2019s state-run media has been rife with rumours of the failure of a mid-sized bank and a string of defaults by local government entities linked to \u2018ghost city\u2019 investment projects in provinces including Shandong and Inner Mongolia. The intensity of the rumour mill forced the Bank of China, one of the \u2018big four\u2019 banks, to issue a denial that it had defaulted on one of its loans. More ominously, a Bloomberg News report on 20 June said the central bank had intervened with US$8.2 billion in \u201crelief\u201d to the Industrial and Commercial Bank of China (ICBC), which is the world\u2019s largest bank.<\/p>\n

While the murky nature of China\u2019s banking system lends itself to all kinds of rumours, and a clear picture may never emerge, it seems the central authorities are involved in a game of brinkmanship with the banks nominally under their control, turning off the liquidity tap last week as a warning in their efforts to curb runaway credit expansion and the banks\u2019 increasing recourse to shadow banking channels.<\/p>\n

<\/a><\/p>\n

Debt crisis<\/strong><\/p>\n

Whatever the immediate outcome, the drama of recent days is a clear warning of the massive and unsustainable financial imbalances that have arisen in China.<\/p>\n

\u201cI think what people don\u2019t really grasp is the extent to which this is not a liquidity crisis \u2013 it\u2019s a debt crisis, so it\u2019s not something that can go away,\u201d argues Beijing-based economist Anne Stevenson-Yang. \u201cThey have a situation now where they\u2019re running the whole economy on debt.\u201d<\/p>\n

While China has its own special features due to the high degree of state ownership in its banking system and economy and a dictatorship running the state, this does not allow it to defy economic gravity. As the CWI has warned a financial crisis is only a matter of time in China, given the massive levels of debt accumulated especially since the regime\u2019s monster 4 trillion yuan (US$650 billion) stimulus package of 2008. This headline sum \u2013 huge in itself \u2013 was only the tip of the iceberg in terms of the subsequent credit expansion which was \u201cunprecedented in modern world history\u201d, according to a recent report from Fitch, the ratings agency.<\/p>\n

The Fitch report says outstanding loans by Chinese banks and shadow financial institutions rose to 200 percent of GDP at the end of 2012, from around 125 percent of GDP in 2008. The state-run China Securities Journal has published an even higher figure, putting total credit in the financial system at 221 percent of GDP. Overall credit jumped from US$9 trillion to US$23 trillion in 2008-12. \u201cThey have replicated the entire US commercial banking system in five years,\u201d said Fitch\u2019s senior director in Beijing, Charlene Chu.<\/p>\n

\n

<\/a><\/p>\n<\/div>\n

The central authorities lost control over this credit expansion, with earlier government attempts to slam on the brakes proving ineffective. In the first quarter of 2013 alone, China generated 7.5 trillion yuan (US$1.2 trillion) of new credit. As Tom Holland in the South China Morning Post (25 June 2013) pointed out, \u201cThat\u2019s more new credit than China created in the whole of 2007 at the height of its Olympic investment boom\u201d.<\/p>\n

Huge new injections of credit have become necessary to prevent old loans from souring and triggering a wave of company failures and defaults among China\u2019s heavily indebted local governments. According to a study by Soci\u00e9t\u00e9 G\u00e9n\u00e9rale, the combined interest repayments of Chinese companies will total US$1 trillion this year \u2013 more than any other economy.<\/p>\n

With massive overcapacity in industry squeezing profits, much of the new credit has been ploughed into speculation \u2013 in property, commodities, or new forms of shadow finance \u2013 fuelling a financial bubble. China\u2019s housing market is history\u2019s largest property bubble, with vast swathes of completed housing lying empty and \u2018ghost cities\u2019 littering the landscape.<\/p>\n

Growth of shadow banking<\/strong><\/p>\n

Between 2010-12 the shadow banking sector doubled in size to 36 trillion yuan worth of loans (69 per cent of GDP), according to JP Morgan Chase. Shadow finance is mostly comprised of \u2018off balance sheet\u2019 loans and investment products created by the state-owned banks to get around government controls and hide non-performing loans. Chu of Fitch estimates that about three-quarters of shadow banking transactions are directly or indirectly related to the mainstream banks. This is about creating a second \u2013 unofficial \u2013 balance sheet for the state-owned banks, she says.<\/p>\n

The growth of shadow banking shows the extent to which China\u2019s economy has become a \u201ccredit junkie\u201d, to quote a recent Bloomberg report, getting fresh credit fixes via the \u2018backdoor\u2019 whenever government policies restrict access to official banking channels. In recent months the growth of shadow finance has accelerated, accounting for the majority of new lending.<\/p>\n

In the first five months of 2013, total social financing \u2013 which is a measure of all credit in the economy \u2013 grew by 52 percent from 2012, with two-thirds of this originating from shadow finance. This is a sure sign of crisis ahead, and explains the central bank\u2019s drastic actions of the past week.<\/p>\n

\n

<\/a><\/p>\n<\/div>\n

Economic pain ahead<\/strong><\/p>\n

The credit squeeze comes on the heels of a stream of bleak economic data. Statistics published last week suggested Chinese manufacturing activity for June fell to a nine-month low. HSBC\u2019s preliminary purchasing managers\u2019 index (PMI) sank to 48.3 for the month, from 49.2 in May (readings below 50 indicate negative growth). Manufacturing is not the only sector in the doldrums. The China Beige Book published this week reports the \u201ceconomy is weakening across the board, with the previously robust retail and services sectors now starting to see slippage in revenue growth\u201d.<\/p>\n

The mini-stimulus programme (worth around US$160 billion) injected last summer to prop up economic growth in the run up to the 18th CCP Congress, has clearly already worn off. This underlines a further serious problem \u2013 that fresh doses of credit are producing diminishing economic returns. \u201cThe extra GDP growth generated by each extra yuan of loans has dropped from 0.85 to 0.15 over the last four years, a sign of exhaustion\u201d, says Ambrose Evans-Pritchard in The Telegraph (16 June 2013).<\/p>\n

The Financial Times interpreted the central bank\u2019s tough stance as \u201cboth good and bad news\u201d, hoping this will head off a more serious credit collapse at a later stage. But the newspaper added, \u201ctaming a credit boom is always risky, especially as, in China\u2019s case, much of it lurks off balance-sheet, often in Ponzi-type layers of transactions, and subject to uncertain liquidity conditions. The combination of regulatory tightening and restricted liquidity in these markets raises the risk of miscalculation or an accident that might trigger the instability the authorities want to avoid.\u201d<\/p>\n

Even if China\u2019s central bank \u2018wins\u2019 its current standoff with the banks and succeeds in instilling greater credit discipline, this will push up the cost of loans meaning painful medicine for the economy as a whole, and a further slowdown in GDP growth. The corporate bond market has already been hit, adding to companies\u2019 borrowing costs. As Japanese bank Nomura warns, \u201cwe expect a painful deleveraging process in the next few months. Some defaults will likely occur in the manufacturing industry and in non-bank financial institutions.\u201d<\/p>\n

While a full-blown financial crisis may be averted for now, the current unprecedented levels of debt will weigh like an albatross on the whole economy. As Chu of Fitch warns, \u201cThere is no way they can grow out of their asset problems as they did in the past. We think this will be very different from the banking crisis in the late 1990s.\u201d<\/p>\n

In a majority state-owned system the Chinese regime will not stand by while banks collapse, but will step in to bailout distressed entities as it did in the 1990s. But even with banks on government \u2018life support\u2019 \u2013 which today will be much a more costly proposition than it was 15 years ago \u2013 this can act as a gigantic drag on future economic growth. It also means huge costs will be passed on to the Chinese people \u2013 especially workers, farmers and the poor \u2013 through inflation, higher taxes and neo-liberal \u2018restructuring\u2019 of the public sector. China risks \u201cbecoming dangerously like Japan in the late 1980s \u2013 an economy in which a massive investment bubble deflates to stymie growth for a generation\u201d, warns the BBC\u2019s Business Editor, Robert Peston.<\/p>\n

The central bank\u2019s current gamble fits in with the PR image of the new CCP leaders, Xi Jinping and Li Keqiang, who want to show they \u2018mean business\u2019 early on in their rule. According to media reports they are planning a major programme of pro-capitalist economic reforms for this autumn\u2019s Central Committee plenum (perhaps today\u2019s banking mayhem is an example of the greater role for \u2018market forces\u2019 they want to promote). But more than anything the regime fears political instability and the prospect of the masses taking to the streets \u2013 a now familiar sight in other \u2018BRIC\u2019 economies, as exemplified by Brazil\u2019s huge protest movement, which the Chinese leaders are undoubtedly watching. The current financial volatility is conclusive proof that China\u2019s \u2018miracle\u2019 years are behind us and the CCP dictatorship faces a turbulent and uncertain future.<\/p>\n

For further reading:<\/strong><\/p>\n

China: banking crisis looms (chinaworker.info, 14 December 2011)<\/a><\/p>\n

How bad is China\u2019s debt crisis? (chinaworker.info, 12 April 2013)<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Credit explosion \u201cunprecedented in modern world history\u201d behind financial volatility Vincent Kolo, chinaworker.info World financial markets have been rocked again in recent days. First came the US Fed\u2019s announcement last Wednesday (19 June) that it could start to unwind its cheap credit policy of \u2018quantitative easing\u2019 by year-end. The following day financial markets were stunned […]<\/p>\n","protected":false},"author":12,"featured_media":973,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"tdm_status":"","tdm_grid_status":"","footnotes":""},"categories":[132,124],"tags":[174,183,184],"class_list":{"0":"post-967","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-china","8":"category-news","9":"tag-china-2","10":"tag-credit-crunch","11":"tag-debt-crisis"},"yoast_head":"\nChina\u2019s credit crunch causes global shockwaves - China Worker<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/chinaworker.info\/en\/2013\/07\/11\/967\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"China\u2019s credit crunch causes global shockwaves - China Worker\" \/>\n<meta property=\"og:description\" content=\"Credit explosion \u201cunprecedented in modern world history\u201d behind financial volatility Vincent Kolo, chinaworker.info World financial markets have been rocked again in recent days. 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First came the US Fed\u2019s announcement last Wednesday (19 June) that it could start to unwind its cheap credit policy of \u2018quantitative easing\u2019 by year-end. 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