Don't be fooled, Beijing lacks the stomach to fight inflation
Over the past week or so, Beijing has been busy rolling out its latest round of administrative restrictions aimed at cooling the mainland's dangerously overheated economy.
At first glance, it looks like the government is mounting a vigorous campaign to bring both the mainland's rocketing property market and consumer price inflation under control.
On Wednesday, Beijing announced that buyers of second homes would now have to put up a punishing 60 per cent down payment on their new properties, up from 50 per cent beforehand.
On top of that, local authorities will be required to announce firm targets for price rises and to impose - and collect - a new property tax.
The measures, aimed at restricting real estate lending and slowing property price rises, come shortly after the central bank moved to tighten monetary conditions and limit the volume of new loans that mainland banks can extend this year. Not only did the central bank raise the proportion of their deposits that big banks are required to set aside as reserves to a record 19 per cent, it also said it would tighten up its supervision of lending.
Banks will be obliged to bring disguised loans back onto their balance sheets, and the central bank introduced a new system for setting loan quotas. Although the central bank has held back from announcing an explicit target for system-wide lending this year, analysts believe it is aiming at an implicit target of 7.2 trillion yuan (HK$8.5 trillion), a reduction from last year's target of 7.5 trillion yuan.
By introducing these and a suite of other recent measures, the mainland authorities are clearly hoping to persuade the markets they are determined to rein in the runaway bank lending that is largely to blame for inflating the property bubble and driving up consumer prices.
Yet doubts remain. Despite the latest round of cooling measures, it is far from clear that Beijing has either the courage or the will to take the tough action that would be needed if it really wanted to cool the overheated economy.
Persuading the country's banks not to lend with such abandon is proving far more difficult than the central bank imagined. Despite efforts to clamp down on credit, new bank lending came in just short of 8 trillion yuan last year, well above the government's 7.5 trillion yuan target.
And even that understates the true extent of new lending, with analysts estimating that mainland banks could have disguised as much as 3 trillion yuan of new loans by shifting them off their balance sheets, largely by channelling them into trust companies. As a result, it is likely that new lending actually grew to 11 trillion yuan last year, up from 2009 in spite of the authorities' tightening measures (see the first chart).
And if the mainland media are to be believed, the banks have no intention of slowing down this year. According to reports, they extended a further 1.2 trillion yuan of new loans in the first three weeks of this month, almost as much as they lent in the whole month of January last year.
Such a blatant flouting of official guidance might seem shocking, but in reality Beijing is not trying especially hard to clamp down on new lending. After all, bank loans are needed to fund the government's ambitious programme of investments, and high investment levels are needed to maintain economic growth.
Last year, more than half of the mainland's 10.3 per cent output growth was driven by new investment. According to official figures, only about 16.5 per cent of that investment was funded by bank loans, the bulk of the financing coming from 'self-raised' funds and 'other sources' (see the second chart). But in reality, it is likely a considerable amount of those funds - as much as 3 trillion yuan - consisted of indirect bank loans.
If Beijing were now to enforce its 2011 new lending target of 7.2 trillion yuan, it would mean a decline in actual new loans - once last year's off balance sheet lending has been factored in - of one-third. That would cut the bank loans for new investments by 2.5 trillion yuan. Such a fall could cut the growth rate of China's investments by half, reducing the contribution of investment growth to overall growth to less than 3 percentage points.
If consumption growth and net exports were to contribute a similar amount as last year, then China's overall growth would drop below Beijing's sacrosanct 8 per cent minimum target level.
It would feel like a hard landing, and no matter how boldly officials might talk about tackling overheating, no one wants the mainland economy to come down with a bump.