Jake's View

The beneficiaries of Beijing’s ‘lift off in lending’ seem a little odd

By offering cheap credit for second-hand cars and the idle shipping sector, Beijing is simply postponing a problem that will be harder to deal with in the future

PUBLISHED : Wednesday, 17 February, 2016, 7:01pm
UPDATED : Wednesday, 17 February, 2016, 7:06pm

The guidelines – jointly issued by the central bank, the planning agency, the finance ministry and financial regulators – require banks to grant more credit to buyers of clean-energy cars and second-hand vehicles.

They were also directed to continue lending to some clients in steel, non-ferrous metal, coal mining and shipbuilding sectors...

SCMP, February 17

The command was obeyed even before it was heard. Figures just in show that financial institution loans shot up by a record 2.5 trillion yuan (HK$2.98 trillion) in January. Four...three...two...one..., Houston, we have lift-off in lending.

But some of the intended beneficiaries seem a little odd. Why this emphasis on second-hand vehicles?

The chart should give you a clue. In what is possibly not entirely a coincidence, automobile production in the mainland has also shot up to record levels with more than 2.6 million vehicles turned out in December alone.

You may think it odd to gear up car factories in an economic slowdown but there is a bigger problem here, to wit the doubling of car production in 2009, which the chart also shows.

These cars are now coming back on the second hand market and new car sales will falter if second hand prices tumble as a result of this flash flood. Call to mind the photos a few years ago of thousands of brand new cars all lined up, rusting in the rain. It will be tens of thousands this time.

Beijing’s way of avoiding this fate is to subsidise second hand sales with cheap finance. The United States had the same problem in 2009 and tried to solve it with “Cash for Clunkers” – government will buy your old car if you buy a new one.

It was a different technique but it was the same problem and it had the same result. Money was wasted to push an inevitable predicament further into the future and make it worse when it can no longer be avoided.

Similarly, we have this mention of granting more credit to the shipbuilding sector. A few days ago, when the weather was clearer, I could look south from my home in Repulse Bay and count 15 bulk carriers anchored and idled.

The United States had the same problem in 2009 and tried to solve it with ‘Cash for Clunkers’

A friend in the shipping business tells me he can almost charter one of his company’s vessels for the cost of his wine bills at the Foreign Correspondents Club and he doesn’t even drink the club’s best reds, nor have I ever seen him gaga. That’s how bad things are in shipping.

But Beijing is determined to supply even more ships to that idle fleet out to sea from my balcony. Once again, this solves no problems. It just staves them off and makes it worse later.

I also had my doubts about the steel, non-ferrous metals and coal mining sectors but I confess they are doubts no longer. I can now call them certainties if these industries are on the must-lend list. If this keeps on, we shall soon add banks to the list. More than half their loans will be duff.

Any economy naturally moves in cycles and recession is that part of the cycle, in which people are forced to consider the mistakes they made in the boom part, when no-one sees how anything can go wrong. In recession you get the time and opportunity to correct your mistakes.

And, yes, that is also how it works with an entire nation state but won’t work if the authorities tell themselves that they made no mistakes and then insist on continuing to make them.

They talk of a soft landing now but even the Titanic made a soft landing, just a little bump as it settled gently right side up on the ocean floor, several miles down. Soft talk is sometimes dangerous talk.