China’s policymakers face a difficult problem.... how to rein in credit growth while keeping the economy humming along
Chinese authorities face mounting pressure to tighten credit expansion in a bid to prevent a debt crisis and stabilise the yuan, analysts say.
China’s economy appears to have stabilised, as it grew 6.7 per cent last year, within the target range. But some analysts say the steady pace of economic growth is being propped up by an overly-rapid expansion of credit.
“The policy makers have done all in their full strength to reach the economic growth target in 2016. And they have succeeded,” said Jiang Chao, chief macro analyst for Haitong Securities, China’s second largest brokerage firm.
He pointed to a number of encouraging signs in the industrial sector. Industrial power generation and crude steel production both rebounded by the end of 2016. Sales growth of both trucks and excavators accelerated to above 30 per cent to “near their peak levels during the 2011 to 2013 economic recovery cycle”, Jiang said in a recent research note.
The economic recovery owes much to the investment boom. In particular, infrastructure investment increased 16 per cent last year to become a pillar of economic growth. In addition, investment in property and manufacturing also helped with the industrial recovery.
However, behind the investment boom is a huge amount of government debt, as the government-related financing amounted to more than 10 trillion yuan (US$1.45 trillion) in 2016, Jiang said. Included among the liabilities are treasuries, local government bonds, and policy bank bonds.
In the property sector, real estate loans increased by 5.7 trillion yuan in 2016, up 27 per cent on year, according to the People’s Bank of China. Total lending to the real estate sector reached 26.7 trillion yuan as of the end of December 2016, the PBOC said.
“The steady economic growth is all due to old tricks, as the policy makers reflate the economy through an extremely large amount of new debt in property and infrastructure,” Jiang said.
However, he noted that conditions may be approaching an important inflection point.
“The amount of money used to stabilise economic growth is far more than the past,” Jiang said.
In 2016, total government and social financing reached 25 trillion yuan, generating more than 6 trillion yuan of gross domestic product for the year.
However, in 2007, the total government and social financing amount to roughly 7 trillion yuan, which generated 5 trillion yuan of GDP.
“Too much cheap money is causing a lot of problems, such as the bubble in the property market,” Jiang said. “They can’t use the old ways this year.”
China’s Politburo, the nation’s de facto ruling body, has set its primary goal this year as “containing asset bubbles” and “preventing financial risks”.
In a sign of policy tightening, the People’s Bank of China in February raised short-term interest rates on open market reverse repurchase agreements by 10 basis points. Aside from helping to prevent financial risks, the monetary tightening was also widely regarded as part of China’s efforts to reduce the interest rate differential between China and the US, so as to stabilise the yuan and curb capital outflows.
“All in all, China’s policy focus this year is deleveraging, including reducing the money supply and tightening regulations on banks’ off-balance sheet wealth management business, which saw explosive growth last year,” Jiang said.
However, the deleveraging of the financial sector will also “prick the credit-fuelled bubble” in the property sector and “inevitably” lead to a sharp fall in housing prices, he said.
Jiang believes property investment will undergo a sharp drop in the second half of the year, considering the time lag from the drop in housing sales to the slowdown in property investment.
In the meantime, the real economy will show the impact from the deleveraging.
According to Haitong Securities real economic growth is likely to tumble in the second half and turn negative in the third quarter.
In the event of a sharp domestic economic downturn, policy makers should respond with corporate and individual tax cuts, instead of loosening property restrictions, Jiang said.
“If China continues to fuel the property bubble, we may see a run-off of manufacturing firms and capital from China to the US, as companies already face higher land and energy costs in China,” Jiang said.
“US President Donald Trump will possibly launch a big corporate tax cut. I believe China should also respond with tax cuts and comprehensive state-owned enterprise reforms, so to help improve the corporate sector’s profitability and boost the consumption, ” he said.