China credit squeeze puts brakes on factory growth
The refusal of the new leadership in Beijing to ease the credit crunch and boost liquidity is translating into slower growth in the economy
Mainland factories ran at their slowest pace in nine months in June as the new leadership's caution in boosting liquidity dampened hopes that aggressive monetary easing would provide easier credit.
Premier Li Keqiang has diverged from the policy of his predecessor by refraining from injecting fresh liquidity into the mainland economy to ease a credit crunch on the interbank market.
In a sign that the top leadership has reached a consensus, President Xi Jinping told a high-level party meeting over the weekend that officials "shouldn't be judged solely on gross domestic product figures", but that their performance was also linked to people's livelihoods, social progress, and the environment.
Xi's remarks were confirmation that the new administration aims to slow credit expansion and focus on structural reforms to the economy, where the wealth gap has been widening and rapid industrial growth has come at the expense of overcapacity and pollution.
Patrick Chovanec, chief strategist at Silvercrest Asset Management and a former professor at Tsinghua University, said reining in credit expansion may help curb overcapacity and bad debt, although "it will translate to slower growth, at least in the short term".
"Last week's freeze-up in China's interbank lending market was just a symptom of a more chronic disease," he said. "As the burden of bad debt grows, it takes more and more credit to generate less and less growth."
Money supply in the mainland is expanding at roughly twice the rate of GDP growth and the government plans a bigger financial deficit this year than last. In 2012 the mainland delivered the slowest year of growth in 13 years as policymakers attempted to walk a fine line between structural reform and job creation.
Some analysts believe Beijing risks missing its annual growth target of 7.5 per cent for this year, though this may not necessarily be a bad thing for the economy.
Beijing appears more comfortable with slower growth, and in the current five-year plan only forecasts 7 per cent average annual growth for the period 2011-2015, against the 10 per cent average growth delivered over the past 30 years.
Former premier Wen Jiabao has been heavily criticised for flooding the economy with too much liquidity under a stimulus programme introduced to combat the global financial crisis.
As a legacy of the stimulus programme, 18 provincial and municipal governments tracked by the National Audit Office had 3.85 trillion yuan (HK$4.87 trillion) of outstanding debt at the end of last year, up 13 per cent from two years ago. Of the total, nearly half was new debt built up after 2011, the agency revealed last week.
Barclays Capital described Li's policy framework as "Li-konomics", under which Beijing has signalled it would endure short-term pain to favour more sustained development.
Stimulus measures introduced last year in the form of US$150 billion of accelerated infrastructure approval plans have not been repeated so far this year. Barclays estimated that the mainland may see 6 to 8 per cent annual growth for the next 10 years. But it warned of "an increasingly likely downside scenario" and a temporary "hard landing", with quarterly growth falling to 3 per cent over the next three years before bouncing back rapidly.
The HSBC China purchasing managers index, with a heavy weight in small businesses, showed operating conditions deteriorated at the quickest pace since September. The index fell to 48.2 in June, down from 49.2 in May, dragged by falling new export orders and the first contraction in output since October.
The official PMI data compiled by the National Bureau of Statistics, which cover a wider range of companies, was at 50.1 in June, down from 50.8 in May and only slightly above the threshold of 50 that indicates an expansion.
The seven-day repurchase rate, a gauge of interbank liquidity, has eased to just above 5 per cent from the record 12.45 per cent on June 20, after the central bank said it had pumped in fresh liquidity for selected lenders and added 12 billion yuan in rediscounted loans for banks to support small businesses.