Will China really be able to arrest its runaway credit growth?
Joe Zhang says pledges for deleveraging and risk control following the national finance summit are all very well but, after years of expansionary excess, will the new precautions deliver?
At the national finance summit earlier this month, President Xi Jinping (習近平) vowed to arrest China’s credit expansion and contain financial risks. But should we realistically expect a significant change in China’s monetary policy? A bit of history may help us see the path forward.
With the exception of barely two years, China has implemented only two types of monetary policy in the last four decades: expansionary and very expansionary.
The only exception was in 1995-1996 when, amid runaway inflation and a real estate bubble in Guangdong and Hainan ( 海南 ) provinces, then central bank governor Zhu Rongji ( 朱鎔基 ) tightened credit abruptly, which quickly led to the collapse of the Hainan Development Bank.
That was the only bank failure in the history of communist China, and it took a full decade to work out the large number of abandoned real estate projects that the credit boom had been responsible for.
Unfortunately, that episode taught policymakers the wrong lesson.
Since then, the People’s Bank of China, as well as the Ministry of Finance, has become ever more accommodating of the country’s construction binge, all in the name of financial stability.
In the past 20 years, the compound growth rate of China’s money supply has stayed as high as 16 per cent. In May, the growth of money supply moderated to 9.6 per cent, marking the first time the reading had dipped below 10 per cent in 22 years.
Most observers now take this as a sign that further tightening is in the making. However, I see it as only a continuation of the extremely rapid expansion of credit in a sluggish economy. Growth rates year-on-year are often misleading because they mask the ever higher base. China’s gross domestic product is 40 per cent smaller than that of the US, but its money supply is 80 per cent bigger – and still growing almost three times faster.
The 500-word communiqué released after the National Financial Work Conference reads like a typical, vague and well-rounded, official pronouncement – where “every temple gets its fair share of the worship”, as the saying goes.
On the one hand, it says systemic risks must be controlled, and on the other it stresses that the finance industry must strive to serve the real economy, as well as a host of other – and often competing – objectives, such as job creation, and the needs of small businesses, and projects related to the “Belt and Road Initiative”.
In the West, having one’s cake and eating it too may carry a negative connotation – but not so in China’s policymaking circles, where the comparable term, inherited from the Soviet era, is following “multipronged strategies”.
For example, the Chinese government always aims for surpluses in both the current and capital accounts, all while aiming for the stability of exchange rates, with no regard to the underlying policy contradictions.
For a given product – steel, coal, the equity market, or housing units – the government often aims to control the prices as well as the volumes, never mind the fact that many variables are beyond its control.
Moreover, policy targets are often set arbitrarily but few even bother to review the actual performance in reaching those goals, because every so often an even newer list of targets is released and everyone has to move on.
Some have repeatedly warned, for a decade now, of an imminent credit crisis in China. And so Beijing’s latest vows of financial deleveraging and risk controls may be music to the ears of certain China watchers.
But one must remember that Beijing’s latest rhetoric is not new. Above all, the recent change of policy has come because of Beijing’s own initiative, rather than being forced upon the country by a crisis.
Therefore, whether the precaution has real teeth remains to be seen.
Joe Zhang is chairman of China Smartpay Group and the author of Inside China’s Shadow Banking: The Next Subprime Crisis?