China’s economy is in a fix, but authorities are right to resist more stimulus measures

Despite the country’s many economic challenges, cushions of support exist to prevent a crash
Officials have the tools to act if a more aggressive rescue is needed

Joe Zhang

Published: 11:00pm, 14 Aug 2019

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For four decades, China has seemed like an overly energetic start-up company. It has always had ambitious targets, from the “Four Modernisations” to “Quadrupling National Income” and “Made in China 2025”.

Now, it seems, “slogan fatigue” is setting in and officials appear to have run out of ideas.

In my view, that’s not a bad thing. Indeed, it is a sign of maturity and increasing sophistication. If officials can take a back seat, the economy will be able to grow “not only at night, but also during the day”, to borrow a phrase from the Indian businessman and author Gurcharan Das.

China faces many challenges at present. At the current exchange rates, its credit balance is bigger than those of the euro area and the US combined, despite its much smaller economy.

Very few local governments or companies have been forced to liquidate their assets despite an economic slowdown in recent years that is still unfolding

However, its constant flood of liquidity is not enough to prevent mass bankruptcies among its small and medium-sized businesses.

Instead, inflation has popped up everywhere. The country’s average property prices have risen sharply in two decades and are still going strong.

The consumer price indices, while rising slower than in India or Brazil, are constantly eroding the renminbi’s purchasing power and threatening its exchange rates. Its export machine has met resistance not only from the US, but also from elsewhere.

But is China’s economy doomed? Are we likely to see a crash soon? I think not. In fact, things are not as gloomy as they might seem to some.

First, very few local governments or companies have been forced to liquidate their assets despite an economic slowdown in recent years that is still unfolding.

The People’s Bank of China does not even fake independence, household consumption is holding up, and domestic infrastructure building is still in full swing, so the economy is far from desperate.

A year ago when the controlling shareholders of several hundred public companies simultaneously went bust because a stock market slump pushed their personal debt above the value of their stock collateral, the government came to their rescue.

When the likes of Jinzhou Bank and Baoshang Bank went bust in recent months, three big national lenders – Industrial and Commercial Bank of China (ICBC), China Cinda Asset Management and China Construction Bank – magically became their “shareholders” or caretakers, forestalling the contagion effect.

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It is possible that some regional banks are already operating with a very thin slice of capital, or even negative equity, if the impairment of assets is taken into full consideration. But we have been here before. And often.

For banks, capital is designed to be destroyed in unfortunate circumstances. If their owners are willing and able to replenish the cushion, that is ideal.

However, If they are not, a subsequent economic revival will do the trick anyway – as long as public confidence in the banks is supported by the government or by some illusion.

A bricklayer works on a construction project in Beijing in 2017. Amid the economic slowdown, domestic infrastructure building is still in full swing. Photo: AFP

China has gone through many such cycles. So have other countries – even though the mainstream thinkers may not acknowledge that fact.

In China, the creation in 1999 of the four bad banks (Cinda, Huarong, China Orient and China Great Wall) has proven over time to have been a fatal mistake, as their creation accelerated credit inflation over the next decade.

Meanwhile, the Group of Four have done nothing useful, except continue to ride on top of non-stop asset price inflation.

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Over the past decade, they have become sizeable lenders themselves and generators of bad credit rather than collection agencies, to the embarrassment of the Ministry of Finance.

They now profit from their unearned privilege of being the only conduits to the purchasing of bad assets from national banks. They perform no useful function except to sell on their purchases to humbler companies like mine.

Donghu lake in Wuhan, Hubei. Factory closures in Shenzhen and the coastal areas have led to an exodus of migrant workers leaving for their homes in the inland provinces, where the pay and the cost of living are lower. Photo: Xinhua

On the jobs front, continued retrenchment by factories in recent years has not caused widely feared social unrest. Armies of workers are going back to their roots in the countryside.

I can count 15 of my siblings, cousins and their grown-up children who have retreated to the land in Hubei province from Shenzhen and coastal Zhejiang province.

Back home, they earn about a third of their old salaries, but the cost of living is also much lower. For them, it is a suboptimal scenario but not a truly desperate one.

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Judging from the official data, the central bank is not doing much pump-priming at present. If need be, it can do more. Interest rates are still relatively high, so there is room for cuts.

Much like the European Central Bank, the PBOC also intends to do “whatever it takes”. But unlike the ECB, the PBOC has not exhausted all the weapons in its economic arsenal.

Joe Zhang is vice-chairman of YX Distressed Asset Recovery and a former officer at the People’s Bank of China

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