• Tue
  • Dec 23, 2014
  • Updated: 1:56am

Slowdown in mainland loans as Xi Jinping stresses 'new normal' growth

Response from Beijing and Xi's 'new normal' growth indicate that the authorities are comfortable with the way the economy is performing

PUBLISHED : Monday, 12 May, 2014, 12:27pm
UPDATED : Tuesday, 13 May, 2014, 12:37am

The amount of new loans extended on the mainland last month was lower than expected, indicating the authorities refrained from adding liquidity to spur growth despite a rapidly cooling property market that has flagged further weakness in the economy.

The lingering tightness in liquidity also reflects the regulators' efforts to rein in shadow-banking businesses to prevent systemic risks after several property trusts reportedly defaulted on their products. An approaching peak of property trust repayments is likely to test market stability, analysts say, with more than 120 billion yuan (HK$151 billion) worth of products expected to mature this month.

Remarks by President Xi Jinping during a visit to Henan province on Saturday that people should adapt to the "new normal" of economic development have been widely interpreted by observers as suggesting that Beijing remains comfortable with the pace of slowdown in economic growth.

Echoing Xi's message, People's Bank of China governor Zhou Xiaochuan told a closed-door forum at the weekend the authorities would not easily resort to massive stimulus in response to short-term fluctuations in economic data, but policy fine-tuning would continue.

Aggregate social financing fell by 12 per cent year on year to 1.55 trillion yuan last month, PBOC said on its website yesterday. Trust loans rose 41.7 billion yuan year on year, only a fifth of the increase in April last year.

New yuan loans extended by banks reached 774.7 billion yuan last month, below the 880 billion yuan expected by analysts and also lower than the 1.05 trillion yuan issued in March.

M2, a gauge of money supply, rose 13.2 per cent at the end of April, accelerating from 12.1 per cent growth in March but slower than the 16.1 per cent growth in April last year.

"In the face of calls for stimulus, China's government appears comfortable with a continued slowdown in credit growth," said Mark Williams, chief Asia economist with London-based Capital Economics.

Some analysts have warned that the mainland's gross domestic product growth risks slowing further, after easing to 7.4 per cent in the first quarter from 7.7 per cent in the fourth quarter of last year, if the government does not pump in liquidity in a timely manner to help companies, including property developers.

The real estate market has been cooling fast in the past few months, thanks to curbs on home sales and bank lending implemented by regulators in response to property bubbles. Land sales and home transactions fell in some cities while some developers are near bankruptcy.

China Vanke, the mainland's largest developer by sales, reported a 5 per cent drop in net profit - its first in more than a decade - in the first quarter.

Barclays Capital said the government was likely to tolerate further correction and "bad news" in the property market, but that it could announce more supportive measures including broad-based easing if house-price declines reach about 10 per cent.


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Like Korea and Japan, Taiwan developed an education system which came to resemble those of the manufacturing-based economies of Germany and Italy in Europe.
South-east Asian states, in the Anglo-Saxon tradition, placed more emphasis on the humanities and on ‘pure science’.
As the Japanese scholar Masayuki Kondo put it when describing Malaysia’s failure to develop indigenous technological capacity despite a lot of investment in higher education and research:
‘The main context for industrial technology development is firms, not public institutions.’
Technology policy, not science policy, is the key to the early stages of industrial development.
As a result, a government’s industrial strategy is the most powerful determinant of success.
If a state does not force the creation of firms that can be the vehicles for industrial learning --- and then nurture them --- all efforts at formal education may go to waste.
‘In theory, theory and practice are the same. In practice, they are not.’ --- Albert Einstein.
The early success of Meiji Japan was achieved with surprisingly few engineers --- the country only began to step up its vocational and scientific and technical education in the 1930s.
In countries like Cuba and Russia, by contrast, vast numbers of engineers have been churned out without positive results.
Which means a lot of critical learning in the most successful developing countries takes place outside the formal education sector. It occurs, instead, inside firms.
This intra-firm learning helps explain the relative failure of the former Soviet Union and its satellites, where investment in education and research was focused on elite universities and state research institutions rather than inside businesses.
The situation has been not too dissimilar in south-east Asia, which combined the Anglo-Saxon tradition of elitist tertiary education with a major post-independence expansion of public sector research institutions.
In Japan, Korea, Taiwan and post-1978 China, by contrast, a lot of highly effective educational investment and research has been concentrated not in the formal education sector but within companies, and by definition --- unlike the Soviet situation --- within companies that are competing internationally.
This may be critical to the rapid acquisition of technological capacity.
Demography aside, there are at least four reasons which lead to increasing wage rates in China:
(a) Through education, innovation, on-the-job training, apprenticeship schemes, vocational training, evening schools, certificate qualification, and so on.
(b) Through the increase of capital equipment or machinery.
(c) Increase in the cost of living, due in particular to the persistent rise in house prices and rents, so labour demands higher wages (wage-price spiral).
(d) Government’s minimum wage law.
For (b), we can’t keep on increasing the labour’s working equipment or machinery forever --- the law of diminishing marginal returns will sooner or later set in.
For (c), the recent downturn of the property market will help lessen the pressure on the demand for wage rate growth.
For (d), perhaps in the name of rebalancing the economy toward domestic consumption, and for the sake of appeasing the residents, the government keeps on raising the minimum wage rates in many cities almost every year --- and we are talking about double-digit growth !
With higher income it doesn’t mean the residents will automatically spend commensurately more --- their precautionary savings may increase further, considering the relative lack of social security in the country.
Premature financial deregulation in south-east Asia led to a proliferation of family-business-controlled banks which did nothing to support exportable manufacturing and which indulged in vast amounts of illegal related-party lending.
Without successful and large, branded companies of their own, south-east Asian economies remain technologically dependent on multinationals, eking out a living as contractors for the lower-margin parts of international production chains.
(From 'How Asia Works' by Joe Studwell)
The best and most healthy reason is of course (a).
Especially in China, where the village migrant workers are most probably undertrained and unqualified to produce more sophisticated manufacturing products.
Their 60 million children left at home are not expected to receive as good education as their city counterparts, as is shown by 'A Bite of China', the latest Chinese documentary television series on the history of food, eating, and cooking in China.
With insufficient (a), the country's labour productivity growth rate is most probably less than her wage rate growth rate.
This also arguably leads to the present yuan overvaluation --- internal devaluation has to take place, in the form of higher productivity growth rate, lower wage rate growth rate, or both (and falling property prices and rents), to restore the country's external competitiveness.
China’s burgeoning service sector is potentially large enough to absorb part of those low-skill workers, and enable their wages to keep on rising in the future.
But formal tertiary education and vocational training are needed to produce those high-skill professionals in the manufacturing, service and finance sectors.
To maintain the long-term competitiveness of the country, the Chinese government must pay much more attention to (a), rather than just concentrating on those financial reforms, like interest rate liberalisation, yuan internationalisation, and capital control relaxation --- there is no easy escape.
As is said by George Soros, the most rewarding investments are usually the most boring ones.
I think the problems mentioned in the following Chinese article should be heeded and resolved.
There are two main problems.
One is that China's labour productivity growth rate is now less than her wage rate growth rate, which in turn is less than the debt growth rate.
The other is that massive amount of resources are sincerely but inefficiently redirected by the government to the western (and middle) part of the country, causing misallocation of economic resources and rising debts.


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