No short-term financial crisis for China, expert says, assailing ‘double standard’ on debt woes
‘People have invented the concept of productivity of credit to say bad stuff about China,’ said Dragonomics’ founding partner Arthur Kroeber
China is not headed for a near-term financial crisis, said one of the most esteemed experts on the country’s economy.
Arthur Kroeber, founding partner of the China-focused Dragonomics research service, debunked the contention that rising debt levels amid slowing GDP growth suggest China has a credit productivity problem that may tip the world’s second-largest economy into a tailspin.
In a discussion hosted by the New York-based China Institute, Kroeber pointed out that from the 1960s to the 1990s, the US, Japan and Canada saw their GDP growth decline while debt surged, all without any economic routs.
“GDP growth steadily decelerated even as credit growth continued to build [in the US, Japan and Canada]. There was no one in the 1980s who was pointing to these numbers saying ‘isn’t this economy heading for a collapse?’
“There is a double standard at work here, where people have invented the concept of productivity of credit to say bad stuff about China.”
China has opted for debt-fuelled spending to keep its economy stable, increasing global debt to a record US$152 trillion. Pegged at 260 per cent, China’s debt-to-GDP ratio is higher than the global average of 225 per cent, up from 160 per cent a decade ago, according to calculations by Bloomberg.
Massive credit unleashed by Chinese banks is keeping unprofitable companies alive and inflating housing prices in major Chinese cities. A few have reported more than 30 or even 40 per cent increases in home prices in a 12-month span.
At least 19 Chinese cities, including Beijing, Shenzhen and Guangzhou, have tightened control over home purchase and mortgage loans in the last week to cool off the property investment frenzy.
The IMF warned in its global economic outlook report released earlier this week that “vulnerabilities continue to accumulate with the economy’s rising dependence on credit” for China and that credit growth is complicating Beijing’s efforts to rebalance the economy.
Still, China needs to address the amount of credit disbursed to unprofitable state-owned enterprises, which on average borrow twice as much as their private counterparts and deliver only about a third of a return by comparison, Kroeber said, adding that the government has begun to address the problem.
“We’ve essentially had this period of 10 years of almost unfettered deregulation … and now is the time to apply the brakes,” the economist said. “Now we’re in for a fairly long period of much tighter financial regulation and that’s probably a good thing.”
CICC US Securities Vice Chairman Zhang Lanlan, who was speaking on the China Institute panel, agreed.
“This year, the Chinese government is emphasising more attention on the financial risks in the financial system,” Zhang said.
“Given all the credit expansion we’ve seen in the last 10 years means it’s getting to the time that we may start to see changes on the regulatory front. For example, we might see more licensing requirements for financial institutions, which means that maybe the credit expansion will be slowing down in the coming years.”
CICC US’s parent, China International Capital Corporation, is one of the country’s leading global investment banks.
China’s outstanding yuan loans increased 13 per cent at the end of August to 102 trillion yuan (HK$119.722 trillion), and home mortgage loans accounted for the lion’s share of newly granted credit in recent months.
China will try to rein in excessive bank credit growth, the People’s Bank of China governor Zhou Xiaochuan said last week, after the International Monetary Fund warned that the country’s debt-to-GDP ratio was “increasing at a dangerous pace”.
“As global economic recovery gradually normalises, China will exert certain control over credit growth,” said a statement on the central bank’s website, summarising Zhou’s comments at the meeting of G20 central bankers and finance ministers in Washington.