When will the “sky fall in” on China’s economy and on its financial system? There have been so many warnings in international media that such a catastrophe is imminent that it must surely happen soon. Yet the data and much expert opinion offer little evidence of a coming crash in China.
A recently published survey of China’s financial system by the International Monetary Fund does not support the idea that China is in a credit bubble which could pop at any time. The study does provide ground for caution over the massive and rapid build-up of financial assets in China, relative to the size of the economy, and it does point to the need for specific reforms in the system. None of this, however, gives credence to the idea of an imminent bust.
The data appears worrying if viewed in a purely statistical context. Financial assets in China jumped from 270 per cent of gross domestic product in 2010 to about 470 per cent in 2016, with those in the opaque non-banking sector (shadow banks) growing especially fast. Banks’ loan assets and other forms of credit have been growing faster than GDP and the question being raised is whether the size and complexity of China’s financial system has expanded beyond what is needed even in the world’s second largest economy.
There are, however, different ways of viewing this credit overhang. One view is that China’s centrally-imposed target of doubling the size of national income between 2010 and 2020 has driven excess credit creation. Added to this, controls on capital outflows from China are seen by some as a factor driving overinvestment in the domestic economy. In this view, the credit creation “tail” in China has wagged the real economy “dog”, setting the scene for a huge increase in asset values, inflating an unsustainable asset bubble.
Seen in a different light, however, China’s officially encouraged investment boom – not least in creating nationwide “top of the line” physical infrastructure – represents an investment in the future that will go on yielding high returns.
Some argue that China’s pumping up of credit has left its banks and “shadow banking” networks vulnerable to a sudden increase in non-performing loans, or even to collapse. Yet the fact that so much Chinese enterprise (and foreign exchange reserves) is in state hands arguably makes bailouts easier than in fully marketised economies.
It would be futile to argue that China’s economy has not suffered partial meltdowns in its financial system since it began opening up. The Shanghai stock market crashed in 2015, the shadow banking system creaked ominously for a time, and there have been bond defaults. But Chinese authorities have been quick to contain such crises.
Apart from some standard recommendations such as strengthening macroprudential frameworks, reinforcing capital in the banking system to withstand major shocks and building liquidity buffers, the IMF report concludes that China should “de-emphasise” its official growth target to reduce the strains on the financial system as it strives to keep pace with arbitrarily determined growth goals. This may be true on a theoretical basis but those provinces and regions where official growth targets are highest – Chongqing, Guizhou, Tibet, Anhui, Fujian and Jiangxi – are all strongly connected with the development of China’s Belt and Road Initiative. As such, their investment targets are linked to future growth in national income.
China has performed a remarkable balancing act over the past four decades in keeping an economy of over 1 billion people moving forward at a rapid pace without any major economic or social crisis.
Yet still we hear repeated assertions that the world’s second largest economy is about to pay the price for having the temerity to overtake Japan’s in size and even to challenge the US as the world’s leading economic superpower. Could it be a simple case of envy?
Source: South China Morning Post