Friday, September 18, 2009

Recovered

I commented on a post at the excellent The Peking Duck Blog last night. In the post, Richard, the author, was lamenting coming back to America at this time when the Chinese economy has, as The New York Times reports, "recovered." He too just left China after living there for an extended period of time.

I wrote a similar post myself last month. Indeed, leaving China for America right now feels weird. America is reeling and has been for some time now. While at the same time, there is still excitement and optimism living in China.

As I've been ranting about for months, I just don't see how the reckless lending, being promoted by the government, that's been producing China's growth, is a good thing though. To me, it's all a big mirage. China is keeping itself afloat by bubble-blowing and doing the same things that got the west into trouble. How can that be lauded?!

China's bank lending was addressed in the NY Times "recovery" article Richard referenced over at the Peking Duck.

From the end of the article:
Chinese banks came into the crisis with enormous excess reserves, the result of three years of tight regulatory limits on lending to prevent the economy from overheating. When those limits were removed, and authorities urged bank executives to lend, the total value of loans outstanding shot up more in the first seven months of this year than in the previous 24 months.

...

As much as a third of the extra bank lending in China appears to have gone into real estate and stock market speculation. But the bulk has gone into investments by companies and local governments, with tangible results.

...

Still, China’s stimulus efforts could be sowing the seeds of future distress. With so much money washing into the system so fast, regulators have voiced concerns about corruption in government investment projects.

Cheap cash has a way of inflating bubbles — just ask Wall Street — that could damage China’s economy and its banks when they pop.

“You have to imagine the rigor and due diligence” that mainland banks have been showing in rushing out so many loans, said Benjamin Hung, the chief executive of the Hong Kong unit of Standard Chartered Bank.

But such concerns are so 2008.
Uh... OK...

Here's an article that I think addresses such concerns in a more, I think, adult tone.

From Reuters:

Image from The Wall St. Journal earlier this year

Risks in China's banking sector are growing as banks have pumped out large amounts of credit this year to help the economy, the top banking regulator said in comments published on Friday.

Chinese banks extended 8.15 trillion yuan ($1.2 trillion) in local currency loans in the first eight months, far exceeding the government target of 5 trillion yuan for the full-year 2009 set early this year. The sharpest rise came in the first six months.

'This year, as bank loans have increased rapidly, all kinds of risks in the banking industry are picking up,' Liu Mingkang, chairman of the China Banking Regulatory Commission (CBRC), said in a statement on the agency's website (www.cbrc.gov.cn).

It marked the most pointed recent warning from the banking regulator about increasing risks due to the explosive rise in lending

Read On
There's no doubt that this massive lending is what has China's economy clicking. Is China going to succumb to a similar crash as the US following this significantly increased lending? I don't know. Maybe it won't. But China really seems to be tempting fate by leveraging itself up in such staggering amounts of loans. The whole thing seems short-sighted to me.

The New York Times says that China has recovered. I can't say that I'm utterly convinced things are so clear-cut though.

4 comments:

hchuang said...

Regarding your Nth post on the "china repeating US mistake" theme:

There's a time and place for things. US got into trouble for excessive borrowing doesn't mean nobody should borrow money at all. China is spending money it has saved up to weather over the financial crisis. Rest assured that if stuff doesn't turn out so good, China still have MORE money to throw at the problem.

Mark said...

How long into the future can China keep the unprecedented lending that's churning its economy going?

If the US and the world economy stays in a recession for years, can they keep this going for another five years?

I just don't see what's happening as sustainable.

Mark said...

Hopefully the recession won't last years and China won't need sustained lending and such, but......

George said...

This is pretty incredible. As an economics major in college, I've been keeping an eye on US-China relations, and I was bowled over with the amount of leverage China is using. I read a few more articles that say China's debt/GDP ratio may in fact be closer to US levels because of some unique accounting practices used by the CCP.

As an aside, the WSJ has a pretty cool data visualizer for a lot for a lot of worldwide macroeconomic data.