China: All The Hallmarks Of A Bubble
It’s hard not to conclude that China’s economy is showing the hallmarks of a massive bubble, which, if burst, could lead to painful readjustments at a later date.
The root of this bubble is all the money that is being pumped into the economy to boost economic growth. It seems that the mantra of Chinese policymakers has been ‘growth at any price’, for the sake of social stability. While the CNY 4 trillion (US$586 billion) fiscal package announced last November was impressive by any standards, the questions are whether this money is going to the right place, and what happens once this stimulus is scaled back.
Shanghai Composite Index
According to various reports in the international media, 20% of new loans may have gone straight into the stock market, with a further 30% into the property market. No wonder then that the Shanghai Composite Index is up 60% in value since the start of 2009. As for total loan growth, the figure was recently at an astonishing 34% y-o-y. By comparison, in 2003 at the height of China’s previous investment boom, loan growth was ‘only’ 24%.
Total Loan Growth (% y-o-y)
All this begs the question of how sustainable China’s recent economic resurgence really is. Real GDP growth accelerated from a 20-year low of 6.1% y-o-y in Q1 2009 to 7.9% y-o-y in Q2, and various estimates of seasonally-adjusted quarter-on-quarter growth put the corresponding figures at 3% and 16% respectively. While the world has cheered China’s rebound and is counting on the Middle Kingdom to lead us out of recession, I increasingly fear that Business Monitor International (BMI)’s scenario of a ‘double-dip’ slump in China could be coming closer to reality.
China – Real GDP Growth (% change, y-o-y)
How, for example, will Chinese policymakers cut lending sharply without bursting the stock market bubble or for that matter leaving the economy in the lurch? Keep in mind that China cannot count on exports yet, since these were still down 23% y-o-y in July.
And what about loan quality? The sheer surge in loans has been so steep that I have to wonder about the diligence of lending and to what extent these will be repaid. Recall that it was only a decade or so ago that Chinese banks were saddled with tens of billions (some say hundreds of billions) of dollars’ worth of non-performing loans. This necessitated government capital injections at the major banks. Admittedly, China has US$2 trillion in forex reserves, but that doesn’t mean that it wants to use these to bail-out banks and companies every decade.
Chinese policymakers have thus far shown tremendous force in preventing a ‘hard landing’, but their biggest challenges may be yet to come.