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Reading the Chinese economy with the right context
By Chris Leung |
June 24, 2013, Monday
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Print Edition
Print Edition
IT is natural for an economy to show conflicting signals during a transitional phase, so it is important to embrace a holistic approach in order to make suitable policy decisions.
China's economy has entered a "normal" growth phase (between 7 and 7.5 percent), which is far slower than the days of "supernormal" growth. As such, we should not be too worried about the lower growth rate and hope for the government to stimulate the economy. The era of supernormal growth is over.
Property prices, on the other hand, are pointing north in spite of more administration measures. In May, property prices rose in 69 cities out of the 70 monitored by the government. In major cities such as Shanghai, Beijing, Shenzhen and Guangdong, prices rose more than 1.5 percent month on month. In Shanghai, mortgages drawn in May more than doubled the monthly average in the first four months of this year as home buyers expect forthcoming austerity measures. This shows enormous pent-up demand has accumulated over the past three years, and potential home buyers have an adequate source of funding. Money supply growth is running at almost 16 percent, ahead of the 13 percent target and above nominal GDP by 620 basis points. Conventional loan growth and total social financing are also advancing steadily.
Signs of stress
However, signs of stress are appearing in the domestic interbank market. The liquidity squeeze could well be expected. The jump in interbank rates occurred after the authorities tightened the governance of wealth products in March. The new rule stipulated by China Banking Regulatory Commission required banks to invest not more than 35 percent of funds raised from the sale of wealth management products into non-publicly traded debt.
This effectively chokes off an important source of funding flowing into property developers and local-government finance vehicles. Property developers and local-government finance vehicles often find it difficult to obtain conventional bank loans, thereby they must have been relying on non-conventional channels to obtain the necessary funding. A few months down the road, the market should not be surprised to see certain wealth management products default. The new leadership probably sees this as both necessary and inevitable.
The whole idea of introducing such rules is to rectify structural problems with an aim to improve the health of the banking sector. This "cleaning up the act" is consistent with the government's launch of the frugality program and its determination to control the property market. Of course, the market is always worried that the slowdown may run out of control. But it is important to have a holistic and balanced perspective rather than jumping to conclusion too hastily.
Against such backdrops, the dominant strategy is to keep the status quo on monetary policy and to inject liquidity through open market operations when needed. By now it should be very clear the new leadership is willing to sacrifice short-term growth in exchange for better growth quality in the long run. Structural reforms are often the most difficult to execute as it can create uncertainty and trigger fear of growth slowdown. A courageous attempt at structural reform should be embraced openly.
China's economy has entered a "normal" growth phase (between 7 and 7.5 percent), which is far slower than the days of "supernormal" growth. As such, we should not be too worried about the lower growth rate and hope for the government to stimulate the economy. The era of supernormal growth is over.
Property prices, on the other hand, are pointing north in spite of more administration measures. In May, property prices rose in 69 cities out of the 70 monitored by the government. In major cities such as Shanghai, Beijing, Shenzhen and Guangdong, prices rose more than 1.5 percent month on month. In Shanghai, mortgages drawn in May more than doubled the monthly average in the first four months of this year as home buyers expect forthcoming austerity measures. This shows enormous pent-up demand has accumulated over the past three years, and potential home buyers have an adequate source of funding. Money supply growth is running at almost 16 percent, ahead of the 13 percent target and above nominal GDP by 620 basis points. Conventional loan growth and total social financing are also advancing steadily.
Signs of stress
However, signs of stress are appearing in the domestic interbank market. The liquidity squeeze could well be expected. The jump in interbank rates occurred after the authorities tightened the governance of wealth products in March. The new rule stipulated by China Banking Regulatory Commission required banks to invest not more than 35 percent of funds raised from the sale of wealth management products into non-publicly traded debt.
This effectively chokes off an important source of funding flowing into property developers and local-government finance vehicles. Property developers and local-government finance vehicles often find it difficult to obtain conventional bank loans, thereby they must have been relying on non-conventional channels to obtain the necessary funding. A few months down the road, the market should not be surprised to see certain wealth management products default. The new leadership probably sees this as both necessary and inevitable.
The whole idea of introducing such rules is to rectify structural problems with an aim to improve the health of the banking sector. This "cleaning up the act" is consistent with the government's launch of the frugality program and its determination to control the property market. Of course, the market is always worried that the slowdown may run out of control. But it is important to have a holistic and balanced perspective rather than jumping to conclusion too hastily.
Against such backdrops, the dominant strategy is to keep the status quo on monetary policy and to inject liquidity through open market operations when needed. By now it should be very clear the new leadership is willing to sacrifice short-term growth in exchange for better growth quality in the long run. Structural reforms are often the most difficult to execute as it can create uncertainty and trigger fear of growth slowdown. A courageous attempt at structural reform should be embraced openly.
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