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Three volatile consequences of monetary policy
By Sean Maguire |
August 17, 2009, Monday
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Print Edition
Print Edition
CHINA now stands as a beacon of growth in these dark economic times, but the oxygen which keeps this light aflame - loose monetary policy - is creating a combustible fiscal mix that will require careful husbandry.
The Chinese government has authorized over US$1,100 billion of new loans in the first half of this year, an amount exceeding proposed lending levels for the whole of 2009.
Typically, lending is front loaded to the beginning of the year, but nonetheless, the authorities have indicated that they will seek to reign in current lending levels over the rest of the year as massively increased liquidity flushes into the economy.
The dampening down of new lending comes in response to the emergence of a number of potentially volatile consequences of recent monetary expansion: an increase in the number of anticipated non-performing loans, the creation of asset bubbles across the market and the typical beneficiaries of these loans.
The government-backed stimulus package is a drop in the ocean compared with the massive investments by local governments.
The National Development and Reform Commission has developed a mechanism by which local governments can borrow by using long-term loans from policy banks or bond issuance as the 30 percent required capital.
These local governments can then borrow the rest from commercial banks, essentially financing projects entirely through debt. This leads to the possibility that banks may be asked to put up finance for projects that are financially suspect. Despite the risks posed by nonperforming loans, there is little danger of a full-scale banking crisis. The banks have relied upon deposits rather than the wholesale markets for funding, so they are pretty much secure.
Of more immediate concern is the creation of assets bubbles in the equity, real estate and commodity markets as corporate borrowers revive speculative interest.
The Shanghai Composite Index has increased 80 percent this year and while a significant proportion of this growth is attributable to the effects of the stimulus package and generally lead by fund managers rather than bank loans, this recovery has taken place against a backdrop of a declining export market and a comparatively modest growth which suggests that some borrowed cash is leaking into the equity markets.
Real estate prices are closing in on previous highs and the government, mindful of the effects of 2007's overheated market, are monitoring this sector very closely, but they are unlikely to come down too hard on this crucial sector of the economy.
The commodities markets have also seen brisk business as cheap money and worries about inflation are directing speculative money into iron, copper and oil.
The third issue concerns whether these loans are reaching the parts of the economy where they are needed most.
China's small and medium-sized enterprises (SMEs) are arguably one of the biggest drivers in China's growth. Yet, with the exception of the China Merchants Bank, only 10 per cent of lending went to SMEs from the four largest government-owned banks.
(The author is counsel of AllBright Law Offices in Shanghai. The views are his own. His email: sbmaguire@allbrightlaw.com.)
The Chinese government has authorized over US$1,100 billion of new loans in the first half of this year, an amount exceeding proposed lending levels for the whole of 2009.
Typically, lending is front loaded to the beginning of the year, but nonetheless, the authorities have indicated that they will seek to reign in current lending levels over the rest of the year as massively increased liquidity flushes into the economy.
The dampening down of new lending comes in response to the emergence of a number of potentially volatile consequences of recent monetary expansion: an increase in the number of anticipated non-performing loans, the creation of asset bubbles across the market and the typical beneficiaries of these loans.
The government-backed stimulus package is a drop in the ocean compared with the massive investments by local governments.
The National Development and Reform Commission has developed a mechanism by which local governments can borrow by using long-term loans from policy banks or bond issuance as the 30 percent required capital.
These local governments can then borrow the rest from commercial banks, essentially financing projects entirely through debt. This leads to the possibility that banks may be asked to put up finance for projects that are financially suspect. Despite the risks posed by nonperforming loans, there is little danger of a full-scale banking crisis. The banks have relied upon deposits rather than the wholesale markets for funding, so they are pretty much secure.
Of more immediate concern is the creation of assets bubbles in the equity, real estate and commodity markets as corporate borrowers revive speculative interest.
The Shanghai Composite Index has increased 80 percent this year and while a significant proportion of this growth is attributable to the effects of the stimulus package and generally lead by fund managers rather than bank loans, this recovery has taken place against a backdrop of a declining export market and a comparatively modest growth which suggests that some borrowed cash is leaking into the equity markets.
Real estate prices are closing in on previous highs and the government, mindful of the effects of 2007's overheated market, are monitoring this sector very closely, but they are unlikely to come down too hard on this crucial sector of the economy.
The commodities markets have also seen brisk business as cheap money and worries about inflation are directing speculative money into iron, copper and oil.
The third issue concerns whether these loans are reaching the parts of the economy where they are needed most.
China's small and medium-sized enterprises (SMEs) are arguably one of the biggest drivers in China's growth. Yet, with the exception of the China Merchants Bank, only 10 per cent of lending went to SMEs from the four largest government-owned banks.
(The author is counsel of AllBright Law Offices in Shanghai. The views are his own. His email: sbmaguire@allbrightlaw.com.)
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