viernes, 19 de julio de 2013

viernes, julio 19, 2013

China defies IMF on mounting credit risk and need for urgent reform

If you think China's Communist Party fully understands the mess it has created by ramping credit to 200pc of GDP and running the greatest investment bubble know to man, read its shockingly complacent response to warnings from the International Monetary Fund.

By Ambrose Evans-Pritchard

8:00PM BST 17 Jul 2013
.
A policeman patrols under a giant communist emblem on the Tiananmen Square on June 28, 2011 in Beijing, China
 All those charts of a Chinese-led planet that enthralled us all in 2008 will look very silly indeed, unless China heeds the IMF's advice Photo: Getty Images


As you can see from the first chart, total credit has jumped from 129pc to 195pc of GDP since 2008, and has completely departed from its historic trend. The great mistake, plainly, was to keep the foot on the floor in 2010 and 2011, long after the Lehman crisis had subsided.
 

The deeper thrust of the IMF report is that the growth model of the past 30 years is exhausted. The low-hanging fruit has been picked. If the Communist Party fails to take radical action, it will soon be caught in the middle income trap.
 
Charlene Chu at Fitch has a slightly higher credit ratio because she includes a broader range of shadow banking, but the IMF paints much the same picture. Loans have jumped from $9 trillion to $23 trillion since 2008, a faster pace of debt build-up than in any major episode of the past century.

Total credit is higher in many rich countries but that means little. China's ratio is double or triple the level in states with a similar per capita income.

The Fund said wealth products (WMP) and trusts - a disguised second balance sheet of banks, worth $2 trillion - "could over time evolve into a systemic threat to financial stability". A sudden loss of confidence could "trigger a run" and set off "a severe credit crunch".

"As of now, the authorities still have sufficient tools and fiscal space to address potential shocks. However, failure to change course and accelerate reform would increase the risk of an accident or shock that could trigger an adverse feedback loop," it said. China has been warned.

Beijing's replied dismissively that "vulnerabilities were well under control". It said the fast growth of wealth products and trusts were a healthy sign of "market-based intermediation". Any risks were "manageable". Bad loans in the banking system "remained low and Chinese banks had some of the highest capital and provisioning ratios in the world". Do you laugh or cry?

It may be that the barrage of criticism lately from the IMF, Fitch and others has nettled Beijing more than it lets on, hence the violent "stress test" of the banking system in late June. If it was indeed a stress test, one wonders what they learnt as the interbank market seized up in a Lehmanesque moment and intra-day Shibor rates exploded to 30pc.

Xia Bin from China's Development Research Center (DRC), home of reformers, says it is time to end happy talk and brace for condign punishment. "We need to find ways to let the bubble burst and write off the losses we already have as soon as possible to avoid an even bigger crisis. It means hard days, it means the bankruptcy of some companies and financial institutions, above all it means reform," he said. Mr Xia said the debate over China's growth rate - allegedly 7.5pc - is surreal since the country is already in the grip of an unprecedented financial crisis.

Professor Michael Pettis from Beijing University expects growth to fall to 3pc or 4pc over the 10-year term of President Xi Jinping, which would come as a shock to many. He argues that this may be no bad thing provided the government bites the bullet on reform, and provided the Chinese people are at last given a bigger share of the pie.

Headline growth would collapse, but household income would not. This is what occurred in Japan after the Nikkei bubble burst. The Chinese people would hardly feel the difference. The social upheaval everybody fears might never happen. Mao statues might not topple so soon after all.

Unfortunately, the reform drive has yet to advance much beyond hot air. "Progress with rebalancing has been limited and is becoming increasingly urgent. A decisive shift toward a more consumer-based economy has yet to occur," said the IMF.

China is still diverting 48pc of GDP into investment, the highest in the world and far higher than the figure in Japan or Korea during their catch-up spurts. Consumption is still stuck at around 35pc of GDP, which matters for the rest of us. It means that the country is still reliant on export-led growth, flooding Western markets with excess goods by means of a suppressed currency and subsidised state credit.

The IMF expects China's current account surplus to rebound from 2.5pc of GDP to 4pc by 2018. That surplus will be $600bn or so, enough to perpetuate the crisis of over-capacity that lies behind our global malaise, and to be a horrible prospect for southern European societies that cling to the D-Mark.

China's savings rate has continued to ratchet up, not because the Chinese have uniquely Puritanical habits, but because workers never receive the money in the first place. The lion's share goes to the great state entities, the patronage machines of the Party, and these behemoths are defending their turf with tooth and claw. They also have powerful allies in the Standing Committee.

Chart 3 shows that China will fail to replicate the break-out spurt achieved by Japan and Korea if it clings to the status quo. Per capita income will languish at around 25pc of America GDP per capita through the decade.



This will happen just as China's aging crisis and demographic crunch hit in earnest. The workforce is already shrinking. It shed 3m people last year. The IMF says the 160m "reserve army" of cheap labour in the country will dry up by the end of the decade - the long-feared Lewis Point. This will turn into a drastic shortage of labour by 2030.





Given that the US will keep growing towards 400m people as China's population shrinks, the basic maths imply that America will continue to be the world's dominant economic (and strategic) power for the next century. All those extrapolation charts of a Chinese-led planet that enthralled us all in the BRICS hysteria of 2008 will look very silly indeed, unless China heeds the IMF's advice.

I have no doubt that premier Li Keqiang genuinely wishes to move to "market mechanisms" and break the monopoly of the party cadres over the industrial machine. He was the sponsor of a report last year arguing that China would have to abandon its top-down model and embrace the free market and - more controversially - free thought as well. "Innovation at the technology frontier is quite different in nature from catching up technologically. It is not something that can be achieved through government planning," it said.

Whether the shrewd equivocating Xi Jinping will ever let him have his way is another matter. Mr Xi seems to think he can keep a vibrant market economy on a short leash, preserving the iron fist of party control. History suggests that the Politburo cannot have it both ways.

0 comments:

Publicar un comentario