Trying to deleverage China without blowing up the system
By Ambrose Evans-Pritchard
Last updated: January 22nd, 2014
China is walking a tightrope without a net. There is an acute cash crunch. Credit at a viable cost is being fiercely rationed. Foreign buyers with money in hand can – and are – buying up nearly completed buildings from distressed developers for a song.
The shadow banking system has risen to 30pc of all lending from 20pc in barely more than a year. The growth generated by each extra yuan of credit has fallen by three quarters from 1.0 to 0.25 in five years, evidence of credit exhaustion.
That was the gist of a fascinating gathering on China at the World Economic Forum in Davos, including CITIC Chairman Zhang Yichen, the president of the Chinese Academy of Social Sciences Wang Weiguang, and Blackstone chairman Stephen Schwarzman, among others.
It was Chatham House rules so they cannot be quoted by name (except for one), but I pass on a few general thoughts to readers.
"They are trying to deleverage without blowing the whole thing up," said CITIC's Zhang Yichen.
"The M2 money supply is 120 trillion RMB but that is still not enough cash because velocity of money is very slow, and interest rates are going up."
"My guess is that they will manage it. The US couldn't contain Lehman contagion but in China all contracts can be renegotiated, so it is very hard to have a domino effect. We'll see a slow deflating of the bubble," he said.
"The stock market is not a true market. It is wholly controlled by the government. Even under the new reforms some of the rules are mind-boggling. They are trying so hard to contain speculation that they ended up causing more speculation. They are trying to control price of IPOs, to discourage the price going up. It is a perfect example why markets should be left alone."
There was general agreement that there will be "no more stimulus" for now. President Xi Jinping is determined to tough it out.
The moment the Chinese authorities open up the capital account and make the RMB convertible there will be a rush of money abroad. That will unleash captive funds in property that have nowhere else to go, and could trigger a disorderly fall in real estate prices, and much else besides. So the government will not do it yet.
An ex-global regulator sitting next to me disputed the 30pc figure for the shadow banking sector, muttering out loud that it was really 50pc. Others agreed.
The authorities are alarmed at the mushrooming difficulties of the trust fund, especially the looming default of the China Credit Trust Co on $500m of debt. However, they will let some trusts go bust to teach a lesson in moral hazard. There will be haircuts, but not wipeouts.
US-China rivalry could become ugly. The West is in deep structural crisis, and will not face up to its own failures. It will blame China. Both Xi Jinping and Barack Obama are worried about this in the long-run. (To which I would say, why did China then impose an air identification control zone over a big chunk of the East China Sea, including the Senkaku Islands?)
Nothing said changes my mind that China is riding a $24 trillion credit tiger that it cannot really control. Loans have jumped from 120pc of GDP to around 220pc since the post-Lehman blitz (George Magnus from UBS says it may be 250pc by now).
As Fitch says, this is an unprecedented rise in the credit-GDP matrix in any large state in modern times. It will not end with a Western style banking crash because the financial system is an arm of the state. It will end in an entirely different way. Since Chinese credit now matches the entire US and Japanese banking systems combined in dollar worth, this is no longer a local Chinese story. It is part of our lives too now.
Now off to hear Shinzo Abe talk about Abenomics live and in person.