China is slowing gracefully …
South China Morning Post, 14 Aug, 2019.
For four decades, China has seemed like an overly energetic
start-up company. It has always had ambitious targets, from the
“Four Modernisations” to “Quadrupling National Income” and “Made in
Now, it seems, “slogan fatigue” is setting in and officials appear
to have run out of ideas.
In my view, that’s not a bad thing. Indeed, it is a sign of
maturity and increasing sophistication. If officials can take a
back seat, the economy will be able to grow “not only at night, but
also during the day”, to borrow a phrase from the Indian
businessman and author Gurcharan Das.
China faces many challenges at present. At the current exchange
rates, its credit balance is bigger than those of the euro area and
the US combined, despite its much smaller economy.
However, its constant flood of liquidity is not enough to prevent
mass bankruptcies among its small and med
ium-sized businesses. Instead, inflation has popped up everywhere.
The country’s average property prices have risen sharply in two
decades and are still going strong.
The consumer price indices, while rising slower than in India or
Brazil, are constantly eroding the renminbi’s purchasing power and
threatening its exchange rates. Its export machine has met
resistance not only from the US, but also from elsewhere.
But is China’s economy doomed? Are we likely to see a crash soon? I
think not. In fact, things are not as gloomy as they might seem to
First, very few local governments or companies have been forced to
liquidate their assets despite an economic slowdown in recent years
that is still unfolding.
The People’s Bank of China does not even fake independence,
household consumption is holding up, and domestic infrastructure
building is still in full swing, so the economy is far from
A year ago when the controlling shareholders of several hundred
public companies simultaneously went bust because a stock market
slump pushed their personal debt above the value of their stock
collateral, the government came to their rescue.
When the likes of Jinzhou Bank and Baoshang Bank went bust in
recent months, three big national lenders – Industrial and
Commercial Bank of China (ICBC), China Cinda Asset Management and
China Construction Bank – magically became their “shareholders” or
caretakers, forestalling the contagion effect.
It is possible that some regional banks are already operating with
a very thin slice of capital, or even negative equity, if the
impairment of assets is taken into full consideration. But we have
been here before. And often.
For banks, capital is designed to be destroyed in unfortunate
circumstances. If their owners are willing and able to replenish
the cushion, that is ideal. However, if they are not, a subsequent
economic revival will do the trick anyway – as long as public
confidence in the banks is supported by the government or by some
China has gone through many such cycles. So have other countries –
even though the mainstream thinkers may not acknowledge that
In China, the creation in 1999 of the four bad banks (Cinda,
Huarong, China Orient and China Great Wall) has proven over time to
have been a fatal mistake, as their creation accelerated credit
inflation over the next decade.
Meanwhile, the Group of Four have done nothing useful, except
continue to ride on top of non-stop asset price inflation.
Over the past decade, they have become sizeable lenders themselves
and generators of bad credit rather than collection agencies, to
the embarrassment of the Ministry of Finance.
They now profit from their unearned privilege of being the only
conduits to the purchasing of bad assets from national banks. They
perform no useful function except to sell on their purchases to
humbler companies like mine.
On the jobs front, continued retrenchment by factories in recent
years has not caused widely feared social unrest. Armies of workers
are going back to their roots in the countryside.
I can count 15 of my siblings, cousins and their grown-up children
who have retreated to the land in Hubei province from Shenzhen and
coastal Zhejiang province.
Back home, they earn about a third of their old salaries, but the
cost of living is also much lower. For them, it is a suboptimal
scenario but not a truly desperate one.
Judging from the official data, the central bank is not doing much
pump-priming at present. If need be, it can do more. Interest rates
are still relatively high, so there is room for cuts.
Much like the European Central Bank, the PBOC also intends to do
“whatever it takes”. But unlike the ECB, the PBOC has not exhausted
all the weapons in its economic arsenal.
Joe Zhang is vice-chairman of YX Distressed Asset Recovery and a
former officer at the People’s Bank of China