What happened to the China credit crisis?
2016-09-10 08:55阅读：
SCMP, 7 Sept. 2016, by Joe
Zhang,
How to predict nine out of the next five China
crises...
For the past four years, analysts at Fitch Ratings
and Wall Street banks have shared a consensus: a credit
crisis will break out in China at any time. Their prediction was
based on two factors: China’s economy was slowing sharply, and bad
debts would lead to bank runs. Above all, the country’s debt-to-GDP
ratio was alarmingly high and climbing. But, four years on, a
credit crisis seems a more remote possibility.
Look at the current situation: China’s banks are still very
liquid; loan growth has stayed at a 10 per cent clip; public
confidence in the banks is unquestioned; and external debts are
manageable.
It is true that the number of officially reported bad debts
may be only a fraction of the actual figures. It is also
true that some banks may be running on a very low or even
negative equity as their bad debts may have wiped out their capital
cushion. But does that really matter? Capital cushions are
there to be wiped out, by design. In bad times – like today –
capital gets depleted, and come the good times, the banks will make
a killing and build the cushions again. Even in bad times such as
these, China’s banks continue to pay very high dividends despite
analysts’ constant talk of rising bad debts and thin capital
cushions.
And, it is worth highlighting that non-bank financial
institutions in China have fared much worse in the current economic
downturn. A large number of crippled microlenders, and
failed trust companies, guarantee companies and even leasing
companies litter the landscape. And it is easy to see why, since
their cost of input (that is, funding cost) is the banks’ cost of
output. In other words, they not only operate in a subprime sector
but they are also at the mercy of the banks. Securities firms
(dealer-brokers) are now also becoming risky lenders in the already
inflated A-share market while the insurance sector is slowing. Some
analysts argue that, compared to the US or Europe, market
penetration of China’s insurance services is very low and that it
has huge growth potential. But in the short to medium term, the
sector looks overserved and wildly competitive.
A slower economy is the cause of banking distress in China
and parts of Europe. But if the governments of Italy, Greece,
Portugal and Spain had China’s kind of total freedom in setting
fiscal and monetary policies, their own banking sector distress
would be much easier to manage.
Since this kind of banking distress, in most cases, is a
reflection of a slower economy, it is natural to wonder how Beijing
is going to boost growth. I think the government, knowingly or
unknowingly, is experimenting with just how much of an economic
slowdown the country can tolerate. Beijing is clearly not priming
the pump as much as it is capable of doing.
The last stimulus in 2008 has now been badly
discredited and there is no appetite for a repeat of that scenario.
Thankfully, labour market pressure is mild, after the 35-year cycle
of family planning which has ensured that workers are not flooding
the marketplace. So it is safe to say that China can afford to slow
down much more, as the economy appears resilient
enough.
So what do we make of supply-side reforms? Sadly, I believe
the push for reforms is mostly lip service at present since Beijing
is not cutting taxes, red tape is still a big headache, and
state-owned enterprises, instead of being sold or downsized, are
regaining dominance at the expense of private-sector
rivals.
Rural land reform is unfolding slowly. Farmers need the
reform to benefit from economies of scale, and to be able to use
their land as collateral for bank credit. It is safe to expect the
market value of rural land to rise significantly on the back of the
reforms. This is long overdue, as the country’s economic
growth and asset price inflation of the past two decades have left
farmers far behind city residents.
Overall, China’s economy is probably not growing at present,
judging from power consumption and transport volumes. But it is a
blessing in disguise. A recession is a much-needed shock if China
wants to transform its economy into one led by domestic
consumption. In such a transition, banks would suffer enormous
pain, obviously, but it is far too simplistic to predict a banking
crisis.
Joe Zhang is the chairman of China Smartpay Group, and a
formermanager at the People’s Bank of China.
