Lots of people have said lots of times in the past year that cash is king. So which country has oodles of surplus cash these days? It’s China, of course. It has almost $2 trillion (Rs98.4 trillion) of foreign exchange reserves, a low fiscal deficit and its public debt is just 18.5% of gross domestic product (GDP), so it has the money to boost its economy.
True, China hasn’t been acting much like a king these days. Its fourth quarter GDP growth was down to 6.8%, the slowest in seven years. But that hasn’t prevented many observers from looking to China as a beacon of hope in a collapsing global economy.
That’s on account of several straws in the wind. First among them has been the country’s massive $585 billion stimulus package, announced last November. More importantly, there are already signs the stimulus is working.
Loan growth in Chinese banks was up 101% year-on-year in January. Loans made in January equal one-third of all loans made last year. China’s Purchasing Managers Index for January shows that while the economy contracted, it did so at a slower pace. Cement and steel prices have rebounded smartly from their lows and iron ore imports have resumed, breathing some life back into the Baltic Dry Index (BDI), a measure of the price of moving commodities by sea that also serves as a barometer of the health of global trade.
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The upshot: The Shanghai Composite Index is higher by around 38% from the depths it plumbed last October.
China is a top-down, state-driven economy and its public sector banks have no option but to do what the government wants. Also, unlike the developed world, China cleaned up the bad loans in its banks’ books long ago. As a result, its banks are not weighed down with so-called toxic assets and are in fine shape to follow the state’s orders to lend.
At the same time, recent Chinese trade data has been appalling. Since China has become the world’s manufacturer, the global slump in demand has hit it badly. The big question is: Will the government’s spending spree be able to compensate for the fall in export demand?
But first, there are doubts about the impact of the lending surge. According to an article in the South China Morning Post, much of the lending is an increase in bill discounting, not for new projects. Also, some of this is illusory because banks, faced with lending targets, are shovelling loans to their best customers, which don’t need the money.
A recent Citigroup Inc. report on Chinese loan growth said: “Loan growth numbers (are) unlikely to get better than this—the issues with strong loan growth are firstly, sustainability of such strong growth, especially set against the potential for significant expansion of China’s bond market later this year (for corporate and local government bonds), which could potentially lead to disintermediation of lending. Historically, there has also been a lot of seasonality in lending, with Chinese banks in the past fulfilling...(about) 35% of full-year loan targets in Q1 (first quarter). This year we believe this figure could be skewed to...(about) 40-50%.”
There’s also the argument, made clearly by Michael Pettis, professor at Peking University’s management school, that China faces a huge overcapacity problem and funnelling credit to companies will only exacerbate it. Writes Pettis: “China can boost total demand by boosting manufacturing—every worker not fired is a worker able to consume more—but boosting manufacturing also boosts Chinese production. If it increases production relative to consumption, then China is actually reducing net demand, even while it is increasing total demand. That this is happening, by the way, shows up in the rising trade surplus.”
In other words, the Chinese fiscal boost will end up exporting China’s overcapacity. Pettis argues that China was in the midst of an investment bubble caused by global imbalances and it makes no sense to try and solve the crisis through policies that led to it in the first place. What is needed instead, says Pettis, is more consumption by the Chinese.
January’s trade figures, which showed imports contracting by a huge 43.1%, don’t signal that. And finally, there are lots of questions about the actual size of the Chinese government’s stimulus package, with a Citigroup estimate putting the real stimulus at 3% of GDP, against the announced 12%. All this has put a question mark over the sustainability of the Chinese upturn, a scepticism reflected in a renewed fall in BDI.
Much will depend on the kind of spending the Chinese government undertakes. If it increases infrastructure spending, and much of the stimulus package is earmarked for that, it will boost Chinese growth without adding to global overcapacity. In any case, state spending will certainly boost China’s GDP growth.
But for the rest of the world, as Citigroup’s Johanna Chua points out: “Any proposed argument that China’s rebound will boost the region should be viewed sceptically. As already widely known, China’s share of the world economy is rising, but still relatively small at around 6% versus US/Europe accounting for over 50%.”
Manas Chakravarty looks at trends and issues in the financial markets. Your comments are welcome at firstname.lastname@example.org