Could China’s credit slowdown lead to a crash?

China's growth has slowed by less than feared. But that was about it for the good news.

Markets took some comfort this week from data showing that China's economic growth slowed by less than feared in the first quarter of this year. GDP growth came in at 7.4% over the first three months of 2014, from 7.7% in the fourth quarter of last year. "However, that was it for the good news," says Socit Gnrale's China economist Wei Yao.

Companies are complaining of a double whammy of rising costs. Wages are surging as the supply of cheap labour from the countryside dries up. Meanwhile, a credit crunch engineered by a government keen to cool lending down has pushed up the cost of borrowing.

As a result, says Keith Bradsher in the International New York Times, finding the funds to finance "everything from raw material to new equipment" has turned into "a crippling challenge for businesses and individuals without the political connections to borrow at regulated rates from the state-controlled banking system".

This drop in lending has been led by the shadow banking system (a term that simply describes any lender that isn't a bank), according to Wei Yao. Lending by trusts (companies that take investors' money then lend it out) has cooled the most, followed by corporate bond issuance by non-financial firms.

"China's credit slowdown seems to be increasingly market-drivennow, due to rising risk aversion among lenders." "Pessimists worry about a catastrophic crash" driven by baddebts and collapsing credit availability, saysSatyajit Das in The Independent.

The optimists insist that "debt levels are manageable because of high growthrates" and that "reform programmeswill ensure a smooth transition", with China "rebalancing its economy from investment to consumption". Both sides are wrong. Defaults will be managed.

"As in a shell game, bad debts will be shuffled from entity to entity." Unfortunately, maintaining this illusion of stability will entail ongoing financial repression', with interest rates kept below the rate of inflation. That will keep households' buying power weak, which in turn will make it harder to encourage more consumption.

In the end, "China's Potemkin economy of zombie businesses and banks will create progressively less-real economic activity".

Recommended

3 emerging-market stocks to watch
Share tips

3 emerging-market stocks to watch

The top emerging-market stocks to keep an eye on, according to Union Bancaire Privée’s Eli Koen.
1 Dec 2022
Three of emerging Asia’s best value stocks
Share tips

Three of emerging Asia’s best value stocks

If you’re looking to boost your investment in Asia, then here are the stocks you should be considering, says Nitin Bajaj of the Fidelity Asian Values …
22 Nov 2022
Why there is still life in the energy bull market
Energy

Why there is still life in the energy bull market

A green power initiative on the Galapagos Islands demonstrates how the renewable energy transition will need to be supported by fossil fuels for some …
4 Nov 2022
Invest in Brazil as the country gets set for growth
Emerging markets

Invest in Brazil as the country gets set for growth

It’s time to invest in Brazil as the economic powerhouse looks set to profit from the two key trends of the next 20 years: the global energy transitio…
3 Nov 2022

Most Popular

Is it cheaper to leave the heating on low all day?
Personal finance

Is it cheaper to leave the heating on low all day?

The weather is getting colder and energy bills are rising, but is it really cheaper to leave the heating on low all day or should you only turn it on …
1 Dec 2022
Radiator vs electric heater – which is cheaper?
Personal finance

Radiator vs electric heater – which is cheaper?

We compare the costs, pros and cons of radiators and electric heaters and see which one will help keep your energy bill as low as possible.
28 Nov 2022
State pension errors – why tens of thousands of mothers could be missing out on millions in state pension payments
State pensions

State pension errors – why tens of thousands of mothers could be missing out on millions in state pension payments

LCP launches Mothers Missing Millions campaign amid DWP state pension errors.
3 Dec 2022