Could China’s credit slowdown lead to a crash?

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 Société Générale’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-driven now, due to rising risk aversion among lenders.” “Pessimists worry about a catastrophic crash” driven by bad debts and collapsing credit availability, says Satyajit Das in The Independent.

The optimists insist that “debt levels are manageable because of high growth rates” and that “reform programmes will 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”.

  • PAT

    Ultimately they have only one way to keep their restive population employed in a country with no social security and no pensions that is to fuel the military and armanents. Its very sad -can millions abandon the tower blocks and go back to the fields. There will be anger particularly with America for buying their stuff on the cheap then dumping them -the masses will be fed the poison to keep the powers that be in place. America said the cold was over and sent their ships to the Pacific to guard against China. The evil regime in North Korea are their laqueys -turned a blind eye to. The dedicated goose steppers are certain of eventual war and they are waiting for the day . Lets hope it never happens and intelligent brains in Beijing find a better way