Subscribe Feed (RSS)Repairing China’s financial system
November 26th, 2009 by Michael Pettis | Filed under Banks, Interest rates, NPLs.The stock market had a bad day today, with the SSE Composite down 3.62%, mainly on rumors that banks will be seeking to raise equity capital next year in response to their loan surge this year. On Tuesday Bloomberg reported that the five largest banks were supposed to have submitted plans to regulators for raising money, after unprecedented lending eroded their capital.
I would argue that a more compelling reason to raise capital is the almost-certain surge in NPLs over the next three or four years. In fact I am pretty surprised that these rumors caught the market by surprise. Every time that banks have engineered a policy-induced surge in lending, they have followed up with a surge in NPLs, and it would be pretty extraordinary if this time were any different. A refusal to raise capital levels would have been very imprudent, and it is pretty clear that the PBoC and the CBRC are already worried about the impacts of the credit expansion on the banking system.
Raising capital by selling equity is one way for banks to protect themselves from the consequences of bad lending, but I have been arguing for a long time that the main way banks have been recapitalized in the past has been the very wide spread between the PBoC-mandated lending and deposit rates. This was more or less confirmed in an interesting but perhaps little noticed speech last week by Governor Zhou. According to an article in Reuters,
China needs to maintain a certain spread between deposit and lending rates in order for banks to be able to support the economy, Zhou Xiaochuan, the governor of the People’s Bank of China, said on Friday. The central bank sets a ceiling on the rates banks may pay depositors and a floor on their lending rates. The built-in margin is a rich source of profit for Chinese banks that strengthens their balance sheets.
Speaking at a forum, the central bank chief also said China must ensure that its pro-investment policies do not lead to overcapacity, which he said was already plaguing some sectors.
The low deposit rates mean that Chinese savers are effectively being taxed to replenish bank capital. Although this may be necessary in order directly to maintain the health of the banking system, it indirectly undermines the banking system in another way. By forcing Chinese households not only to subsidize China’s very low cost of capital for producers and SOEs, but also to protect the banks from the effect of economically non-viable policy loans, Chinese households are bearing a pretty hefty share of the cost of China’s investment-led boom, and it is these same households whose surging consumption will be necessary to absorb the increased production resulting from the investment boom.
Given the increased financial burden being placed on them, I doubt that they will be able to do so. After all, it is because of lesser versions of these same policies in the past that the enormous gap between production and investment exists in the first place. And if they cannot raise their consumption sharply to absorb all this additional excess production, the banks will be stuck financing rising inventory and unprofitable companies. It’s a vicious circle.
There is no easy way to resolve this problem, and it is pretty clear that Governor Zhou understands this, at least this is how I interpret his warning about pro-investment policies leading to overcapacity. Interestingly enough around the same time as his speech the Financial News , a government newspaper, published a PBoC opinion piece that argued, according to an article in the South China Morning Post this week, that the “mainland should immediately halt some of its real estate stimulus policies, or risk inflating a bubble that in its bursting would wreak financial and even social trouble.”
On the same day the CBRC also struck. According to an article in People’s Daily,
China’s banking regulator on Monday asked the country’s commercial banks to better manage risks and avoid year-end volatility in lending. Commercial banks should ensure that lending increase was kept in a stable and sustainable pace, the China Banking Regulatory Commission (CBRC) said.
Financial institutions with low capital adequacy ratio and no practical remedy plans would face restrictions in various sectors such as overseas investment, branch increase and business expansion, it said. The CBRC called for enhanced inspections in financial system to detect problems after surging loan extends between the fourth quarter last year and the second quarter this year.
There seems to be a real tug of war. On the one hand much of China’s industrial and exporting sectors along with provincial and local leaders, are eager to see a continuation of the financial policies that have goosed employment and GDP growth at the expense of domestic consumption. On the other hand the macro and financial specialists are worried about the growing imbalances and their impacts on the financial sector. Professor Yu Yonding of the CASS Post-Graduate school, a former member of the Monetary Policy Committee and one of the smartest analysts on China, gave a speech in Melbourne yesterday in which he warned about China’s over-reliance on exports and investment and suggested that the imbalances are worsening, not improving. I strongly recommend that interest readers check out the speech for themselves.
In part the debate resolves around the issue of financial sector reform, especially of the banking system. This is an extremely important topic because most economists and analysts, including me, believe strongly that financial sector reform will be one of the most important steps forward for the healthy development of the Chinese economy. The Chinese financial system misallocates capital on an heroic scale.
A few days ago I was in a debate with a friend of mine about whether or not there has in fact been financial sector reform and liberalization in China, even after the US financial crisis gave anti-reformers what seemed like an unanswerable argument against financial liberalization. My friend argued that instead of taking the easy way out and backtracking, China has in fact deepened financial sector reforms. In support he referred to numerous statements by regulators to this effect, and other moves to liberalize finance in China. For example there is no question that the Chinese bond market is growing. According to an article in Tuesday’s Financial Times,
Emerging east Asia’s local currency bond markets have tripled as a proportion of the global market since the Asian financial crisis, but remain plagued by poor liquidity, according to a report published on Tuesday by the Asian Development Bank. It says the region’s local currency bonds outstanding accounted for 6.2 per cent of the global total in the first quarter of this year, compared with 2.1 per cent in the fourth quarter of 1996, on the eve of the 1997-98 Asian crisis.
The $3,658bn of bonds outstanding amounted to nearly seven times the value in 1996, reflecting efforts by governments in the region to strengthen and deepen local bond markets to avoid the pitfalls of extensive borrowing in foreign currencies.
The bulk of the increase reflects a surge of local currency bond issuance in China, which accounted for 3.7 per cent of the global market in the first quarter of 2009, from just 0.2 per cent in 1996. China remains the fastest-developing market for local currency corporate bonds, growing 87.7 per cent year on year, but the Philippines was second, with 65.8 per cent growth year on year, according to the ADB’s Asia Bond Monitor.
Perhaps more excitingly, foreign firms are likely to be welcomed into China’s domestic bond markets. Rumors about this started on Monday with a CICC report and then seem to have been confirmed in an article in today’s People’s Daily:
Foreign companies may be able to sell bonds in China within a year as the government expands its domestic capital markets, according to China International Capital Corp (CICC), the No 2 underwriter of yuan debt this year. ”The first group of future international issuers is likely to be blue-chip companies,” John Cheng, CICC’s investment banking managing director, said in an interview on Tuesday.
Overseas “firms will increase their presence in China and they’ll need to match their growing yuan assets with instruments in yuan, be it debt or equity,” he said. China is urging domestic companies to tap bond and equity markets for funding and reduce reliance on banks after regulators said record loan growth poses risks. Authorities will consider allowing sales of high-yield corporate bonds to provide new sources of funding, People’s Bank of China Deputy Governor Hu Xiaolian said on Nov 18.
But in spite of the good noises, I am very skeptical about whether there has been real reform or liberalization in the financial sector, especially during the past year. Why? Because for me this would involve two main types of reform, on neither of which has there been any advance. First, interest rates would have to be decontrolled and liberalized in order to remove the financial repression implied by extremely low interest rates. I see no evidence that this has happened. Interest rates are as controlled, and as much a policy tool, as ever.
Second, there needs to be substantial improvement in bank governance, so that the lending and investment decision is a function of economic rather than non-economic factors. This is another way of saying that there must be a reduction in the process that leads to such massive capital misallocation.
Although there have been a series of baby steps in that direction, I would argue that these were completely undermined – reversed, in fact – by the surge in lending this year. Any chance that the financial system is getting better at making the capital allocation decision was blown away by the events especially of the first half of this year. The Chinese financial system, I would argue, is less liberalized, and certainly less efficient, today than it was one year ago and even five years ago. This may sound like an outrageous statement, but reform has to be more than tinkering on the side. To matter it must address the fundamental problems in the financial sytem – which I believe to be distorted interest rates and weak governance – and I don’t believe either has been addressed.
Finally, I want to mention two additional recent papers that have come out on the Chinese economy. First is my misnamed “Brief” for the Carnegie Endowment, which discusses the tug-of-war between rising US savings and persistently high Chinese savings and what the consequence are for the global balance and international trade. Second is a paper called “Overcapacity in China: Causes, Impacts and Recommendations,” released today by the European Union Chamber of Commerce in China. Full disclosure: I was involved partially in the preparation of the paper.
And for those who celebrate my favorite holiday: Happy Thanksgiving.
“…the main way banks have been recapitalized in the past has been the very wide spread between the PBoC-mandated lending and deposit rates.”
It may just be my inherent paranoia, but isn’t the same scheme being employed by the U.S. Federal Reserve?
Happy Thanksgiving from Boston MA
Very interesting article, as usual.
One question remains, and I don’t seem to see
it confirmed 100%: in your opinion, is Chinese real
estate market in a bubble (right now) ?
It seems that many properties are purchased and left
empty, waiting, as a form of ‘investment’, for better times
(higher prices). It’s been going on for while now,
and it feels like there is something wrong with this model.
Happy Thanksgiving !
[...] Repairing China’s financial system (Pettis) [...]
[...] Repairing China’s financial system (Pettis) [...]
The flippin’ Overcapacity paper causes internet explorer to dump. Is there an alternative source? Or an HTML view?
Thanks for all your hard work.
Marc
An interesting post. I have been skeptical about the true behind-the-scenes support for China’s bond market. While some reformers no doubt recognize the need for a healthy bond market to diversify sources of funding across the economy, it does appear to pose a threat to that fat, state-guaranteed interest spread you mention. If a free bond market is adopted, China’s bluest chips will most likely get better rates through bond sales than borrowing through the banks, considering the artifical spread. That would lead to a bond market skimming off the best banking customers. Then the creation of bond-heavy mutual funds would provide a more stable investment alternative to little investors, which in turn will drain bank deposits on the other side of the balance sheet. I can’t imagine all this makes the CBRC all that happy, if I were to take a wild guess. I have heard for a while, “the bond market is coming, the bond market is coming” re: China. It has been a rather slow, labored approach though. I imagine that someone behind the scenes has figured out that while a healthy bond market is something the country really needs, at the same time it does threaten other policy objectives … as well as China’s tight control over interest rates. I think the liquidity stuff isn’t all that meaningful, re: problems with the bond market. The market’s small, and so there naturally isn’t much liquidity (plus apparently, IIRC, the big insurers that buy bonds tend to sit on them bcz of scarcity). If a bond market were allowed to flourish, the liquidity issue goes away, I bet. But what does China really want, re: a bond market? Hmm.
Someone called John Ross has made the following argument on another website (sorry, but I can’t link). It sounds dubious to me but i wondered what others think:
“If the arguments presented for RMB revaluation by the US administration have no factual basis, why are they being put forward? The real answer lies not in trade but in debt – as other writers, such as Daryl Guppy, have rightly pointed out. In asking for RMB revaluation, President Obama’s advisers were, in effect, asking China to donate $150-$300 billion in RMB to the US via debt reduction.
The arithmetic of this is simple. China’s holdings of US dollar assets, chiefly Treasury Bonds, are around $1.5 trillion, or 10.2 trillion RMB. A 10 percent devaluation of the dollar vis-à-vis the RMB would reduce the value of these holdings to 9.3 trillion RMB, and a 20 percent dollar devaluation would reduce their value to 8.5 trillion RMB. In either case the U.S. is asking for its debt to China to be reduced by 10-20 percent in RMB terms.
It may now be seen why President Obama’s advisers have a vested interest in not examining the factual situation of China’s trade. They are seeking a large debt relief package. Other countries, however, do have an interest in examining the facts carefully – as they will not benefit from the debt relief but will suffer from the adverse trade effects.”
Ross’s arithmetic may be simple, but his logic is breathtakingly simple-minded. Why would it benefit the US if the RMB value of US debt held by China declined by 10-20%? The US isn’t matching the dollar debt held by China with RMB assets. In fact, using that logic, why limit the “value” to the US of a RMB deprciation to only $150-300 billion? If the RMB rises by 10-20% then the value of all US debt (roughly $40-50 trillion, I think) declines by $4-10 trillion in RMB terms. Wow, what a windfall!
This is totally irrelevant. Ross has no understanding of balance sheets and makes the kind of simple-minded mistake that might convince the average man-on-the-street, i.e. China “loses” $150-200 billion, so therefore the US “gains” $150-200 billion.
Except that China neither loses nor the US gains. The losers are anyone who holds dollar assets matched by RMB liabilities (the PBoC, for the most part, but also exporters with RMB debt) and the winners are owners of RMB assets matched with dollar liabilities (anyone in China who directly or indirectly import from abroad, which means most of the rest of China excluding exporters).
Isn’t this the same Ross who puts out conspiratorial theories on secret attempts by evil capitalists in the US to rule the world? In that case the silliness of this argument makes sense, since the conclusion is necessarily one of the key assumptions. What a ridiculous argument!
Is there a good up to date source on NPL ratios of Chinese banks?
Even if the site is in Chinese, I would really appreciate it.
Michael,
Thank you for another outstanding post. Also, congratulations on your excellent Carnegie Policy “Brief”
. Your work has really helped me understand the imbalances in the current world financial system and has piqued my interest in the topic.
After reading the volumes of your work on the topic, I ran across another article titled “The Myth of Chinese Savings” published in the November issue of The Far Eastern Economic Review by economist Jonathan Anderson (http://www.allroadsleadtochina.com/reports/Anderson_November.pdf). At first it seemed to me that his views differed compared to yours, yet after a second review it seems that his views are actually quite similar to yours. However, he seems to place more emphasis on corporate savings rather than on household savings as you point out in your recent work, “Sharing the Pain.”
Regardless, it seems that you are both saying virtually the same thing in that households are effectively subsidizing the corporate sector.
What I do not quite understand is where exactly those savings are going? Are they being reinvested into the banking sector or used for foreign asset acquisition?
Also, what are your views on Anderson’s article?
Again, thanks for your excellent work and insight!
Regards,
Nathan
Nada, yes, the Fed (and other central banks) often manipulate short term rates as a way of restoring profitability to banks, although they tend to do so not by mandating wide spreads between lending and deposit rates (deposit rates were deregulated in the US, if my memory of Professor Giles’ Money and Banking class is to be trusted, as part of DIDMCA in 1980), but rather by keeping short term rates much lower than long term rates. In the US however that creates less of a transfer from households to corporates because households and corporates are both borrowers and depositors.
Adam, there are certainly bubble-like characteristics in Chinese real estate, but for me the key issue is not the stock and real estate bubbles but rather the risk of overinvestment.
Marc, they will send me a copy soon but for now my only source is the linked website.
Tony, your instinct is right. This is an argument that can only be taken seriously by someone who has no understanding of either how reserves work or how balance sheets work. I am surprised by the claim to say the least, although I wonder if the real purpose is really to make a substantial point in the debate. It sounds more to me like he is hurriedly endorsing any point that can appeal to certain factions, and in the process make him seem a serious ally, without worrying too much whether it makes logical sense.
JackZhang, thanks for saving me the need to point out the obvious flaws. I would have preferred, however, that you had swatted a little less aggressively. I do want to keep this discussion forum as open as possible and the article really can’t be taken seriously enough to warrant such a hard rejoinder.
ChinaWatcher, I think you are exactly right. There are great technical reasons to hasten the development of the bond markets but there are also at least a few serious political impediments that will make some policymakers reluctant to allow too rapid development. This is the basic problem of financial sector reform – it is as much political as it is technical.
Lemiwinks, it depends what you mean by a good source. The PBoC’s website and the financial statements of the banks list official NPL ratios and numbers. There are a number of analysts who provide their own estimates, including Fitch, the other rating agencies, and specialists like Jack Rodman.
Nathan Albitron, thanks. I did read Jonathan Anderson’s piece when it came out expecting, like my reaction to much of what he writes, that I would be impressed again with his sharp intelligence and deep knowledge of China even while disagreeing sharply with his conclusions. Of the people with whom I regularly disagree, his stuff is usually the most interesting, at least to me. However, as you note, although we approach the problem from very different angles it seems that there is some very serious overlap in our conclusions.
There are many ways the transfers occur. They can occur directly in the form of low costs of capital for companies that borrow from banks, or low sterilization costs for the PBoC. They can also occur indirectly in the way undervalued exchange rates subsidize the tradable goods sector, deteriorating social safety nets subsidize employers, etc.
Ross’s weird argument, and the aggressive and aggrieved positions he has staked in other articles, really confirms your saying that it sounds like someone who is “hurriedly endorsing any point that can appeal to certain factions, and in the process make him seem a serious ally, without worrying too much whether it makes logical sense.” He is defending China from rapacious foreigners, I think, and expects gratitude from the natives. Unfortunately there is something disturbingly Orientalist about the way some foreigners patronize the Chinese in these kinds of discussions. Someone should tell Ross that we don’t really need the European defender to ride in on his white horse to save China from the foreign devil. Chinese scholars are doing a pretty good job. This is about positioning, not about debate.
I understand your complaint, Michael, and I do appreciate the quality of this discussion forum, but I will also remind you that Ross has attacked your own and others’ postings and aticles with pig-headed rudeness and nasty manners that in my opinion absolve you from any need to protect his feelings. He is writing mainly to get notoriety and to get the big boys to appreciate him as their attack dog. This is what he did in London, and probably why he had to come to China to escape his reputation, although I am surpprised that his Shanghai university did not do any background check before offering him a post.
Don’t you think bubbles run the risk of causing a financial crisis in China?
Mr Pettis
Today’s markets probably look worse. Hmm, wonder if anyone wants to look in the dubai coffee mug and make some predictions for real estate in China , join the bubbles maybe? ;p
Agree with much of what you’re saying but one small point does come to mind – if the banks gave better interest rates, wouldn’t that offer even more of an incentive to save on the part of those households, thereby, reducing the impulse to spend? Naturally if banks offered anything close to competitive, the real estate and stock markets might not be at the unrealistic levels they are at now.
What I’m more interested in is what kind of exit strategy investors are hatching when the regulatory authorities are now cracking down on transfers and accounts – surely not everyone is going to take the train to hk with plastic bags full of rmb? sorry, the ironic humour in that scenario is just a tad too much to resist.
happy thanksgiving, let’s hope black friday is good for the retailers?
Marc
Try using Firefox to download the Overcapacity paper.
BTW: Those of us who use a Mac have no problem downloading with Safari
[...] Repairing China’s financial system (Pettis) [...]
Re: Real Estate Bubble,
I can’t help but think that the potential of Yuan appreciation might pop the real-estate bubble. Today’s value, expressed as the amount of human capital per Yuan vs. A Yuan that is 20%+ higher, would put tremendous downward pressure on prices.
The built in spread that the PBOC affords banks makes the business model simple. State owned banks have such market power. You have the name. You can get mediocre talent pursuing a secure, cush job to come work for you. So you don’t have to pay them much. Keep expenses low and blow your liquidity out through lending as much as you can. The model works as long as you don’t screw up your portfolio quality…and that is the 64,000 dollar, call it the 8 trillion RMB question.
Thanks for another great post. The Yu Yonding speech and EUCC paper are interesting and IMO are mostly right on with a couple of exceptions.
Suggested actions to rebalance are valid and beneficial, but gradual. There is not much emphasis on direct fiscal stimulus on the part of the central government of China. IMO a substantial increase in direct government spending is the only hope for adequately reducing trade imbalances in a reasonably short period. Political pressure is building, and I do not believe the US will be willing wait 10 years or more for a gradual rebalancing. The pressure is likely to escalate in the next election cycle as high unemployment persists.
The indirect approach of politically directed forced lending used this past year is extremely inefficient and appears to result in a lot of non productive or counterproductive investments. Direct spending is preferable because it is can be directed to areas that benefit the country and do not further increase excess manufacturing capacity. China has taken some productive steps, such as subsidies to promote purchase of autos and appliances, however they need to do far more. This includes investments that are not economic from a business sense but where the return on investment is in the form of benefits the public. A good example is pollution control. The government could provide large subsidies or cost sharing for projects that reduce pollution and/or increase energy efficiency without increasing net production capacity. There are many other examples. It seems unimaginable that there are not productive things that need to be done that are sufficient to soak up 100% of Chinas excess savings for many years to come while the gradual restructuring steps take hold. Why does China prefer to stick the excess savings in US Treasury bonds rather than use them internally to benefit the country?
There seems to be a lot of resistance to the idea of the central government taking on a lot of (on the books) debt. This appears a bit irrational, since they seem perfectly willing to accept massive contingent liabilities. This includes future losses on US debt securities. As pointed out in the Yu Yonding speech (and previously by Prof. Pettis) large losses on the US debt China holds are virtually certain/inescapable. Why is it considered OK for the PBoC to take deposits and invest them in US treasuries with an essentially guaranteed future loss? The alternative of investing the money in China government bonds would likely be required if the government ran large deficits; however, this seems preferable since full repayment is assured.
One major flaw in the Yu Yonding speech is the suggestion that the US somehow compensate China for its (future) losses on the treasuries. This has to be one of the strangest things I have read and makes me wonder what he could possibly be thinking.
http://www.reuters.com/articlePrint?articleId=USSHA35298520091127
SHANGHAI, Nov 27 (Reuters) – China has signalled it may clamp down on asset prices to do its part in a battle several emerging countries are waging against capital inflows, potentially putting a lid on its booming stock and property markets early next year.
your view on this would certainly help me, thank you!
I am bit confused on the bank spreads. It’s my understanding that corporations and SOE in particular get very very cheap financing. But fat spreads would indicate that it’s the bankers being subsidized. Are the corporations being subsidized through expected high NPL’s with little enforcement, or are the rates still lower than one expect at market derived rates even with the spread?
Which that leads me to wonder if there are any reasonable estimates of what deposit rates and lending rates would be at market compared compared to the government set rates.
In response to Judy Yeo’s point about higher interest rates giving more incentive to save. I think it depends on how and why one is saving. If a household saving to reach a specific nominal goal or to have enough money for a specific item like college, a higher return makes it easier to reach those goals by setting aside a smaller percentage of your income.
In the US one of the main reasons net savings rates tend to fall with interest rates is that households borrow more for purchases like cars and home remodeling with lower rates. It is more that borrowing rises, not that saving falls. But in China I don’t think most households have that option.
Michael,
Your posts are usually close to the frontier of (often missed) reform opportunities in China. What is happening in the Chinese financial system is typical of a mixed model/developmental state/state-led economy. China has retained state capitalism where it is not a political burden for the ruling party. And the party (or organized elite) has the means to extract a lot from the rest of the population, as long as some semblance of bevenolence can be maintained. Not very good for efficiency but not harmful enough to cause riots.
However the banking system will be the scene of some interesting micro-political spectacles. But there is always CIC to support new issues.
“but also to protect the banks from the effect of economically non-viable policy loans”
The Fed is incentivizing the same sort of activity here. Rates set at zero so banks are spraying capital everywhere in hopes of landing high yields. Abolish the Fed!
It seems very difficult to compare what’s happening in China real estate to the recent bubble here in the U.S.
Here, condo speculators tended to be highly leveraged (often less than a 10% down payment) and intended to sell within a few months. In China, people put 50% down and seem content to sit on an empty, unfinished condo for years.
On the one hand, China’s situation would seem to be less prone to the explosive fall in prices deleveraging brings about. On the other hand, this apparent safety seems to have allowed the over-building to go much further. Booming Shanghai has higher vacancy rates than Manhattan saw in 1933.
I can’t get my head around what the optimists see as the outcome. That growth will suddenly increase at a rate that will both allow the development to continue and absorb all the empty buildings over the next 4-5 years? Or that the appetite to buy and service empty buildings continually increases?
[...] for the command economy to bolster their banks, but one of the best analysts of the China scene argues otherwise: The low deposit rates mean that Chinese savers are effectively being taxed to replenish bank [...]
The EU report essentially parrots much of what the State Council has said publicly. Their positions make sense because they are always worried about things getting out of hand in the provinces, and they have, again. The only difference is that this report comes from foreigners, who are always wrong – even when they essentially repeat the conclusions of the State Council – because the government is so desperate to save face. With regard to the bond market, you have to look at which segment has taken off, because the kind of debt being issued this year is much different than that issued during earlier bouts of a functioning market. This debt is not the normal kind approved by the NDRC. If there had been meaningful bond market reforms then there would not still be a maze of inter-agency competition for control on issuance and approvals – there would be a market where qualifying firms (according to objective, market based criteria and underwriting) could issue debt priced according to the market, not according to the preference of some middling bureaucrat. That bonds have been issued does not mean that reform has occurred. In my mind the regulatory apparatus for the financial sector is a mess right now, more so than it has been in a while, and at a time when the stakes are higher for Chinese tax payers and stakeholders. Even with a recapitalization, tbe balance sheets of commercial banks are supported more and more by sub debt (obligations that will come due, have to be repaid and refinanced). Sure, they have called for an end to this, and called upon the banks to raise some real capital, but this in itself says something about the approach of the bureaucracy to financial management – lend to support political programs and use dodgy means to fund all of the new assets. This all leads to the question of who is really in charge of this space, and when might there be some policy consistency? Not soon.
Seems that the CBRC and CSRC were shocked by the market reaction to the Capital raising plans. Now they are talking about capping capital raising schemes per bank, and delaying their CAR requirements.
We have the ABC IPO and capital raising needs by BOC, CCB and ICBC all coming up. Someone may have to wait till 2011!
Also i hear rumours today that next years total new RMB lending target will be about 7.5 trillion
I would argue that low deposit rates result in one more very dangerous consequence: Those individuals that do have the luxury of building up savings, due to the ridiculously low deposit rates, are coerced into two types of far riskier investments: property (often financed by the same bank) and public equity stocks.
I think we’ve seen this in China, and it’s certainly been a theme in small oligopolistic banking markets such as Hong Kong and Singapore. In Hong Kong, HSBC has had around 50% (or more) of local deposits throughout Hong Kong’s history. Deposit rates have been so pathetically low, that it made more sense to own HSBC stock and take the dividend or take out an HSBC loan to buy an apartment. Perhaps China admired this model and saw it as a convenient way to develop their own HSBCs…
Thank you for your posts.
Stefan
Wallace,
Right. Indeed. But who pays what price to whom, (as Lenin said “kto kovo”). I think the most interesting China related issue for serious political economists is if, when and how bits and pieces of the system will crack, corrode or whatever mechanics analog one might choose and what pieces of the system then will turn out to be critical for the structure as a whole. And to what extent broken pieces can be repaired in time for the structure to survive.
I spent a lot of time looking for that kind of weaknesses in another fascinating Asian non-democracy with a peculiar mixture of government, politics and business, all within the same cooptative, but mobile and competitive elite, and what you see is that these things are pretty resilient and their non-elite citizens patient and tolerant for leadership imperfections, as long as certain boundaries are not crossed (as these elites apparently believe themselves and which according to some is an important principle of policy making). If you can move the market like one would like to move the hole on a green during a game of golf, it gets a little easier for the player with that capacity. Likewise, economics becomes a different game when you can manipulate markets and politics – indefinitely?.
The government of China creates the bubble, and it will cause the bubble to burst. It’s just a matter of time.
I wonder how bad the effect will be on the stock markets and real estate markets in other Asia countries.