For so many months all economist and equity and financial research analysts across the world have been trying hard to accentuate the eyes of the world economy that china is building a asset bubble fuelled by excess over capacity. Now finally it has been accepted by china itself that they have created a bubble larger than them to control. Before I start on I must thanks all the equity research and financial analysts that we all have succeeded to draw the attention of the upcoming asset bubble which will make the process of recovery out of recession difficult.
China’s lending surged to 1.39 trillion yuan ($203 billion) in January and property prices climbed the most in 21 months. According to the National Development and Reform Commission property prices in 70 cities of china have rose 9.5% from a year earlier. The surge of prices has been due to the affects of easy lending followed with uncontrolled flow of funds in to the main streets. Real estate is one of the sectors where prices have scaled up. Automobile followed with cements and capital goods are also under the ambit of excess flow of funds resulting over capacity bubble .Asset prices and commodity prices are also under the threat of excess valuation.
It’s not due to the stimulus package alone declared by china but the uncontrolled loans given by banks without taking care of any quality measures on the loan papers. Its juts like US mortgage case where quality of loans was never taken in to account. China’s 9.35 trillion yuan of loans in 2009 have given birth to the fear of another financial crisis in the fastest growing economy.
The borrowing in the month of January’s was 14% less than a year earlier, after the government targeted a reduction in new loans this year to 7.5 trillion yuan from a record 9.59 trillion yuan in 2009. This have happened due to the strict norms declared by china during the end of January 2010.Chinese banks are now focusing and have instructed on the quality of loans that are being disbursed. The new lending norms framed by china are:
- The China Banking Regulatory Commission (CBRC) issued new regulations on Saturday evening telling banks to set lending quotas after “prudent calculation” of borrowers’ “actual demand”.
- It also reiterated working capital should not finance fixed-asset investment and equity stakes.
- Banks have been asked to keep a tab and follow a detailed analysis of the repaying capabilities of borrowers through inspections and monitoring.
- Borrowers will not be able to obtain loans without declaration of a specific use, and they should meet bank representatives in person to avoid false claims
- It have been noticed that the borrowers are borrowing more than they require. It have been found that despite of ample funds on hand for routine business operations, Chinese enterprises are borrowing much more than they needed in order to speculate with various types of investment. This is creating the bubble of speculation and thriving up the prices of the commodities and other asset classes.
- The threat lies once they fail to meet the obligation of excess payment over their original capacities followed with a correction in asset prices and commodity prices,
- In support of the government’s 4-trillion yuan stimulus package, Chinese banks have lent an unprecedented 9.6 trillion yuan in 2009, nearly half of 2009 gross domestic product.
- 80% of the funds went in to stock market and real estate. This has lead to shoring up of prices to an unprecedented in china. Same thing applies for stock market.
- Chinese government is aiming to restrict credit supply to 7.5 trillion yuan (about $1.1 trillion) in 2010.
The below chart shows the stock market rally of china.
China has built the castle out of sand and when it will burst out it will tighten the financial recovery of the world economies. Since china is very much intricate with major economies across the world. If we dig in to the investments made by china in other economies then we will get a more clear picture of the tremors that might the world economy might have to face if the over capacity and asset bubble burst out.
- China’s foreign investment rose for a sixth straight month in January
- Foreign direct investment rose 7.8 percent in January from a year earlier to $8.1 billion according to the commerce ministry.
- FDI more than doubled from a year earlier to $12.1 billion.
- The government approved the establishment of 1,866 overseas-funded ventures in January, a year-on-year increase of 24.73 %.
- Even European countries are now dependent on China for doing investments.
So if any bubble burst out happens in China then inflow and out flow of funds will get stuck and another phase of skeptical economic investments phase will start on. Every economy will be shaken to go for cross border investments.
At the same time when the bubble was getting prepared Chinese economy grew at 10.7% in the forth quarter of 2009 showing the first green shoots of recovery out of recession in 2009 beginning. China’s fourth quarter growth of 10.7%, compared with 6.2% growth in the first quarter, 7.9% in the second quarter, and 9.1% in the third quarter. China have show the recovery out of the recession.
The below chart shows the GDP growth of China.
It have created a bubble on the go of 10.7% GDP growth, but when it started its journey after 2008 September the world economies were busy in finding a piece of land in the ocean of recession. China gave the first land out of the ocean of recession to stand up and bring the hope of recovery mechanisms among the hearts of the world economies.
China’s economy expanded 8.7% in 2009 from a year earlier, indicating that China achieved its full-year growth target of 8% for 2009. GDP (gross domestic product) rose to RMB33.54 trillion yuan (US$4.91 trillion compared with the US GDP of about $14 trillion) in 2009.
But all at the cost of excess and uncontrolled flow of funds Chinese main streets of economy. The only thing which makes happy is that Chinese governments and banks have accepted and the over capacity bubble and have taken measures to control the risk. We can expect some slow down in china economy due to cut down of excess flow of funds and some pull back from the growth rate of 10% GDP. We will found very soon a slow growth as its by natures law that after an unprecedented growth their have to be a decline. The next ball game for china is to maintain the growth rate consistently with out making a bluff call of decline.
Investments in china should be done with caution followed with detailed analysis of the risks that might pop up. It would be better to look out for some other economies who are still trying to come out of the dark days of recession. Since their is one thing of surety that its difficult to climb from 100 to 200 but easy to climb from 10 to 100.Since in both cases the percentage of risk is different in case of fall down.
Author: Indranil Sen Gupta
Financial, Economic Writer and Research Analyst.