China’s “recovery” is largely the result of a massive expansion of its bank system and shadow banking system.
From the beginning of 2009 to the end of June this year, Chinese banks have issued roughly 35 trillion yuan ($5.4 trillion) in new loans, equal to 73 percent of China's GDP in 2011. About two-thirds of these loans were made in 2009 and 2010, as part of Beijing's stimulus package. Unlike deficit-financed stimulus packages in the West, China's colossal stimulus package of 2009 was funded mainly by bank credit (at least 60 percent, to be exact), not government borrowing.
If you’re looking for the reason China’s economy continues to explode, look no further. To put this data into perspective, the above bank expansion would be the equivalent of US banks lending over $10 trillion into the US economy from 2009 onwards.
That is the equivalent of what China has done in the post-2008 Crash period.
Mind you, the above statistic is only for China’s official lending numbers (the ones Chinese banks official reveal). Indeed, China’s non-regulated financial system, also called its shadow banking system, has expanded to over $18 TRILLION, more than twice the size of China’s economy. Just last year (2012) the Chinese shadow banking system expanded by $1.3 trillion (that’s the equivalent of 20% of China’s GDP).
THIS is where China’s wealth and corruption and alleged economic “recovery” have come from: not real economic growth, but a massive credit fueled debt binge. And as anyone can tell you, there is a major consequence for this kind of financial expansion: INFLATION.
The massive expansion of the Chinese banking system has unleashed a much higher cost of living in China. And your average Chinese civilian, struggling to meet these increased costs, is going to be none to please to find that the very banking expansion that was supposed to grant him or her a higher quality of life has:
- Benefitted corrupt Government officials much more than the Chinese population
- Resulted in the very same increased cost of living that is eating up his or her paycheck.
This is precisely the formula that resulted in the Arab Spring in the Middle East: increased costs of living and a corrupt Government. China’s Government knows this and so is doing three things to try to mollify the Chinese population:
- Launching a very public campaign to crack down on corruption (to mollify the populace).
- Taking steps to tame inflation (slowing financial speculation and importing massive quantities of commodities to attempt to control prices).
- Curbing its stimulus efforts.
The first of these items is mainly political posturing. True, there will be some sacrifices made (Bo Xilai for instance), but it’s worth remembering that Premiere Wen Jiabao made dozens of speeches and announced numerous campaigns to crack down on corruption for years. So this new campaign against Government corruption likely will likely not add up to any real change (when in history have corrupt officials living high on the hog reformed themselves in China or anywhere for that matter?).
Regarding #2, China is now actively moving to curb inflation in the real estate sector by increasing down payments and loan rates:
China's cabinet announced late on Friday an increase in down payments and loan rates for buyers of second homes in cities where prices are rising too quickly. The announcement came ahead of the start of China's annual parliamentary meetings.
A gauge of property developers listed in Shanghai dived 9.3 percent, its biggest daily loss since June 2008.
It’s also increasing its importation of politically important commodities (food in particular) in an attempt to control prices.
Recently published figures from Ministry of Agriculture show that China's grain imports increased to 29.81 billion yuan from January to July this year, increasing by 75 percent on a year base.
Among all the products, beans and corns increase more sharply. Imports of beans were 34.92 million tons, increasing by 20.1 percent, while corns have been imported 15 times of the quantity of last year, reaching to 3.127 million tons.
Many Western analysts believe that as China’s economy weakened, it would slow its imports of commodities. The truth is quite the opposite. Remember, the single most important issue for the Chinese Government in assuaging the Chinese population is to control inflation. This means importing even more commodities when the Chinese economy slows so as to control prices.
Finally, China’s Government has begun sending very explicit signals that it will not looking towards stimulus to grow its economy. The first signs of this came soon after the elections in November 2012:
This may sound like an oxymoron, but China‘s new Communist government is turning away from financial stimulus to help its slow-moving economy.
During the party’s two-day Central Economic Work Conference this weekend, party leader Xi Jinping said the country would essentially not be pursuing high growth rates through stimulus. That doesn’t mean that Beijing has turned sour on fixed asset investments on things like roads, bridges and subways. They’re still going through with major urbanization projects. But whenever the economy is slowing, the new leaders say they will be less likely to prime the pump.
This is not just idle talk. As I noted in last issue, China has begun actually withdrawing liquidity from its banking system:
Chinese authorities took a step to ease potential inflationary pressures Tuesday by using a key mechanism for the first time in eight months.
The move by the central bank to withdraw cash from the banking system is a reversal after months of pumping cash in. That cash flood was meant to reduce borrowing costs for businesses as the economy slowed last year—but recent data has shown growth picking up, along with the main determinants of inflation: housing and food prices.
The People's Bank of China used a liquidity-draining tool in the interbank market that enables the central bank to borrow money from commercial lenders. It withdrew 30 billion yuan ($4.81 billion) by offering 28-day repurchase agreements, alternatively known as repos. The PBOC hadn't offered repos since June.
"The central bank is trying to send a message that it will not tolerate too-easy liquidity conditions," Dariusz Kowalczyk, a senior economist at Crédit Agricole, ACA.FR +0.99% wrote in a research note.
This process continues today:
Chinese policy makers sent signals that Beijing is preparing to rein in lending, as a recovering economy has reignited concerns about inflation.
At the annual meeting of the country's legislature on Tuesday, Chinese Premier Wen Jiabao set a lower target for money-supply growth, in a clear sign that authorities want to contain liquidity in the financial system.
To recap, the primary themes we’ve addressed so far are:
- The recovery post-2008 in China has been the result of a massive expansion of China’s banking sector.
- This expansion has benefitted China’s political elite and their cronies far more than your average Chinese civilian.
- This expansion has dramatically increased inflation/costs of living in China to the point that civil unrest is rising dramatically.
- The Chinese Government is now trying to curb bank lending and liquidity to lower inflation expectations and mollify the Chinese population.
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