The credit crunch has taken many of us back to a more basic vocabulary, and not just in terms of our choice of expletive.
The loss of confidence in the financial system is such that many are turning to the plumbing industry for reassurance. Hence debt markets, like kitchen drains, need to be unblocked (or, for central heating pipes in winter, unfrozen). Reluctant banks in Europe and the US are also called upon to “turn on the taps” and resume lending to businesses and individuals.
Against this metaphorical background, China’s State Council turns out to be a heavy-handed practitioner. Less interested in a little tinkering with the taps, its own approach is the policy equivalent of taking a sledgehammer to a fire hydrant. HSBC estimates that Rmb2.8 trillion ($409 billion) of credit was lent out in the three-month period beginning in December last year.
To put that in perspective this is 58% of the total lending for 2008 and is marginally more in absolute terms than the GDP of Taiwan.
Reserve ratio requirements (the minimum that banks are required to hold on deposit) have also been cut back and the People’s Bank of China is restricting new issuance of government debt as existing bills mature. Together these two measures have injected a further Rmb1.3 trillion of liquidity into bank balance sheets, HSBC estimates.
Where is all of this newly available credit supposed to end up? Beijing’s focus, of course, is on stimulating economic growth and generating jobs. To do that it expects the banks to underwrite loans on the infrastructure component of its $586 billion stimulus plan.
But reports suggest that some of the new cash is heading in a different direction. Li Huiyong at Shenyin Wanguo, a Shanghai securities firm, reckons that at least Rmb660 billion is being held on short term deposit or is finding its way into the domestic equity markets, which are (amazingly enough) a top performer this year. Companies are reluctant to invest in increased production in uncertain times, Li says, and they see more chance of a quick return through stock speculation.
To the surprise of many analysts, the largest single portion of recent lending (around 40%) is ending up in short-term bill financing. In part this is a response to pent up demand from last year, when restrictions on lending left many companies short of working capital. They are now repairing their balance sheets.
But it also reflects the banks’ efforts to squeeze the surge in lending through their existing risk management pipeline. Bill financing (which is short term, backed by trade assets, and transferable between banks) is generally regarded as a safer form of lending requiring less due diligence. This helps in understanding how risk management teams could have signed off on such a huge surge in lending in the last couple of months. Analysts say that a significant rollover in bill financing arrangements in coming weeks will indicate whether they are in fact vanilla loans in all but name.
The credit quality of the new lending remains a concern. China has succeeded in cleaning up much of the non-performing debt that once plagued its banking system, and some wonder whether the current splurge will see a return to the excesses of the past. Victor Shih at Northwestern University regards it as a “great leap backward” in risk management philosophy. Michael Pettis at Peking University’s Guanghua School of Management agrees that some of the lending is to unhealthyborrowers. But this is a political initiative under the directive of Beijing, so banks are assuming that most of the new loans are guaranteed.
In the longer run, non-performing loans will increase. But some analysts think that the government will worry about this later. The extension of credit is a part of plan to meet a more immediate need – economic growth of 8% and above.
So the expectations are that the splurge will continue.
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