We live in an age of secular stagnation, says former US Treasury Secretary Lawrence Summers. In a lengthy essay published in Foreign Affairs last week, the economist tried to articulate why policymakers have failed to stimulate meaningful growth since the global financial crisis of 2008, despite record-low interest rates and central bank balance sheets ballooning to $7 trillion.
With 10-year US Treasuries currently yielding below 2% (despite the Fed’s promise of rate rises), the financial markets clearly believe the days of low inflation and low demand are here to stay. According to Summers, this is because excessive saving has been dragging down demand and, with it, interest rates.
Summers also believes that China is key, because its growth is so crucial to the global economy. It was, therefore, unsurprising that the announcement of record bank lending in January produced an outpouring of analysis. Figures from the People’s Bank of China (PBoC) show that Rmb2.51 trillion ($384.8 billion) in new loans were created in the course of the month, up 71% year-on-year and way above analyst expectations of Rmb1.9 trillion.
Is this a reversion to the days of 2008 and 2009 when China tried to pump prime the global economy with a Rmb4 trillion stimulus package? And if it is, what happens next given that China is yet to work through the consequences of the bad lending that some of the stimulus created – i.e. by deleveraging local governments and eliminating overcapacity in heavy industry.
Then again, some analysts believe January’s bank splurge was a one-off and an unseasonably high spike. They point out that corporate loans accounted for Rmb1.9 trillion of the total, of which 1.06 trillion were medium to long-term in duration. Many firms are also thought to be taking advantage of low onshore rates and improved access to the domestic bond market to pay off their foreign currency debts in case the renminbi declines further.
A closer look at the numbers also reveals that a sub sector of the financial sector has been doing most of the lending – banks with assets of less than Rmb2 trillion. As Bloomberg reports, they accounted for 60% of the new loans, while the contribution of the big four state-owned banks fell from 40% in December to 20% in January.
GF Securities analyst Mu Hua tells Bloomberg: “While big banks are showing caution, smaller banks are desperate to lend. I just can’t figure out where they would find so many good projects and that’s probably raising some red flags at the central bank.”
Indeed by the end of the week it was being reported that the PBoC had imposed higher reserve requirement ratios (RRR) on regional banks to try to slow their credit binge. And while the government is trying to stimulate growth, its recent efforts have focused on tools such as open market operations, with the central bank injecting liquidity into the sector that can then be drained away if conditions change.
Analysts believe that further easing measures are on the way but are divided on whether interest rate cuts will be announced in the first quarter or the first half of the year. One important factor will be whether the renminbi stabilises against other currencies. If it does, the central bank may gamble that further interest rate cuts won’t prompt renewed capital flight.
Other commentators believe the government will also reduce banks’ provisioning requirements so that non-performing loans can work through the system more gradually, allowing lenders to remain profitable even as bad debts peak. At the end of 2015, the system-wide NPL coverage ratio had dropped to 181% from 233% in 2014, although it remains above the 150% regulatory minimum.
Claims that China’s bad debt crisis could turn out to be worse than the sub-prime meltdown in the US have also been firmly rebuffed by Chinese commentators. In mid-February, US hedge fund manager Kyle Bass suggested that Chinese banking writedowns could exceed US sub prime losses by 400%. The view got media headlines because Bass successfully called the crisis in his own country. However, China watchers say his figures are distorted by double counting and selective sampling.
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