Michael Marquette’s “View from the Bridge”:
There is an increasing fear that China is headed toward problems in the very near future. There are even people who expect the Chinese economy to crash sometime in the next 9 to 12 months.
The Chinese property market is booming and China’s Central Bank is attempting to dampen speculation by lifting its reserve requirement ratio by another percentage point, so that most Chinese banks will now have to hold 17% of their deposits on reserve.
It is widely accepted that the Chinese property bubble will continue to expand for as long as the Chinese Government keeps interest rates below the rate of inflation.
The Chinese Government has desperately avoided increasing interest rates because it fears that huge problems will be exposed throughout the economy, leading to massive loan defaults.
The last decade has seen unprecedented growth in China, with massive building of factories and the continued expansion of its manufacturing capacity in the expectation that the United States and Europe would continue to demand ever-more Chinese-produced goods. However, Western demand for Chinese products has slowed in the wake of the financial crisis, leaving the Chinese economy with substantial overcapacity in manufacturing.
The problem was made even worse during the financial crisis. Chinese exports plunged and the Chinese Government introduced a massive economic stimulus program, equal to 14% of the country’s GDP. It also ordered Chinese banks to lend, and instructed Chinese state-owned companies to borrow.
The Chinese economy grew although there are huge concerns over how the Chinese stimulus money was spent. Provincial governments, under instructions from Beijing to reach specified growth targets, undertook massive construction projects that have resulted in a glut of commercial office space, and huge shopping malls that are near-vacant.
To make matters worse, much of the increase in bank lending was funnelled into property market speculation, pushing up housing prices to astronomic levels. The Chinese Government has instigated various measures to contain its property bubble – increasing the reserve requirement and lifting the minimum deposit that home buyers must have before they’re allowed to borrow.
But it has avoided increasing interest rates for fear that it will cause mass defaults among manufacturers and property developers, leading to huge problem loans in the banking system.
This cannot continue and the Chinese Government will have to raise interest rates or the property market bubble will collapse under its own weight. As always we watch China with enormous interest.