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Posted on 12/12/2007 1:01:06 AM PST by bruinbirdman
China just changed its monetary policy from "prudent" to "tight" in order to slow growth and protect against inflation. Slowing the economy should be straightforward. But what's fascinating here is the glimpse at how China conducts monetary policy and just how different Chinese- and American-style commercial banking are.
Every December, China conducts a Central Economic Working Conference (CEWC) to decide economic policy. This time, they changed monetary policy from "prudent" (as it has been described since 1998) to "tight." They smell trouble. Through all the growth, development and tumult of the last nine years, "prudent" always seemed to work.
Now policy is "tight." In their words, "China will strictly control the volume and granting pace of loans, so as to better regulate domestic demand and balance international payments." China uses numerical targets or quotas on bank lending. The central bank (People's Bank of China) and the bank regulators establish an aggregate annual target for loan volume. No individual bank-loan targets are announced or acknowledged, but the individual banks somehow know what to do.
Interest rates in China do not flex up and down, rationing credit and modulating economic activity in a transparent fashion with the market's "invisible hand" working its magic. Facing what they believe to be a real economic threat, China's leaders have adopted a tight monetary policy for the first time since 1998, without a single reference to interest rates. They're comfortable with command and control, not with "invisible hand" outcomes.
Compared to America, China has a "monetary result" rather than a "monetary policy." That's too bad for a big, complicated and important economy like China. China has raised interest rates seven times in the last 18 months, but loan growth hardly budges. The current one-year borrowing rate of 7.29% is still far too low to cool things off in a red-hot 10%-plus gross domestic product growth economy. Getting interest rates to play a real role in China's economy would require a fundamental change in banking operations--which is not even on Beijing's back burner.
Banking in China is dominated (67% of loans) by the Big Four state-owned banks, lending arms of the government. Their primary activity is taking in deposits and making loans to other state-owned enterprises, administered via connections and historical relationships, not so much on credit quality or rate of return criteria. Many of China's biggest banks are traded on the New York Stock Exchange and elsewhere. Most have American minority-owner partners. But make no mistake: They are governmental entities from top to bottom.
Strikingly, bank loans in China get bunched early in the year. In 2006, 82% of the annual target had been used up by mid-year. In 2007, 88% was used up by mid-year, and 116% during the first three quarters. Oops. So now Beijing has put the word out that no new loans--as in zero--are to be made for the remainder of calendar 2007. That's too bad for those who really need the money.
But even if no loans are made through Dec. 31, loans will again start to flow on Jan. 1 under new 2008 targets. All that would have been accomplished is a disruptive December interlude. Surely the creative Chinese business community, with a wink and a nod, will figure out how to bridge this gap.
No new 2008 targets have yet been announced, but China wants slower loan growth than the 15% in 2006 and the 18% over the first 10 months of 2007. They are trying to pare loan activity a little, while not risking a real economic slowdown for which they would be blamed. In China, it's still the jobs (and income) engine that the people love.
Now onto overheating and inflation: China's economy has been growing at an 11.5% rate so far in 2007, gradually accelerating from 9.1% in 2002. Three times the U.S. rate, certainly, and no country grows as fast. But it doesn't feel all that overheated to me. The rise in inflation to over 6% during the last year, twice their 3% upper-limit target, has been entirely in food prices, occasioned by supply shortages. When I travel in China, which I do regularly, shortages with a frantic bidding-up of prices is not common. It is common to find companies frantically looking for customers for their products. So while I don't see China as overheated, the leadership in Beijing is concerned, and is acting accordingly.
Beijing wants slower growth, but 9% real GDP growth, we believe, would be too slow after their double-digit habit of the last five years. Expect Beijing to be delicate, not firm, in their tightening. There are plenty of outside macro forces (U.S., Europe, elsewhere) serving to slow growth. So we see no reason for China to go crazy on the tightening when a gentle "policy" reminder interacting with these emerging international influences should deliver the desired dampening result.
Let them keep their phony cheap tainted product to sell to their commie friends.
Is that loaning money to American companies looking to build? Or, are those loans to Chinese people? <
I find it hard to believe there's any real regulation in China. Are they going to cut down on graft and extortion by local politicians?
We should severe all business with them... keep a line of diplomacy active... but that is it. BOYCOTT the Olympics!
LLS
LLS
China ping.
It ain’t going to hppen. There is a transition under way from a totalatarian communist system to a more capitalistic system into which freedoms are gradually being introduced.
The article does not mention the Chicap stock market. In the last Forbes, there was a piece on the stock market. Companies are bid up and up and up with no earnings or prospects. The Chinese are experiencing the same problems and manipulation that occured in America during the railroad boom.
The lessons ust be learned by painful experience.
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