Bank loans and China’s economy recovery: risk of a speculative bubble?
Loans by Chinese banks exceeded US$ 1 trillion in the first half of this year. The constant flow of money helped the economy in crisis, but more and more voices are being raised about how much of that money will turn into non-performing loans and what their impact on banks will be.
Bloomberg News reported on Wednesday that the China Banking Regulatory Commission sent draft rule changes to banks requiring them to deduct all existing holdings of subordinated and hybrid debt sold by other lenders from supplementary capital. Banks have until 25 August to provide feedback. The net result is that many banks will likely have to cut lending, according to experts.
China’s banks have sold 236.7 billion yuan (US$ 34.6 billion) of subordinated bonds so far this year, triple the amount issued in all of 2008.
Banking regulators estimate about half of the subordinated bonds in circulation are cross-held among banks, creating the appearance of wealth when in fact it exists only on paper.
Now the authorities seem eager to curb this practice used by banks to artificially boost their existing holdings and thus the amount of capital they can lend.
If adopted these rules will force Chinese banks to raise new capital or, more likely, cut cross-held holdings, perhaps by mutual compensation.
Citing Wei Jianing, a deputy director at the Development and Research Centre under the State Council, China Business News reported that about 1.16 trillion yuan of loans were invested in stocks in the first five months of this year in what can only be described as high risk speculation, divorced from any other consideration, thus highly sensitive to the vagaries of the stock market.
The flow of liquidity almost doubled Shanghai Composite Index during the first seven months of the year through 4 August after falling 65 per cent last year. Since then it lost 19.8 per cent before gaining 5 per cent between yesterday and today (+1.7 per cent today).
Many experts are warning that this has fuelled a highly vulnerable asset bubble, based in part on volatile and unpredictable investments like shares.
They are wondering how real is China’s economic growth (7.9 percent in the second quarter according to official data).
Some have noted that whilst Chinese exports have begun picking up in Asian markets, the United States and Europe as well as internal demand have remained sluggish. At the same time the prices of oil and metals have gone up with inevitably negative consequences for production.
Any recovery that is underway might thus simply be the result of the massive liquidity injected into the economy by the government, which has to be translated into greater output in order to be fruitful.
At the same time foreign fixed investments have gradually declined in 2009.