Analysts are confident that China’s gradual monetary tightening and clouded prospects for exports to the US will prevent overheating. However, some have told Emerging Markets of their concerns that the authorities in Beijing may struggle to ensure adequate credit controls and environmental safeguards, especially in the less developed regions.
“The debate about overheating is probably even hotter within China than it is in the rest of the world,” joked Kevin Lai, senior economist at Hang Seng bank in Hong Kong. “But we don’t have the capacity utilization indicators in China that you have in the UK or the US, so all we have to go on is inflation. The headline figure is at 4.4%, which is way above the central bank’s target of 3%, but if you strip off the food component, prices are really very stable.”
Lai added that there are few apparent bottlenecks on the supply-side. He therefore believes that the People’s Bank of China (PBoC) still regards its monetary tightening measures – most recently a 50 basis point (bps) rise in the CNY reserve requirement and a 27bps rise in the benchmark deposit rate – as pre-emptive rather than reactive. Indeed, Lai argued that the central bank may pause at the end of 2007 to observe the effects of its sustained round of rate hikes and yuan revaluations.
At the Institute for International Finance (IIF), the global association of financial institutions, Greg Fager, the director of the Asia/Pacific department, agreed that inflationary pressures were muted. Moreover, he expects a moderation in China’s export performance, in view of growing signs of a US credit crunch, the cumulative effects of upward CNY revaluations, and possibly the recent senate moves to allow the US government to take punitive measures against China because of its “undervalued” exchange rate.
However, Fager is concerned that the PBoC’s means to ensure sustainable economic growth are capped by the limited development of a market economy in China. In July 2007, the China Banking Regulatory Commission issued a statement urging banks to withdraw loans from companies that were heavy polluters or had overcapacity. Fager welcomed the change toward a policy environment that is less tolerant of pollution, but was concerned that the regulator needed to take such a top-down approach in the first place.
“If the banks are doing a proper credit analysis, they would not make a loan to an industry that is polluting, and you would not make a loan to a company with overcapacity because you’d be worried about their ability to pay you back. That second part of the statement is more disturbing to my mind, it is troubling that they are making loans to companies that are investing in overcapacity,” Fager told Emerging Markets.
Moreover, Fager doubted that the statements issuing from Beijing, or even the past year’s cutbacks in infrastructure spending at a national level, would go that far to soften the dash for growth pursued by regional and provincial governments (see "Managing China's credit deluge").
“The real question is whether they are doing enough to offset the injection of liquidity from the massive current account surplus, and I don’t think they want to slow this economy up that much. The PBoC doesn’t want the economy to grow any faster than it is, and the government are making statements about the need for quality growth, but there is a lot of this economy they just don’t control any more,” noted Fager.
Tse Kwok Leung, senior economist at the Bank of China (Hong Kong), which is majority-owned by the Chinese government, also saw a dual purpose in the regulator’s stance on pollution. He concurred with Fager’s doubts on how profound the effects of monetary and regulatory policy would be.
“The government does have concerns about the environment, but if these measures can also curb the risk of overheating, they would be pleased about that. The monetary tightening will have some effects on the margins, but there are not many outlets for bank liquidity, so you are still going to see a bubble in some of the real estate markets and stock markets,” Leung told Emerging Markets.
However, Leung is less concerned than Fager about credit control in the Chinese banking sector. “Banks do have some exposure to the corporate sector that will test risk management, but it is not as bad as a few years ago.”
At Hang Seng, Kevin Lai is even more bullish. “I don’t think it is a real issue right now, as loan growth has been in an orderly manner, and corporate profitability has been quite spectacular, so there has actually been an improvement in the non-performing loan situation in the past couple of years,” he concluded.