Australias economy is still closely tied to the Chinese expansion. Therefore its wise to understand the factors that impact upon the Chinese economy. The single biggest risk for the economy is still the interlinked problems of shadow banking, local government and corporate debts and the stagnant real estate sector. The problem was recently highlighted by the IMF. It describes the risk as “a web of vulnerabilities” “across the key sectors of the economy”. This web of risks work like this: Chinese companies and local governments borrow heavily from both the banking and shadow banking sectors to finance their investment. The borrowing binge was put on steroids after Beijing unleashed its 4 trillion yuan stimulus package and the accompanied 10 trillion yuan credit expansion. This has resulted in a rapid increase of indebtedness for both government and corporate borrowers. Ratings agency Standard & Poor’s estimates that total outstanding corporate debt in China was around $US14.2 trillion at the end of 2013, compared with $US13.1 trillion for the US. With Australia still heavily dependent upon mining revenue the headwinds for the Chinese do not bode well for mining profits and the resultant tax revenue. So how serious is the risk to the Chinese economy? The official IMF verdict is “the government still has the capacity to absorb shocks and prevent the kind of loss of confidence or sudden stop that have triggered major problems in other countries -- such as a deposit run, freezing up of the interbank market, collapse of the real estate market, or capital flight”. Chinese banks are very liquid and have deposits equal to 140 per cent of GDP, compared to 55 per cent in the US. Both central and local government sit on trillions of dollars worth of high quality public assets not to mention the $4 trillion foreign exchange reserve war chest. The housing market is governed by the need to put down a minimum of 30% deposit before borrowing, thereby eliminating the chance of a US sub-prime failure. Banks are more inclined to lend to large scale developers in preference to small to medium enterprises (SMEs). The Chinese economy is moving towards consuming in preference to investment, thereby reducing the risk of future unused assets. China has actually made substantial banking and ownership reform progress in 2014. Highlights include the lifting of the deposit rate ceiling and the draft plan for a deposit insurance scheme, new budget laws, local government debt solutions and mixed ownership reform for state-owned enterprises. These reforms are expected to be widened in 2015. Professor Yu Yongding, one the country’s most distinguished economists and a former member of the monetary policy committee of the central bank has the following warning for China bears on an op-ed piece published on East Asia Forum. “China has the extraordinary ability to muddle through and keep the economy going. In 2015, China should be able to hit its 7 per cent growth target. Despite vulnerability in its financial system, it is difficult to envisage how a crisis could play out in 2015. Betting on the coming collapse of the Chinese economy is a dangerous business. This is a lesson at least that China bears should have learnt.” China will continue to grow, the targets will be moderate when compared with those of a decade ago, yet substantial, and sufficient to support our mining sector.
Posted on: Mon, 19 Jan 2015 08:11:22 +0000
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