China’s credit boom raises spectre of financial crisis
The world’s leading stock markets delivered exceptional returns over the past 12 months, as the economics of hope – in concert with abundant liquidity – saw investors embrace risk assets enthusiastically.
Global economic activity fell short of consensus estimates throughout 2013, but after three years of decelerating growth most market commentators expect economic momentum to build in 2014 as fiscal headwinds ease in the US and Europe swings from recession to recovery.
Developments in the advanced economies of the West may well point towards stronger global growth – and a diminution of downside tail risks – in 2014, but more attention should be paid to China, the world’s primary growth engine, where attempts to deleverage and rebalance the lopsided economy could weigh more heavily on global economic activity in the months and years ahead than most commentators currently envisage.
The Middle Kingdom’s economy has been moving in a different direction than that of the developed world since the global financial crisis struck more than half a decade ago. While the western world’s private sector has been busy deleveraging balance sheets over the past five years, the Chinese have been engaged
in a credit boom that has seen the outstanding stock of non-financial private and public sector debt jump to dangerous levels relative to GDP.
Growth model exposed
The investment- and export- led growth model that had served China so well over the previous three decades – and particularly so following its accession to the World Trade Organisation in 2001 – was badly exposed by the unprecedented collapse in world trade that accompanied the financial crisis.
Indeed, the near decade- long export surge came to a shuddering end during the winter of 2008, as monthly exports dropped 2 per cent year on year in November and contracted at an annualised rate of more than 25 per cent in early 2009. The adverse impact on the economy called for aggressive stimulus simply to keep the growth engine running. Chinese policymakers responded swiftly to the financial crisis. China’s State Council unveiled a massive stimulus package amounting to four trillion renminbi – 14 per cent of 2008 GDP – in November.
Additionally, the People’s Bank of China adopted an ultra-accommodative monetary policy during the final months of the year. The central bank reduced interest rates five times and lowered required reserve ratios. All told, the fiscal stimulus and monetary expansion combined helped to jump-start economic growth by the second quarter of 2009.
The aggressive crisis response may well have revived economic growth but it also unleashed a lending boom that continues to grow at a faster pace than the economy, despite efforts to slow the rate of credit expansion.