One of the brighter spots for the global economy in recent years has been China. A heady rate of economic growth – 9.7 percent growth in GDP last year – has encouraged some to wonder whether this nation’s decision to hitch its wagon to the star of capitalism can be translated into a more lasting adoption of liberal civil society. So far, the jury is out, but some signs are encouraging. I honestly cannot see how China can long resist reforms to its political arrangements in the long run.
More recently, though, a number of fund managers, banks and economists have voiced a few worries about whether China could be vulnerable to the sort of jarring market moves that hit Southeast Asia, starting in Thailand, back in the late 90s. China has a fixed exchange rate to the dollar, which means that at present Chinese goods are very cheap in overseas markets, but also swells the Chinese money supply. Credit expansion, guided by the state-owned banks, has been rapid, and a lot of the investment has been spent on questionable enterprises. About 40 percent or more of China’s GDP growth is dependent on bank lending. There are many signs that China could be headed for a serious hangover.
One of the biggest worries could be the state-run banks. About 40 percent of all the loans held by these banks are so-called non-performing loans — in other words, they will never be repaid. These banks are in the throes of a major overhaul, as the Chinese authorities in Beijing try to restructure the system along more commercial lines. But in the meantime, the authorities are trying to cut the pace of monetary growth, which may come at a time when the financial infrastructure is in a weak state.
Attending a conference in the City today, an economist, speaking off the record, said this: “Alan Greenspan (Fed Chairman) is a smart man, has access to all kinds of research backup, but he has made mistakes on the economy. Now the Chinese authorities, who are isolated in their Beijing centre, inexperienced in such matters, could make very big mistakes indeed.”
China offers a great deal of promise in the medium term. In the short term, anyone with a few pounds to spare on an investment should tread very carefully. China could be in for a bumpy ride.
Actually what the Chinese Central Bank is doing is to prop up these non-performing lending banks in hope of attracting unsuspecting foreign banks into buying them on false performance data. That way, the problem will be someone else’s.
Why would you want to invest in China rather than India? All the pluses for China apply to India. India doesn’t have a bankrupt banking system, is a democracy with a free press and the ruling BJP contains a few free marketeers particularly in the Privatisation Ministry.
Johnathan,
Have you read Andy Xie’s last (or perhaps second to last by now) 26 April assessment of the China economy and the Morgan Stanley investors’ trip? You can find it here.
Bigfire: Are foreign banks really so unsuspecting? After all, if you and I and Johnathan know it, surely they’ve cottoned onto the 40% plus non-performing loan thesis by now.
Paul DS: I’m not sure all the pluses that apply to China are equally applicable to India (particularly not for manufacturing). Any drive around the Pearl River Delta should convince you that port and road development in Guangdong (and around Shanghai) is streets – no pun intended – ahead of India. I take your point, though (that China as an investment location is sometimes boosted to the point of silliness), but it’s also true that in certain sectors for specific investors, China presents a better return on the dollar than in India.