Once again, the China skeptics are out in force, notes Stephen Roach, chairman of Morgan Stanley Asia and clearly not a member of the Sino-Cassandra brigade.
In a Tuesday comment in Germany’s Handelsblatt newspaper, Roach pooh-poohs the scare stories about asset bubbles—property and credit— and/or an imminent banking crisis now making the rounds. These fears are overblown, he says, noting:
Unlike policy circles in the West, where there is no appetite to pre-empt bubbles and crises, China views these risks very differently. In the depths of the Asian financial crisis of the late 1990s, the Chinese leadership first adopted a “pro-active” policy strategy—a forward-looking approach that relies on the combination of fiscal, monetary, and regulatory tools to lean against bubbles and financial crises.
Similar tactics were deployed with great success in the global downturn of 2000–01 and again in the Great Crisis of 2008–09, he continues. In fact, Chinese authorities repeatedly have stressed pre-emptive policy discipline over the reactive self-regulation practiced in the West. “Bubbles, and the imbalances they spawn, were to be addressed early rather than after the fact”.
That said, he acknowledges, China’s record is “far from perfect” in avoiding bubbles.
Quite. Witness the “periodic excesses in coastal property markets” and the “major equity bubble” of recent years. As Roach notes, the Shanghai A-share composite index soared 3.5 times in the year ending October 2007 before plunging more than 70 per cent in the ensuing 12 months.
And every China watcher knows about the surge in nonperforming bank loans that required a major recapitalization of a nascent Chinese banking system less than 10 years ago.
But these problems were mere bumps in the road, in retrospect. Roach explains (our emphasis):
That’s because Beijing was vigilant in preventing asset and credit bubbles from spilling over into the real side of the Chinese economy. This was very different from the Japan endgame of the late 1980s, where the confluence of equity and property bubbles led to a massive overhang of excess capacity.
What’s more, he adds, it stands in sharp contrast to the more recent US experience, where property and credit bubbles pushed up homebuilding and personal consumption to nearly 80 per cent of US GDP prior to the bursting of the subprime bubble.
Of course, China is “hardly the poster child of macro stability” – with exports and fixed investment surging to nearly 75 per cent of Chinese GDP and private consumption at 35 per cent and still falling, China’s macro imbalances are in a league of their own.
But in Roach’s view, these distortions are less of an outgrowth of asset and credit bubbles and more a by-product of a conscious strategy of externally-oriented economic development.
While China can hardly avoid bubbles, he notes, it has been successful in preventing them from destabilising the real economy. Roach’s concluding caution however, is about controlling the effects of Beijing’s massive 2008 stimulus, which “entailed a record Rmb9,500bn bank lending binge in 2009 that funded an outsize investment surge”. That leaves a “very real risk” that excesses in asset and credit markets could yet compound macro imbalances.
The good news, in his view, is that Chinese authorities recognise this stimulus must be tempered. Concludes Roach:
They have been among the first to implement post-crisis exit strategies. The People’s Bank of China has hiked bank reserve requirements twice so far in early 2010. The infrastructure-led fiscal stimulus appears to have peaked. Meanwhile, Liu Mingkang, China’s head banking regulator, has expressed concerns over loan quality and signalled his intention to restrict bank lending by about 20% this year.
One of these days—probably sooner rather than later—China will need to get serious in addressing its macro imbalances. I am hopeful that Beijing will use the occasion of the upcoming 12th Five-Year Plan, to be enacted a year from now, to unveil a new pro-consumption strategy that addresses many of these problems. In the meantime, pro-active Beijing policymakers are about to dispel yet another false alarm over the imminent perils of Chinese credit and asset bubbles.
China property bubble: Real or imaginary? – FT Alphaville
China: ‘It’s simply because people are rich now’ – FT Alphaville
China: reaction or overreaction? – FT Alphaville
Chanos: We’re not calling for a China crash – FTAlphaville