There’s been a bit of (somewhat post hoc?) concern in recent days over the cash crunch in Chinese interbank markets.
The one-week Shanghai Interbank Offered Rate went up, up… and then came down. Same stuff in the seven-day repo rate, which probably tells you more as it’s a more developed market than Shibor. That follows the Christmas Day interest rate hike, and could be the market reacting to heavier tightening ahead by the People’s Bank of China in 2011.
On the other hand, it could be the PBOC reacting to the repo market’s much earlier gyrations (which were going on in June and September of last year, too). Hard to tell. That’s China’s half-closed interbank market for you, we guess.
But as those far earlier gyrations strongly suggest, something deeper is going on here. We’d argue that this crunch might also be the broader consequence of China’s equally half-closed politics of growth.
China’s domestic elite politics (versus foreign entanglements over US monetary policy and trade imbalances) haven’t figured on the ‘risks of 2011′ lists very much, in fact.
We’re a little surprised.
These ‘domestic’ politics could rule in 2011. It’s a point that was brought home recently by Steven Sun and Garry Evans, HSBC’s heads of China and global equity strategy respectively, in their 2011 investment outlook for the country.
They start in fairly familiar territory — looking to how Chinese officials carefully balanced ensuring growth with controlling inflation before the crisis, in 2008, as a guide to post-crisis 2011. But then HSBC consider a political imbalance that wasn’t there before (emphasis ours):
A re-run of 2008 is undesirable in 2011, which is a politically sensitive year – the 90th anniversary of the Chinese Communist Party and a year ahead of the transition to the fifth-generation leadership. Growth can’t be too low in order to please the powerful local governments and inflation can’t be too high for social stability concern. The pressure is high for policymakers to get the balance right…
Who really benefited from the bank lending that’s now being squeezed? China’s local governments and those structured vehicles they set up for the very purpose, that’s who. And they still really want growth.
Moreover, China’s state-owned enterprises are stuck in this nexus of credit, too. For instance, HSBC remind that the property bubble is in large part a joint creation of local governments’ use of land sales for revenue (about 60 per cent of total revenue for Beijing, Shanghai and Tianjin in 2009), plus the wild over-bidding by SOEs we’ve previously noted. As HSBC explain, consumers are shut out of the bubble:
Moreover, the property bubble has not created a wealth effect and instead has led to declining consumption propensity, contrary to what many have claimed. This is because the level of house ownership is still low and consumption is driven by mid- to low-income consumers who aspire to own property and so are forced to save more as home prices rise relentlessly.
They add that labour compensation growth isn’t being targeted at the heady heights of economic growth. This doesn’t look like an economy rebalancing fast enough towards the great Chinese Consumer. All the more so, if local governments want mega-growth.
So just rebalance faster then, you might say. But we come back to the credit issue in the SOEs, where fast rebalancing = a very quick loss of margin from vanished cheap financing. Or as HSBC put it:
Investors should also expect more reforms to weaken the monopoly enjoyed by most of the listed big-cap SOEs, increasing competition and allowing market access to private capital. This is unlikely to be good news for the stock market, because the top three sectors – financials, telecom and energy – are dominated by SOEs and account for 70-75% of the net profit of the index…
And in chart form (click to enlarge):
Of course, this is a economy so dominated by its enterprises that the communist party’s own propaganda organ gets a dotcom IPO. That’s what we call political entanglement. As HSBC conclude (emphasis in original):
The reform process has now entered a critical phase, perhaps requiring a leadership reshuffle in 2012 or an unexpected crisis to generate the momentum necessary for any meaningful change. We think certain groups such as local governments, the centrally-controlled SOEs, banks and property developers are too influential, which makes life difficult for the central government.
And when life gets difficult for China… it gets difficult everywhere.
Related links:
China’s fiscal policy - Lex
Is this your average secular bear? – Pragmatic Capitalist
Would you be bullish about a country with five years of negative real ROE? – Naked Capitalism
China’s trust factor - FT Alphaville