đăng ngày: 08.12.2009 | email: gd_us@hotmail.com
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The China Files (Special Project): Real Estate October 13, 2009
Summary The real estate market in China, particularly the residential side, is a burgeoning bubble that is growing bigger and more breakable by the day. Land and housing prices were already rising steadily when Beijing’s stimulus package hit the sector in early 2009. Now prices are surging, with developers, bureaucrats and investors cashing in while urban Chinese — once encouraged to invest in home ownership by the central government — become less and less able to buy. Editor’s Note: This analysis is part of a series that explores China’s industry, finance and statistics. Analysis On Sept. 10, China Overseas Land and Investment, a Hong Kong-listed company and a subsidiary of state-owned China State Construction Engineering Corp., purchased a prime piece of real estate in the Putuo district in downtown Shanghai. The company paid 7.006 billion yuan ($1.026 billion) for the undeveloped property, which will amount to an average of 22,409.3 yuan ($3,283.9) per square meter of floor space (just in land costs) once the designed residential building is constructed. The purchase created China’s newest “land king,” a term for the real estate developer who pays the highest price for a piece of real estate during a land auction. And 7.006 billion yuan was the highest price ever paid for a piece of Chinese real estate for any purpose — residential or commercial. The milestone is a result of an increasingly intense competition for land in major cities that began early in the year, when Beijing began distributing stimulus money to various industries — including the real estate sector — to sustain the economy. As a result, land prices have soared throughout China. And with increasing speculative investment in residential real estate, the market faces a surging bubble that jeopardizes the country’s long-term economic development. Since 1998, real estate investment in China has accounted for more than 10 percent of the country’s gross domestic product (GDP), compared to only 3 percent to 5 percent in the United States. Such investment is also closely associated with many other industries, such as construction and finance, and it provides an abundance of jobs. Therefore, it is seen as a critical pillar of China’s economy and enjoys favorable policies from the government and state-owned banks (more than 70 percent of real estate investment in China comes from bank loans). At the same time, real estate developers, local government officials and investors have escalated housing prices across the country by acquiring massive land holdings, limiting the supply and inflating prices, creating a real estate bubble that is not sustainable in the long run. The bubble has grown mainly on the residential side of the market, where there is more demand and higher profits to be made. However, while fewer developers and investors have been chasing nonresidential projects, Beijing’s 4 trillion yuan ($586 billion) stimulus package in early 2009 has generated more interest and activity in the commercial side. Indeed, there are signs that commercial real estate may also be headed for a bubble, and STRATFOR will be watching the situation closely.
Origins of the BubbleSince 1978, China’s pace of urbanization has increased dramatically, with the number of middle-size and large cities (those having nonagricultural populations of more than 200,000) growing rapidly. Beginning in 1985, economic reforms implemented in urban areas to make China’s planned economy more market-oriented added even more momentum to the real estate boom, with real estate investment increasing by 71 percent by 1987. The government’s macroeconomic policy of monetary belt-tightening helped cool this overheated market, which was further tempered by the government’s continuing to provide housing for state employees (fu li fen fang, or “welfare housing”). However, when the state significantly cut back on its welfare housing program in 1998, the Chinese perception of personal property changed, and this would have an important impact on the real estate sector. The government began this privatization process by making a private dwelling a “commodity” and granting the purchaser the right to own a newly built house for 70 years. (Likewise, the developer who buys the property on which residential or commercial buildings are to be constructed may own that property for 70 years.) Home ownership in China could now be a sound financial investment. Thus, the residential real estate market would boom in almost every urban area in China — and particularly in the “first-tier” and “second-tier” cities (only Beijing, Shenzhen, Guangzhou and Shanghai are in the first tier, with more than 20 cities, and mostly provincial capitals or coastal ports are in the second tier). But rising land prices would eventually put housing prices out of reach for the general public. In Dongguan, a coastal second-tier city in Guangdong province, land prices averaged 4,957 yuan ($726.42) per square meter in 2007, a more than 500 percent increase from 2003, while personal disposable income increased 24 percent during the same period (from 20,526 yuan [$3,008] to 27,025 yuan [$3,960] per year). A 2006 survey conducted by the National Development and Reform Commission showed that the average ratio between housing prices and income was approaching 12:1 in many large and middle-size cities in China (in Beijing it had reached 27:1). Twelve to one is significantly higher than the World Bank’s suggested affordability ratio of 5:1 and the United Nations’ 3:1. The problem was compounded by the fact that, of the more than 80 percent of Chinese who owned their own homes in urban areas (generally considered cities with populations of more than 20,000), 54.1 percent were making monthly mortgage payments that constituted 20 percent to 50 percent of their monthly incomes.
The Recovery BubbleFollowing a temporary drop toward the end of 2007, land prices rose steadily, then began surging again with Beijing’s stimulus package and a flood of easy credit in 2009. With much of this money flowing into the real estate sector, major beneficiaries included large state-owned enterprises (SOEs) involved in speculative real estate and housing investment, contributing to the inflating bubble. Among the 10 highest-priced land purchases in major cities in the first half of 2009, 60 percent went to SOEs. Paradoxically, as the global financial crisis continues, China sees little choice but to loosen its monetary policy even further, fearing the opposite would curtail economic growth and result in massive unemployment, which could lead to social instability. Beijing knows that one of the country’s underlying economic problems continues to be an overheated real estate market, but it also knows that the real long-term solution — limiting the flow of cash and credit — could have dire socio-economic ramifications. Meanwhile, real estate developers, government officials and investors continue to speculate on real estate, raising land and housing prices. As housing prices continue to rise, a parallel trend is manifesting itself — rising vacancy rates in urban areas. A 2009 report by the Shanghai Yiju Real Estate Research Institute revealed that, by the end of 2008, the average vacancy rate for “commodity housing” (as opposed to welfare housing) in Beijing was 16.64 percent, and vacancies reached as high as 30 percent in some districts. Most of these vacant houses, however, are not unsold ones. They have been purchased by investors as speculative investments. While there are fewer and fewer ordinary people who can afford to buy houses, there is still excessive demand for investment housing — pressure that continues to drive up the prices. This closed loop in the Chinese real estate market is facilitated by the country’s political and bureaucratic system. In China, all land is initially owned by the state, and local governments have the sole authority to sell it. And income from property taxes and land sales are a primary source of revenue for local jurisdictions. According to estimates by the State Council’s Development and Research Center, tax revenue from the land in some jurisdictions accounts for 40 percent of the local budget. Moreover, net income from land sales accounts for more than 60 percent of the local governments’ extra-budgetary revenue. The soft budget and lack of accountability to the people reinforces the local governments’ incentive to expand their real estate investments without much concern for cost or impact on public services. Economic performance also is the prime prerequisite for bureaucratic advancement, which gives local officials the incentive to generate as much revenue as possible through land auctions. And this generally involves a level of collusion — and corruption — among government officials, real estate developers and investors. One typical strategy is for a developer to buy a big chunk of urban land from the local government but leave the land undeveloped, or build on only a small portion of it, thereby keeping the housing supply limited. Despite various state policies to lower land prices in order to make homes more affordable, local government officials and real estate developers control the land auctions. When a lower sale price is dictated from above, it is easy enough for the local sponsors to officially deem the auction a failure. Even when the developer does build houses on the property, a speculative investor, working hand in hand with the developer and government officials, can bribe both parties to ensure that he can buy all the houses at a low volume price and keep them off the market, thereby maintaining a limited supply and high prices. Another factor that enters the equation is a cultural one. The Chinese people generally prefer to buy new houses, as opposed to renting homes or buying secondary houses in which people have already lived. Indeed, in urban areas, marriage proposals often include a promise to buy a new commodity house. As a result, the secondary housing market remains very small in comparison (due also to fewer available bank loans for lived-in houses and the complicated process involved in transferring ownership). All of these factors contribute to the burgeoning real estate bubble — and make it difficult to predict when that bubble will burst. With 70 percent of real estate investment in China coming from bank loans, a dramatic drop in land values could send shock waves throughout the economy. There are already signs of decline. In Shenzhen, one of China’s first-tier cities, real estate prices have been dropping for the past two years (30 percent for housing), and many developers and speculators have suffered great losses. The threat looms in other large cities such as Beijing and Shanghai and may be emerging in many second-tier cities as well. Given the current global economy and the economic balancing act it must maintain domestically, Beijing has few good choices. It must keep enough cash flowing to maintain economic growth and social stability in the short term while tightening credit to avoid a tsunami of bad loans and a market collapse over the long term. Certainly, Beijing does not want to face the kind of collapse in the housing market that Japan experienced in the 1990s, which triggered a financial crisis and more than a decade of economic malaise. But in China’s real estate, as in most sectors of this vast and complex land, implementing and enforcing prudent regulation has never been an easy task. China: Problems With the Stimulus Plan May 22, 2009
Summary The Chinese government announced May 22 that one-quarter of the $586 billion stimulus package will be spent helping the province of Sichuan recover from the May 12, 2008 earthquake. The “stimulus” package’s already dubious fundamentals just got weaker. Analysis China’s National Development and Reform Commission, in essence the Politburo’s economic arm, announced May 22 that fully one-fourth of the $586 billion stimulus package will be spent on earthquake relief in the province of Sichuan. Despite the media — both in China and elsewhere — obsession with the “unprecedented” and “massive” size of the Chinese stimulus package, STRATFOR has not been particularly impressed to date. STRATFOR’s take on the package has been thus:
But, for STRATFOR, the new announcement about Sichuan really takes the cake. It isn’t that Sichuan does not need the help. The earthquake there was devastating, the mismanagement of the recovery has been in the same situation as New Orleans in the early post-Katrina days, and the place is a hotbed of problems that the Chinese government desperately wants to contain. Sichuan has become a microcosm of China’s problems, Han Chinese migrants being forced to return from the richer coastal provinces as work dries up. Tibetan and Uighur minorities who came to Sichuan to seek work being sent home for the same reason. And China’s remarkably unsteady banks become more unsteady farther inland. But putting $150 billion in the stimulus package to a single region not only strikes us as a bit of a stretch, but as a warning of just how bad things have gotten in Sichuan in recent weeks. The earthquake, after all, happened May 12 of 2008. The bottom line is that almost none of the official stimulus package is actually going to help China’s industry, faltering as it is due to lack of export orders. China’s vector for that effort originates not in direct government spending, but in loans from the various state banks. From January to April, Chinese bank loans exploded to more than triple their already high rates. Nearly $1 trillion was lended during that period — more than in all of 2008 — in order to force-feed the capital necessary into the system to keep China’s legions of factories from releasing armies of unemployed citizens. But a policy shift that sudden and holistic cannot be done with much oversight — and it wasn’t. China is more concerned about maintaining employment than about ensuring that money is used efficiently. And the result of such a sudden surge in loan-granting will inevitably be a mounting of nonperforming loans that will eat at the very heart of the Chinese financial system (a similar problem is what brought down Japan in 1991). And that is the good news. Much of this loan surge — by some reports, perhaps as much as half — is being lost to scams, corruption and simply using the money to play the various Chinese stock markets. The Shanghai Composite Index, for example, is up 50 percent since its lows in November 2008 — an otherwise inexplicable development considering the steady stream of bad economic news that has trickled out of Beijing in recent months. Beijing and Its Bubble Encouraging economic growth in a recession is a touchy business. Tax cuts can work if they trigger consumption and investment (assuming that consumers are not too shell-shocked). Lowering interest rates is another good tactic — it should drop the cost of getting a loan or using a credit card, making it easier for consumers to make and finance a purchase. But what if you are in a state that doesn’t have a well-developed tax base? Or where interest rates are already below the rate of inflation? This is the problem that China faces. Social stability and national unity are considered such high priorities in China that Beijing essentially bribes the population and the regions with subsidized credit to keep them in line. Nearly anyone can get a loan for nearly any reason, so long as they employ people. Tools that Western states use in recession are used in China all the time. So when recession hits, there are no “emergency” tools to be broken out — they are already in use. China has squared this circle by force-feeding credit into the system, and more than $1 trillion in loans has been pumped out thus far in 2009. But in this flood there has been negligible regard for the quality of the loans — meaning the recipients’ ability to repay them. In a system that glorifies subsidized credit, there were never many checks in the first place, save the ability to employ workers over the medium term. Now, there are no meaningful controls whatsoever. And the Chinese know it. STRATFOR sources in the Chinese financial world — private and public both — estimate that about half of this flood of lending has gone not into normal economic activity, but into speculation in real estate and in the stock market. Whenever there is a virtually unlimited amount of cash being put toward something that exists in limited quantities — such as land and stocks — bidding wars ensue and prices explode. The Shanghai Composite Index has already risen more than 50 percent since its March lows, a bull market completely divorced from any semblance of market fundamentals — and most likely as a direct result of the government’s lending policy. People (ranging from small businessmen to managers of the large state-owned enterprises) take out loans with few controls, sink the cash into the stock market and watch prices rise impressively. But this works in reverse as well. Since there is nothing but speculation holding the market up, any number of things — for example, a loan payment coming due — can cause someone to pull their investment out, resulting in a price crash that has the ability to gather speed and size like a snowball rolling downhill. On Monday, the Shanghai Composite Index plunged by 5.8 percent. This probably can be explained by a combination of local factors and does not necessarily herald a stock crash — much less a broader, systemic crash. But the fact remains that, regardless of how stable one believes the Chinese financial network to be, injecting half a trillion dollars in loan-based investments into it in a few months is precisely the sort of activity that would trigger a bubble were one not there already. And the events seen Monday are precisely how it could all start to fall apart. China: Rural Consumption and Real Estate Sales June 16, 2009 Summary China’s effort to turn its economy into more of a consumer-oriented system, in part to weather the global financial storm, has shown some progress. But a closer look at two of the touted hallmarks of that success — rising rural consumption and a revival of residential real estate sales — suggests they may not be the leading indicators of a sustainable shift in China’s economic patterns. Analysis One of the mantras of China’s economic recovery plans has been the desire to boost domestic consumption, thus reducing China’s dependence on exports and its vulnerability to shifting commodity prices and international consumer markets. Two examples of China’s recovery being touted by Beijing are the rise in rural consumption and the revival of residential real estate sales. But these may not necessarily be indicators of a sustainable shift in Chinese consumption patterns. Even before the onset of the global economic crisis in the second half of 2008, Chinese economists, academics and government officials were calling for an increase in domestic consumption, after seeing the role of domestic spending decline steadily as a percentage of gross domestic product (GDP). China’s booming export sector and the country’s ability to attract foreign direct investment (FDI) fueled a rapidly rising GDP, but exports and FDI also contributed to a widening disparity between urban and rural Chinese, between the coastal provinces feeding the export markets and the interior provinces supplying labor to the coast. In addition to the widening wealth gap (and the attendant concerns of social unrest triggered by the disparity), Beijing also worried about the impact of volatile commodity prices and the uncertainty of export markets in sustaining Chinese economic growth. Both potential problems became realities in 2008 as commodity prices soared, followed by the near collapse of the export markets in Japan, Europe and the United States. As part of its response, Beijing once again emphasized the need to stimulate domestic consumption, calling on banks to loosen credit while the central, regional and local governments offered incentives to spur consumption. And the actions appear to be paying off, at least according to the statistics. Chinese officials and media touted 14.7 percent retail sales growth in March, which bumped upward slightly to 14.8 percent mark in April. The National Bureau of Statistics of China noted that April saw rural spending rise 16.7 percent, outpacing an urban spending rise of 13.9 percent. Further adding to the apparently positive figures was the uptick in real estate prices, which climbed 0.4 percent in April in the 70 largest cities, rising from the 0.2 percent growth seen in March. Real estate investment rose 6.8 percent in the first five months of 2009, with the fastest growth rate seen in central China, though the east saw by far the most volume. Commercial sales volume rose 45.3 percent over the same period. Chinese media have begun to discuss the recovery of the real estate sector in China as another sign of national recovery based on domestic activity, and anecdotal reports from Hong Kong confirm that real estate investment firms are hot once again. But the two prominent symbols of Chinese recovery are somewhat misleading. Much of the growth in rural consumption, for example, was due to a government rebate program to encourage the purchase of some 15 billion yuan ($2.2 billion) in household appliances. This soaked up some of the domestic oversupply of appliances and contributed to consumption numbers, but it is not exactly a sustainable policy — there are only so many refrigerators a person can buy. Government tax rebates and stimulus money also contributed to the rise in small-car sales and purchases of agricultural equipment. Again, these are durable goods, bought largely with government incentive monies, and such activity may be more a one-off gain than a repeatable example of energized domestic consumption. The real estate numbers may also be misleading. Rather than signaling a resumption of economic activity, or portending a follow-on spending surge on household furnishings, published and anecdotal reports suggest that real estate investment, particularly residential real estate, is often seen as a long-term investment to secure money — like buying gold — rather than as something to use or even re-sell or rent. The revival of the real estate markets, rather than a sign of recovery and confidence in the Chinese economy, may instead represent the search for a savings safe haven that is better than banks with their the minimal interest and the unreliable stock market. Also, the secondary housing market remains small in comparison, dampened by the surge in real estate investment, which is causing more new units to be built. As long as investors do not need to access their money, they can keep it tied up in real estate. Technically, it retains its value, sitting as a concrete asset for years until its time to sell in order to provide something similar to retirement income. Unlike gold, however, real estate cannot be dumped quickly in times of sudden personal crisis, particularly when the secondary market remains underdeveloped (and potential buyers are going after new real estate). While China’s current policies appear to be softening social tensions over an economic slowdown, they do not appear to be bringing about substantial changes to the economic system that left China so vulnerable to external factors in the first place.
LIU JIN/AFP/Getty Images A worker fixes scaffolding at a construction site of a new real estate project in Beijing on June 11
China: Emerging Details of the 'Radical Stimulus Package' November 14, 2008 Summary Rumors about the details of China’s “radical stimulus package” have been flying since before the package was announced Nov. 9. As the details come to light, they reveal that the measure is primarily aimed at long-term development rather than short-term growth. Analysis China’s State Council unveiled a “radical stimulus package” Nov. 9 aimed at investing 4 trillion yuan (US$586 billion) into every corner of the country. Since then, rumors have been flying over the details of both the package and the source of its funding. The 10-point package outlines a wide range of major infrastructure projects and social safety nets, few of which amount to true short-term economic stimulus — instead they are aimed at development whose benefits will take years to sink in. The central government’s plan for funding the stimulus package is beginning to emerge from the confusion of conflicting reports and speculation. First, the government will float 1 trillion yuan (US$146 billion) worth of new construction treasury bonds, with 500 billion yuan (US$73 billion) scheduled to be sold in each of the next two years. This could bring the budget deficit up to 2.5 percent of gross domestic product in 2009 and 2010. Responsibility for the remaining 3 trillion yuan (US$438 billion) of the total package will fall to the provinces, mainly through their own budgets and cheap (subsidized) loans provided by the nation’s major banks. So far, the People’s Bank of China has asked the national banks to contribute a tiny 100 billion yuan (US$14.6 billion) in loans for infrastructure projects, but this is likely only an initial push. If the State Council approves the provinces’ right to issue their own bonds, then this too could provide funding, though it will take time for this mechanism to be operable and for provinces to find markets for their bonds. As for the actual projects included in the program, a cacophony of proposals and declarations has poured forth from state organs in recent days after Premier Wen Jiabao urged government ministries and provinces not to delay. Moreover, the stimulus package contains a cobbling together of not-so-recent infrastructure proposals as well as fiscal and monetary policy actions that have occurred since September, when the financial crisis first began to affect China. It is therefore not entirely clear which of China’s recently announced initiatives are properly part of the stimulus package and which are only coincidentally or tangentially related. And it is also not clear which projects will be managed by government ministries and which by provinces. Nevertheless, the current tally of projects included in the stimulus package, culled from state media, probably accounts for three-fourths of the total package, and looks something like this:
The striking thing about the above list is that a remarkably small portion of the money is dedicated to true economic “stimulus.” The loosening of monetary policy and easing of regulations on lending, plus tax breaks for exporters, will provide relief relatively quickly. Some affected social groups — the urban poor, farmers, migrants and the unemployed — will receive direct transfer payments. And the massive 900 billion yuan (US$131.3 billion) that the central government is devoting to building new housing for the poor will benefit the construction sector and boost employment relatively quickly. But otherwise the stimulus plan contains major infrastructure projects that will take years to get going. And since it is relying in great part on new government bonds — and in the case of the provincial governments, the legal authority to issue bonds does not yet exist and cannot even be legislated until March — the plan is debt-driven and therefore long-term by nature. It therefore appears that with the “stimulus” plan, China is using the occasion of the global recession to launch long-anticipated reforms — some planned since at least last March — in far-flung regions, as well as a broad strategic development plan, ultimately aiming to generate homegrown demand and wean the Chinese economy off export dependency. What China is not doing with the stimulus program, at least so far as is apparent from the details that have been made public, is electrifying the sectors that are becoming sluggish. Nevertheless, STRATFOR fully expects a real stimulus plan to emerge in the coming weeks or months, targeting manufacturers and the export sector more directly so as to prevent them from collapsing under the pressure of the global situation and triggering a wave of unemployment and even social unrest. After all, the country’s top leaders and ministers have not yet held their annual economic meeting, which is expected to take place later in November. But because China has chosen to fund its major development and infrastructure projects mostly through deficit spending, it will likely be able to dip into its vast hidden stores of cash to provide instant relief to struggling sectors of the economy. Beijing’s plan also seems unlikely to have a significant impact on Chinese purchases of U.S. treasury bills, and China has little interest in attempting to sell any of its $1 trillion worth of U.S. debt. The implication is that the Chinese currently consider maintaining economic relations with the United States more important than achieving short-term stimulus in their own economy. TEH ENG KOON/AFP/Getty Images A pedestrian walks past the People’s Bank of China
China: Selling Provincial Bonds March 10, 2009 Summary China is moving ahead with its plan to sell bonds for provincial governments, Chinese media reported March 10 from the ongoing National People’s Congress sessions. It appears the central government will issue the bonds on behalf of provinces, and distribute the funds itself — tapping investors while minimizing local control. Analysis China is pushing forward with a plan to allow the issuance of 200 billion yuan ($29.2 billion) worth in provincial government bonds to fund projects related to the country’s economic stimulus package, Chinese media reported March 10, following statements from the ongoing National People’s Congress (NPC) session. A member of the financial and budget committees said the State Council is amending a budget law to permit the issuance of provincial bonds by the central government. A spokesman for the finance ministry claimed the funds will be distributed mostly to China’s underdeveloped central and western regions. The local debt issuance plan is not what it first appeared to be. Initially the concept was that local governments would issue their own debt in order to bankroll major infrastructure development and public works programs. The idea emerged because, at present, the provinces are not allowed legally to run budget deficits (though they often do so unofficially). Bonds were to provide the provinces with a source of capital other than the national banks or informal lenders. When China unveiled its $585 billion stimulus package, the provincial bond issuance proposal gained ground as a means for provincial governments to finance the projects associated with the package that were not being funded by the central government directly or through loans from the big policy banks. There were obvious risks with such a scheme. It would have given provincial governments the power to control their own development, potentially acting independent from the central government, or without coordinating with neighboring regions. By formally allowing provinces to operate on deficits, there was a risk that provincial governments would drive themselves deep into debt and end up begging for central government bailouts. There were also fears that provincial debt issuance could be abused by China’s notoriously corrupt provincial authorities to benefit themselves and their cronies, without achieving any of the central government’s aims of accelerating development or modernization. Moreover, bond issuance along local lines would ensure that wealthier, more experienced provinces (such as the coastal regions) would receive all the attention of investors, while the central and western regions that need funds the most would be neglected. With the details revealed on March 10, however, Beijing appears to have avoided some of these problems. The central government will issue the bonds on behalf of the provinces and distribute the funds itself. The bonds will be issued in the same way as national government bonds, so as to cut costs, take advantage of the government’s strong credit rating (as compared to the unrated individual regions), and attract a larger pool of investors. The ministry of finance will also allocate the proceeds so that the underdeveloped provinces will receive the lion’s share. The result will give the provinces a new source of much needed capital, while Beijing bears the risk and maintains leverage over the provinces whose bonds it sells — leverage that can be used to centralize the country and rein in errant provincial officials. Still, the central government has not ruled out the possibility that provinces will one day be able to issue their own debt directly, if a credit rating system can be devised, or if the economy deteriorates to the point that bolder measures are required to provide provinces with capital. But some in Beijing would prefer not to extend this freedom to the provinces — and at the moment they are getting their way, while still developing a useful means of financing stimulus projects.
GOH CHAI HIN/AFP/Getty Images Delegates leaving after a session of China’s National People’s Congress on March 10
China: Stimulus Plans and Speculation Realities February 18, 2009 Summary A surge in bank lending in China has followed from the central government’s economic stimulus efforts. Yet evidence is emerging that much of the new loan money is being spent on speculation rather than stimulus projects — and this is in addition to the risks inherent in China’s looser lending policies. Analysis Bank lending in China rocketed up 100 percent in January compared to a year earlier — up to 1.62 trillion yuan (about US$237 billion) for the month — as top banks responded to the central government’s economic stimulus policies. The leap in new loans also more than doubled the total lending in December 2008, which amounted to 771.8 billion yuan (US$112.8 billion). The current lending spree has outstripped previous lending booms, such as the one in 2003. Chinese banks normally do the bulk of their lending at the beginning of the year, but there are further reasons for the frantic increase in new loans in January. As the global recession wears on, China faces a slowdown that threatens not only its manufacturing base but also its social and political stability. Since November 2008, Beijing has lowered interest rates, scrapped restrictions on banks’ credit and risk assessments, and encouraged banks to assist with the government’s 4 trillion yuan (US$585 billion) fiscal stimulus program. This was all a dramatic reversal of Beijing’s credit-tightening policies in 2007. Now, these various credit-boosting policies are translating to new loans meant to spur growth to fight off the downturn. The obvious risk associated with such freewheeling lending is that as new loans increase under looser regulations, the number of bad loans will increase too, and this will come back to haunt the Chinese financial system in the medium-to-long term. Nonperforming loans (NPLs) have caused Beijing serious headaches in the past — in 2003 the NPL ratio reached up to 20.4 percent, equivalent to 16.5 percent of gross domestic product. While banking reforms brought that ratio down to 2.81 percent in 2008, the problem was only superficially treated — when Beijing prepared its major policy banks to go public, the bad loans were wiped off their balance sheets and dumped into asset management corporations that were responsible for managing them from then on. However there was no effort made to alter bank policy or personnel, so there was no reason to expect the banks to grant fewer bad loans afterward. So far, the China Banking Regulatory Commission continues to claim that NPLs are falling, not rising. Outstanding NPLs are said to have decreased by 700 billion yuan (US$102 billion), down to 568 billion yuan (US$83 billion) by the end of 2008. This means that the average NPL ratio for all of China’s banks fell from 6.16 percent to 2.45 percent by the end of 2008. These figures resulted in part from reform attempts in 2007-2008 that were scrapped in July 2008, but more importantly they came from China’s unwillingness to publicize the full extent of its NPL problems since 2003. Judging by the colossal rebound in lending in 2009, the NPL problem — and the associated default risks — will return with a vengeance. There are also short-term problems with China’s credit-fueled counter-recessionary moves, as it is not clear whether they are actually stimulating the economy. Of course, much of the new lending is serving the purpose the central government intended: it is being directed at households struggling with debt or seeking to buy homes, and at massive cross-country infrastructure projects and renovations. But much of the new credit is being directed at businesses that have not been profitable since the middle of 2008 and that are teetering under the pressure of plummeting sales and mounting stockpiles. Throughout the crisis, Beijing has wanted to prop up its industries to forestall waves of unemployment, especially among migrant workers. But while increasing bank loans to inefficient firms may enable the firms to cover operating costs, maintain production and make payroll, it will not contribute to overall economic stimulus efforts (and it will sink unprofitable firms into greater debt, further clogging the financial system with doomed loans). Furthermore, many of the new loans are being diverted from intended stimulus efforts and toward various kinds of speculation. Reports are streaming out of Chinese media showing that easily acquired, cheap loans are fueling a flurry of new risky gambles; one estimate suggests that up to 660 billion yuan (US$97 billion), or about 40 percent of the January lending surge, is being used in such a way. The most obvious example is the Shanghai Composite Index, the stock exchange, which, coinciding with the January lending rush, enjoyed a rally up to September 2008 levels while the rest of the world’s stock markets continued stumbling. Companies have also used newly borrowed funds in a “carry trade” involving commercial paper (short-term business loans), as they take advantage of low rates in the commercial paper markets to deposit money in banks that are currently generating higher returns. Funds put in equities or wagered on commercial paper rates will not be spent on roads, bridges, airports, plants, power grids, green projects, technological research and development, or other infrastructure and development improvements promised by the stimulus package. The new speculative frenzy has already led the People’s Bank of China, the central bank, to seek the names of those who received January’s loans in order to scrutinize whether the loans are being spent in line with stimulus package plans. All of this suggests that Beijing will continue having trouble getting people to use new credit in a way that supports its stimulus plans and does not detract from the sustainability of future growth.
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