The third report is from The Telegraph (19 June 2013). Please click here.
This again goes into the details and guesses that the People's Bank of China (PBOC) is deliberately holding bank the liquidity and teaching the banks a lesson for indulging in Shadow banking and making things risky. It also expects that when large payments are due next month it will release the liquidity.
One needs to keep in mind that the problem of shadow banking has escalated tremendously only in the last five years when China was responding to the Global Financial Crisis and trying to maintain its growth rate. All the fiscal stimulus could manage just a 7-9% growth rate over the last five years. This government had been ignoring the dubious semi-legal methods which were generating this increased liquidity. But this is becoming increasingly difficult as the quality of investments gets sacrificed when higher investment becomes an end in itself.
The fourth report also from The Telegraph (20 June 2013). Please click here.
This points out how the Manufacturing Activity Index "Purchasing Manager's Index" calculated by HSBC shows a drop to 48.3. Below 50 is considered a contraction. Goldman Sachs says that the HSBC index is tilted in favor of exports and the actual PMI calculated by the government should come in better. It says that "downside risks" are increasing - meaning the possibility of growth slowdown increases. But Goldman Sachs still sticks to its Q2 growth rate forecast of 7.8%. This is strange because Goldman Sachs is considered to be one of the most reliable analysts around and when if are sticking to their original forecast, probably things are not as unstable as one is made to believe by some of the strident reporting. However there seems to be a warning for the Chinese government to go a little slow with its tough reform policy to squeeze liquidity. It just might happen that in the short term reform might end up hurting deeper than expected and trigger a deeper slowdown instead of stabilising it. The Dangers of extensive Austerity are already being discussed in Europe and just might become applicable to China in the coming days.
One of the good coverages of the entire crisis phase is Simon Rabinovitch's coverage in Financial Times of June 21, 2013. Please click here.
He notes that the seven-day bond repurchase rate, which is a key gauge of liquidity, had gone up to a remarkable 10.8 percent a year. He concludes that in China where the state controls the banking system and the credit situation and which is micro-managed "these financial strains are definitely of the government’s own making." He finds that the small liquidity crisis can cascade and become the cause of a collapse of the arger financial system. But what he fails to mention is that governments taking aggressive steps to rein in renegade banks. That does not seem to happen in the West. Banks even when they collapse are pampered with State funds and the taxpayers have to bear the burden. As regards the power dynamics between the State and Big Business and Big Banks, the China state still wields greater power and has the edge. It can take decisions which pain the banks for improving the banking system in order to protect the larger interests of the people and society. While in the West the pain has to be borne by the people and society in order to protect the banks. This itself is a stark indicator of the clear distinctness of the China Model - capitalist though it is. Or one can call it Financial Regulation with Chinese characteristics.
Arthur Kroreber one of the most important and respected watchers of the Chinese economy has commented in The Atlantic on 22nd June. He estimates that China will get through this crisis period. But a bigger crisis seems to be building up in the long run. Please click here.
And here is the article which convinces me finally that China was an excellent story but currently it is facing a really huge challenge. Stephen Roach of Morgan Stanley is an experienced hand and has been bullish on China for a long time and his bullishness has been justified as China has weathered each storm. But now in January end 2013, he has argued (please click here to read "China's Last Soft Landing") that China is facing an uncertain situation and without rebalancing and reforms the possibility of a hard landing is quite real. While says that China has managed a Soft Landing in the 2nd half of 2012, the future options are getting limited. He says “Without rebalancing and reforms, the days of the automatic Chinese soft landing may be over. I have been an optimist about China for 15 years. I still am. But the clock is ticking.” He feels that some of the reform which Chinese authorities must address are - developing services industries, funding the social safety net and altering the hukou-based residential-registration system.
After January he has written in March end that China is finally Walking the walk. After talking for more than 6 years since 2006, he says that, China has finally started taking the actions required for transitioning to a New Model. Please Click here to read China on the Move.
In his latest piece of April 27, "Long Live China's Growth Slowdown", he says that a services and consumption based economy has the advantage of being able to provide higher level of employment per unit of GDP and so employment can be retained at lower growth rates. Even a China which grows at say 6.5% after it has begun transitioning to services should be able to provide similar levels of employment and will not slip towards instability. He says that China's skeptics have a tendency to exaggerate problems especially the recent one of Shadow banking and an impending credit bubble which gets further exaggerated when combined with longstanding concerns of China descending into a dreaded “middle-income trap” scenario. This is a growth slowdown which fast growing emerging economies have to face after they reach a certain size of GDP. Please click here.
While he says that it is a possibility. He is confident that, "it is unlikely to occur if China can carry out the services-led pro-consumption rebalancing that remains the core strategic initiative of its current (12th) Five-Year Plan. Invariably, the middle-income trap afflicts those emerging economies that cling to early-stage development models for too long."
June 25, 2013, Nobel Prize winner Robert Engle who teaches finance at NYU has commented on the currently credit-squeezed increasingly risky Chinese economy today. Please click here to read the article in the China Economic Review. He feels that this is a deliberate policy of the govt of reducing credit availability and punish highly leveraged firms - which have high debt and low revenue generation to return it. They will avoid lending to risky private players and stick with safe well-performing State Oriented Enterprises. This he says will be bad for the ambitious and greedy entrepreneurs and so will be bad for the economy.
He says that over-greedy entrepreneurs create risks in the economy by taking so much leverage with the capital that’s available, that they and the banking system exposed when it goes away. He feels that there is a negative feature of State backed guarantees to the state financial system. Banks, SOEs, municipal governments which are effectively guaranteed by the government, the tend to take on more risks as they feel they are safe. As a result the true risks inside the system are not known and could be higher. But one must maintain a perspective and keep in mind that many well-known economists have bet against China over the last 2 decades based on their ideas of classical western economics and ended up burning their fingers.
David Keohane of Financial Times explains that the big State-owned banks will be the least affected. Joint stock banks will be next and the small banks which have high exposure to wealth management products are the most likely to be affected. Please click here. Isabella Kaminski of FT analyzes in detail the role of the PBoC in this crisis phase. Please click here. Kate Mackenzie of FT explains that during normal times an opaque Banking and Media system does a good job of suppressing minor rumors and keeps the financial stable. However, in the case of major crisis, such opaque systems can in fact be more dangerous as investors and customers will believe the worst nightmare rumours which will trigger instability. That is just another theory which will be verified over the coming weeks. Please click here.
One will also find out whether China has acted proactively and implemented reform long before a crisis erupted. But it is clear that they have carefully chosen a reform path which hits the irresponsible bankers who created the crisis with their illegal Wealth Management Products. A path much different from the Western model which protected the banks and punished the people. So we could possibly be witnessing here the robust features of Banking with Chinese characteristics. A banking system where large and powerful banks do not dictate policies to the State but can also be held accountable. If this risky gamble of the PBoC succeeds it could stabilize the Chinese economy for a long period of growth and also add to the attractiveness of the Chinese Model for its proactiveness and for holding the rich and powerful to account.
In the meantime it would also be appropriate to mention that all large Western banks and financial companies like Goldman Sachs, HSBC etc have revised downward there China growth forecasts over Jun 23-25. Most have revised 2013 forecasts down from 7.8 to 7.4% and 2014 forecasts from 8.4 to 8.1%.
A good brief review of Wealth Management Products can also be found here. The Economist has naturally been investigating these unusual happenings in the Chinese banking system. Links are provided here to a series of useful articles on these topics. The Economist examines the recent spike in Chinese short-term interest rates here and here . The Economist analyzes wealth management products here and it explores why the yuan has been strengthening lately here.
A highly readable explanation of Shadow Banking and its implications, has been published in The Atlantic on June 28, 2013, "Shadow Banking Threatens China's Economy—but What Is It, Exactly?" by Ryan Perkins. Please click here to access.
The Telegraph of UK has come out with a provocatively titled "China may not overtake America this century after all". The confidence is undeniable but then the media always has a tendency to go overboard to make its point. He says that both on Innovation and Demographics , the US outscores China over the long term. Plus the US banking system has been restored and is much more stable than the Chinese banking system currently. He quotes Richard Haas who has said that the US is firmly on topic and that this will be another US century. He ends by saying that nothing is foreordained and has to be worked for. Is he implying that China is in decline or can it return. Read here.
George Mangus of The Globalist has also written in May 2013 that the Chinese growth story can no longer be extrapolated based on its past performance. China has entered a risky new phas. Read here.