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PERHAPS the only thing growing faster than China’s economy is worry about the country’s economy. Figures released this week showed China’s GDP still expanding briskly by anyone’s standards except its own: it grew by 9.1% in the third quarter, compared with a year earlier. But fears for China also boomed, judging by the dismal performance of Chinese stocks listed in Hong Kong, the rising price of insurance against a Chinese sovereign default, and rare, downward pressure on its currency.
Some of this worry reflects problems beyond China’s borders or the government’s control. Chinese sales to the European Union, for example, plunged by 7.5% last month, their worst September drop since 1995. But in recent weeks China has become a net exporter of anxiety. Inflation is falling, but it has remained higher for longer than the authorities expected. The property market is also slowing. Sales have fallen sharply, as developers wait in vain for demand to pick up rather than flogging their properties at a discount.
Kerbing Chinese enthusiasm
Their wait is all the more painful because credit is, belatedly, tightening. In China’s underground lending market, the most sensitive indicator of credit conditions, kerbside rates have reached extortionate levels of as much as 6% a month (see our report from Wenzhou). Some indebted businessmen have done a runner, abandoning their homes and firms rather than parting with their pound of flesh.
Much of this informal finance is either secured against property or invested in it. The fear is that overstretched borrowers will now dump their nouveau-classical villas and vulgar condominiums, upending the property market and inflicting wider damage on the economy. Land, for example, will fall in value, hurting the fragile finances of local governments, which raise revenue by selling turf.Some analysts argue that informal finance is “the canary in the coal-mine”, an early sign of a broader debt crisis that will afflict the whole economy. Others contend that it is a “time-bomb”, big enough on its own to blow things up. But neither of these metaphors is quite right. Tighter credit is necessary to quell inflation. High kerbside rates are a sign that the government’s lending restrictions have at last begun to bite, even on the furthest fringes of finance.
China’s government will be reluctant to ease monetary or fiscal policy while inflation remains high. That limits its scope to respond to a sharp slowdown in exports, if Europe and America continue to falter. But weakness in foreign sales will itself ease inflationary pressure, reducing the competition for men and materials. After exports fell off a cliff in 2008, Chinese prices began to drop. Thus the more the economy needs looser macroeconomic policy, the more scope the authorities will have to provide it.
What about the bad debts left behind by past excesses? Although some homebuilders are heavily indebted, households are not. Even if the price of their home falls below what they paid for it, it will be worth more than the mortgage they took out on it. Since the central government’s explicit debt is low (about 20% of GDP) it can afford to bail out lower tiers of government and the banks they borrowed from. Because the banks have ample deposits, and savers have few other options, banks can also earn their way out of a hole by underpaying their depositors. And since the banking system is still dominated by the government, the banks will not refuse to offer new loans, even if old loans sour.
China’s chronic problems need not, then, develop into an acute crisis any time soon. For the moment, its government can keep a lid on the financial system, albeit by virtue of financial controls and skewed incentives that were partly to blame for a lot of bad investments in the first place. That sort of response—alleviating the symptoms without tackling the fundamental causes—can’t go on for ever without a painful reckoning eventually. But it can go on longer in China’s closed system than it would elsewhere.
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