China’s economic data is suspect
By Derek Scissors
Wednesday, Jul 21, 2010, Page 8
China has again announced fast growth with low inflation. And again, the People’s Republic of China (PRC) will be widely praised as a future, or even current, economic superpower. However, other facts have not changed, and in these instances stability is not a laudable goal.
Once more, there are inconsistencies in the most basic and prominent official Chinese data. To the extent official data are reflective, persistent imbalances within the economy are no smaller and may be worsening. The loan stimulus so effective in pushing the PRC past an economic rough patch has now faded. Growth, while still strong, is waning as the stimulus fades, highlighting another round of damage inflicted on the financial system. .............
Finally, since 2007, banks have transferred loans to investment trusts, moving them off their own balance sheets. Transfers were banned at the end of last month, but an estimated US$300 billion in assets were moved in the preceding nine months alone. Banks do not hide excellent assets, and the ultimate rate of failure for transferred assets may be high.
Lack of transparency clouds the question of system solvency, but there are hints. In early spring — before the damage was finished, much less tallied — the four largest listed banks needed US$70 billion in fresh capital. Chinese banks chiefly raise money, through rights offerings or subordinated debt, from other Chinese banks. For the past decade, smaller banks grew faster than the large listed banks. Faster lending in a slower economy generally makes for weaker balance sheets, and larger banks have received far more government aid. The large listed banks may be turning to even shakier allies for help.
More ominous is that the government, too, seeks funds. Many government bank stakes are held in an entity known as Central Huijin, which assist with banks’ needed fundraising. However, Central Huijin has to raise capital to buy bonds and stock from its charges. The main purchasers of its bonds will be banks themselves. The central government is turning for capital to a system turning to the central government for capital.
To be clear, there is no imminent crisis. Bad debts will accrue this year and next. They should appear on bank books next year and in 2012, and the inevitable bailout will start no later than 2014. The wisdom of the stimulus cannot be fully judged until then.
Taipei Times Editorial
