China's Economy Facing Risks, Warn Officials

Posted by: Dexter Roberts on January 5, 2010

More signs that China’s red hot economy is facing potential problems: on a central bank-run website called China Finance, People’s Bank Governor Zhou Xiaochuan warned yesterday that industrial overcapacity could “pose a risk to the quality of bank loans.” Even so, China will continue its “moderately loose” monetary policy, Zhou wrote. Yes, there is a tension there: even while Chinese officials recognize the risks of their pump-priming policies, they are far from weaning China off of them. Domestic consumption today still only accounts for about one-third of GDP so investment remains a key driver.

Chinese officials have expressed concern for some time about the risks of industrial overcapacity in a range of industries including steel, aluminum, glass, and wind turbine equipment. China’s massive lending boom of more than $1.3 trillion in new loans last year has helped keep mainland economic growth strong, but also contributed to excess capacity in at least six industrial sectors, China’s National Development & Reform Commission announced last year. Bloomberg BusinessWeek wrote about the rising chorus of concern in early December.

Also alarming: the prospect that China’s lending boom could be helping inflate unsustainable assets bubbles in stocks and particularly real estate (see Bloomberg BusinessWeek’s December 30 piece on that here).

The worry is that asset bubbles too could raise the risk of bad loans cropping up in China’s banks. In a commentary in Bloomberg published yesterday, Liu Mingkang, chairman of the China Banking Regulatory Commission, wrote that “with the strong rebound in real estate and stock markets, structural bubbles also threaten to emerge.”

But in the same commentary Liu also stated that China’s banking system is “now more than adequately capitalized.” Liu continued by outlining steps his agency has taken to ensure banks remain strong: “When overcapacity was detected in certain industries or regions, we issued directives to alert banks to the potential risks associated with relevant project financing. Similarly, when we found bank loans were channeled into the property or stock markets for speculative trading, we stepped in to stop that.”

Those are certainly important moves, but concerns remain. Fitch Ratings warned in December that off-balance sheet transactions and the resale of bank loans to other financial institutions both were rising risks to China’s banking system. Central bank governor Zhou’s comments published yesterday are just the latest warning.

Reader Comments

JiaMing

January 5, 2010 11:36 AM

The fact that China's top economic officials are constantly aware and warning the public of the dangers ahead say something about the kind of government it has. Western elites have grown very complacent about their system and ideologies. Anything different is deemed bound to fail and evil. In the west and India (a proud student of the western system), officials from top to bottom all waste no time reassuring their constituents about how great their economy is going even when signs of troubles are clearly present. Those who warn about the dangers ahead are called "nay-sayers" and "unpatriotic". In the US, officials like Fed chairmen Alan Greenspan and later Ben Bernanke were pretty much asleep at the wheel while the housing market was collapsing right before our eyes. They repeatedly came out to reassure people that there was no housing bubble and the economy was doing well. As late as 2006 and 2007, Bernanke was still telling the world that the housing market crash would not spread to the main economy. It is analogous to the captain of the Titanic telling the passengers the ship would not be affected by the crash into the iceberg so there was no need to use the lifeboats. There was not a hint of diligence from government officials who were supposed to be steering the ship. They only wake up once in a while to shout a few slogans while people cheered and partied on. Many Chinese complain about the overly boastful behaviors of Indian commentators. But this should be attributed to an overwhelming air of triumph among democratic nations which credits all of the successes of the west to its ideologies. Indians seem particularly boastful only because their country is still a poor developing economy, so people feel they deserve less bragging rights.

jjw

January 5, 2010 3:22 PM

Too bad the US government can only give significant 0% interest loans to 'PAPER PUSHERS' instead of loans to 'REAL' people like engineers and designers.
Sad that Ponzi Street can get whatever they need while many engineers and designers I know are about to lose their homes.
PITIFUL>

Taishan

January 5, 2010 8:07 PM

No matter what the problem China is facing economically, China's only way out, is to move up the value chain as rapidly as possible. This is the ONLY way China can truely grow and develop. Loans going into over capacity need to go to the educated and the talented with managerial skills to further develop software, autos, micro chips etc. Bubbles are nothing more than money looking for returns. And in bubbles, the returns are a result of other people piling into investments that ultimately don't have long term returns (like the US housing crisis). China's true out is to examine the entire value chain from when a piece of steel is forged to why there isn't a Chinese version of a Lexus or Mercedes Benz in Western showrooms. Or why there isn't a Chinese version of an Intel Micro processor (from when silicon is removed from the earth to a final etched product). Money, talent, and energy need to be directed (through a combination of government and free market influences) to all the steps and bottle necks that need to be addressed to hasten China's journey into develop nation status. Its the only way.

Strategery

January 5, 2010 8:16 PM

Considering China's lack of domestic demand and overcapacity, I wouldn't be surprised if they start dumping commodities and manufactured goods in world markets. This will be followed by more trade disputes...

Bharath

January 5, 2010 11:47 PM

JiaMing come on.. we (Indians) haven't started yet on this thread. Why take cheap shot ? After all we're neighbours onlee :)

jcage

January 6, 2010 12:34 AM

Lack of domestic demand? GM is actually is selling more car in China than in the USA. Intel is making a third of its profit in China and Asia in general. China might not spend as much as their American counterpart but that does not mean that China has not domestic demand! Also, rather than dumping their product for Dollar or subsidizing American, China might as well subsidized Chinese consumption in the country side. There is a lot of pent up demand in China.

C. H. Ng

January 6, 2010 2:10 AM

1) @JiaMing....I have to agreed with Bharath here. You don't have go all out & step on other people's "tail" when the topic is on China's economy only. Just touch on your country's issue please.

2) @Taishan....I quite agreed with your facts as mentioned, especially on the way China needs to move up rapidly on its value chain. It seems like the most logical way to go right now.

3) @Jcage....you are right, there are huge demands for consumer goods in the countryside and the government should concentrate helping out the poorer countryside region instead of soaking up US treasury bills.

JiaMing

January 6, 2010 10:02 AM

Bharath, I didn't mean to take a shot at Indians. I've expressed my criticism on some of the disparaging remarks on India before on this forum. But I did want to point out that while China's government repeatedly used whatever tools available to cool down the overheated economy over the past 3 decades, western politicians, particularly in the US, simply partied on and declared the beginnings of new era only to be followed by crises. They'd do everything possible to avoid making tough choices that may hurt in the short run, instead pushing the problems down the road. India is a great country but she is ill-served by western-style politicians.

Richard Patterson

January 6, 2010 12:21 PM

The real issue for China is its ability to still do more central planning and control than most other big economies. The reason this question is important is that on the macro level, efficiencies grow and decay as fostered by central planning (deemed an evil demon by Reaganites), as opposed to laissez faire market forces. The efficient market as espoused by Friedman, we have found to be full of holes in application. Still, the free marketers have a point, and China is a great test case if planners can be smart enough bring efficiency and avoid distress better than forces of markets they have released. The macro efficiencies are enormously important as shown by the several hundred billion US Dollar annual waste in health care delivery in the U.S. Many other huge macro inefficiencies exist in the U.S., as a drag on the economy. Here's to you China. I am planning on your success outpacing the mess here in the American empire whose people also are largely optimistic about being successful at growing out from under decline that is staring us in the face.

Edward Eng

January 12, 2010 2:35 AM

China has 300 million in the middle class, leaving 1 billion in poverty according to Marketing Profs Inc. If China doesn't help more of the population reach the middle class, its economy will collapse. China will not slow down anytime soon. And I second what Richard Patterson says. Here's to you China. We also need ties between both countries to strengthen in order for each economy to grow.

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Edward Eng
getchee Staff Writer
http://blog.getchee.com
http://www.getchee.com
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Related Links:
http://money.cnn.com/2010/01/11/markets/thebuzz/index.htm

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