International Law

Happy Happy China Economy Stories

By Stan

That’s all I’ve been reading this weekend, articles talking up the Chinese economy, which is “showing signs” of a recovery. We’ll see what happens over the next few months, but at the moment, the press is generally being kind.

For one thing, the government’s stimulus efforts seem to be moving in the right direction. Reuters has details:

China’s new lending and money supply growth both surged to record highs in March, as banks continued their explosive credit expansion in support of the government’s efforts to rejuvenate the economy.

Banks extended 1.89 trillion yuan ($276.6 billion) in local currency-denominated loans in March, bringing the total for the first quarter to 4.58 trillion yuan — nearing the government’s full-year target of at least 5 trillion yuan.

That helped lift annual growth in the broad M2 measure of money supply to a record 25.5 percent in March, up from 20.5 percent in February and easily exceeding economists’ expectations of a 21.3 percent rise.

Liquidity surged despite the smallest quarterly rise in the country’s foreign exchange reserves since the second quarter of 2001, reflecting slowing inflows through the trade surplus and foreign investment.

As I mentioned last week, I am worried that all this lending might lead to a lot of future non-performing loans. It will take some time for that shoe to drop, however. The WSJ picks up on this theme:

And as new yuan lending surged over the CNY1 trillion (US$146 billion) mark for the third straight month in March, concerns are growing the government’s CNY4 trillion stimulus program will spawn more bad loans for the banking sector and that the flood of credit, instead of being directed into the real economy, is becoming a source for speculative capital into asset markets, including Chinese shares.

The lending data show “funding arrangements are probably not a problem anymore. What really concerns me is credit quality,” said Sherman Chan, economist with Moody’s Economy.com.

She said that if loan assessments aren’t being prudently done, the current robust credit growth would have negative consequences that will drag on the economy further down the road.

The other bit of good news seems to be an end to the free-fall in the export market. This generally means that although the latest info is bad, it’s not quite as bad as things were a short time ago. From the BBC:

Exports fell 17 percent in March from a year earlier, the fifth straight monthly decline but less severe than February’s 25.7 plunge, the sharpest in a decade, the customs agency reported Friday. It said trade “showed clear signs of improvement.”

While I hope that trade rebounds in the near term (don’t expect this, though), I’m not so sure that would send the right signal to policymakers. Growth without rebalancing is a very short-term solution. If China comes out of this recession without moving towards more consumption and less of a reliance on investment and exports — there may be another hard landing later on.

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Full post as published by China Hearsay on April 12, 2009 (boomark / email).