By John Richardson
AS the global economy enters a new recession the great hope, as we discussed yesterday, is that China once again steps in with a stimulus package as did in late 2008.
But can China risk a repeat of the huge increase in bank lending, a key part of that stimulus package?
The answer is quite possibly no for the reasons we give below. This leaves doubting that China has the ability to do anything that will effectively compensate for all the problems in the US and Europe.
It was the doubling of bank loans in China in 2009 that helped overseas industries, including chemicals, recover as the country's imports soared.
This article from the Wall Street Journal points out that the country's bank-sector credit as a share of GDP (gross domestic product) could be close to 180%.
Importantly also China is getting less bang for its buck by flooding the economy with easy credit. From 2003 to 2008, total social finance--a Chinese government measure that includes on- and off-balance-sheet lending by the banks as well as bond and equity issuance--expanded on average by 18% a year, supporting growth in nominal GDP of 17% a year. In 2009 and 2010, finance exploded 33% a year on average, but GDP growth slowed to 12%.
Concerns are growing that a lot of this debt has the potential to turn bad if the real-estate sector implodes.
To date this hasn't happened with property prices in the second-tier cities still on the increase.
But as the amount of unsold housing stock builds up and with buyers sitting on the sidelines in the hope that prices will correct to more-affordable levels, the risk is increasing of a sharp correction in property prices.
Local government debt now accounts for 27% of China's GDP, according to the Business Spectator.
"In all previous cases of countries following similar growth models, the dangerous combination of repressed pricing signals, distorted investment incentives, and excessive reliance on accelerating investment to generate growth has always eventually pushed growth past the point where it is sustainable, leading always to capital misallocation and waste," adds Michael Pettis, the Beijing-based finance professor.
"At this point - which China may have reached a decade ago - debt begins to rise unsustainably."