China Has No Reason To Increase Credit

By John Richardson

RmbA FEW hours ago, the blog was so distressed when we read the argument that a 13-month low for consumer-price inflation in February gave China justification to ease lending conditions that we spluttered coffee on to the hotel sofa where we were sitting.

Sure, China might indeed “blink” again, which remains the default position for most chemicals companies. We should know more when all the Q1 lending data is available.

But to suggest that blinking would be justified is a view that we are eager to challenge.

Here is why:

  • In 2007, each dollar of credit added 83 cents to GDP.
  • By 2012, each dollar was only adding 29 cents; last year, a dollar added only 17 cents.
  • Estimates suggest the figure in 2014 may be as low as 10 cents.
  • China has added $10 trillion of credit over the last five years – equivalent to the size of the entire US banking system, leading to a potentially systemic bad debt problem.
  • In February of this year, producer prices fell for the 24th consecutive month, dropping by 2 percentage points – along with lower consumer-price inflation. Further stimulus would complicate, and probably make a lot harder, efforts to reduce overcapacity in industries such as some chemicals, steel and cement.
  • Removing the lending shackles would also lead to yet more air being pumped into property and other investment bubbles and more speculation in the shadow-banking system, where the biggest systemic risk to China’s whole financial system probably lies.

We apologise for singling-out one expression of the pretty wide opinion that all is well in China, by the way, and, as always, we are happy to discuss and be proved wrong.

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