China’s lending continues to tighten

China lendSept11.pngFinancial bubbles are like balloons. Only instead of air, they need to be constantly pumped up with new lending. Otherwise they begin to deflate, and the Minsky Moment occurs.

The above chart of China’s bank lending shows, as discussed last month, that the Minsky Moment is getting close. August’s lending (red square) was exactly the same as in 2010 at RMB548bn ($86bn). And so far this year, it is down 8% (RMB60bn) versus 2010.

Last year, lower official lending was supplemented by the ‘shadow banking’ system, as described by the blog’s co-author of the Boom, Gloom eBook, John Richardson in a 2-part July post. But that was when the authorities still believed they could contain inflation below 4%.

Today with inflation above 6% and food price inflation over 13%, they have tightened up considerably. 2 major plastics converters, who were also acting as traders, reportedly went bust in Guangdong recently with debts of Rmb100m each.

This leaves the problem of all the inventory, bought on borrowed money over the past 2 years, which is now filling warehouses down the value chain. Some of this is disappearing into exports, where it is depressing Asian and global prices.

For example, data from GTIS, the global trade data experts, shows polyethylene exports were:

• 350kt in January-July, double 2010 levels
• They were also more than 3 times 2009 levels

Of course, the government may panic, if growth really starts to slow sharply, and allow lending and inflation to rise again.

But if it doesn’t, then the owners of the inventory will eventually begin a rush for the exits. At this point, when distressed selling starts, the Minsky Moment will have arrived.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.


Leave a Reply