The Chinese administration has a tricky course to steer in the coming months. It must live up to expectations that it will implement economic reforms and choke off ever-increasing credit supply, without destabilising the economy and provoking popular unrest.
Because China is a Communist state, however much it may have opened itself up to the market, the government still has a great deal of power over all aspects of the economy, but even it is unable to achieve its various goals without a long drawn-out process.
“The naysayers of China’s economic boom are surfacing again, warning all those who care to listen that the country’s debt-fuelled growth will eventually prove its undoing,” says Philip Ehrmann, manager of the Jupiter China fund. He thinks these concerns are misplaced. “The new Chinese administration has made quite clear that it is engaging in meaningful reform to manage the excesses, intended or otherwise, that have been building up in the economy.”
“In a Chinese discussion, you always have the bulls and the bears, and it always comes down to faith in the Chinese government,” says Erwin Blaauw, a senior country-risk analyst at Rabobank. “It has some control over every aspect of the economy, and that explains why it is not in crisis – yet.”
One of the main risks for a Chinese crisis is the ever-expanding supply of credit. The government has made it clear it would like to limit this supply, making individual banks more aware of their responsibility to manage their own liquidity instead of relying on the People’s Bank of China to inject liquidity into the market whenever it is asked.
On a number of occasions, the PBoC has not responded to a need for extra liquidity immediately, causing significant market volatility, such as spikes in Shibor, the key overnight lending rate. In each case, however, the central bank has ultimately supplied the requisite liquidity. The question then is whether Chinese financial institutions are reading this as a comforting message they will not be hung out to dry, or a warning that they should get their houses in order.
Mr Blaauw is optimistic “banks are becoming more aware of their own responsibility for liquidity”. This could eventually lead to a situation where a bank failure would not risk a systemic crash, but “we are not there yet”, he warns.
These actions have failed to curb credit growth, as January produced record new credit figures. Mr Ehrmann says he is confident this is nothing to worry about, as “it has been accompanied and supported by very healthy foreign currency reserves and levels of domestic savings”.
Over the summer, the Chinese government will probably have a series of opportunities to demonstrate its determination to allow markets to move to more efficient capital allocation, as a series of trusts, wealth management vehicles that are a significant source of liquidity to the credit market, mature. It is expected that more than one may struggle to find the necessary liquidity.
Just such an event occurred toward the end of January, when the China Credit Trust threatened to become the country’s biggest failure of this kind in a decade. In the end, investors got their capital back as a bailout was organised just before the Chinese new year, sparking concerns that investors will fail to learn their lesson about default risk.
“The question is, will they let one fail later in the year?” says Mr Blaauw. The PBoC will be concerned about market reaction to such a failure, as it was in January, but “the downside of a bailout would be that investors think [such a product] will never fail”.
Klaus Wiener, chief economist at Generali Investments, is more sanguine. He expects a number of defaults among trusts during the summer, “but they will be idiosyncratic, not systemic”.
Mr Blaauw explains the government has a difficult balancing act to manage the needs for economic reforms, slower credit growth and financial stability.
Financial stability is relatively straightforward to achieve, Mr Wiener points out. “They have the monetary policy and the fiscal levers and they are able to use them. And historically they have been proven to work.”
Financial stability with continued credit growth and inadequate economic reform merely postpones the crisis, says Mr Blaauw. “At the moment, reform is a very gradual process; they are taking it step by step. But will it be fast enough to prevent some crisis in the future?”
“China’s critics would have a point if nothing were to change over the next few years,” says Mr Ehrmann, who is optimistic that reform is on its way. “True, making the necessary structural reforms will probably jar with vested interests, but key is whether the government of President Xi Jinping has the stomach to drive through these reforms. Signs are good, in our view.”
Jupiter中国基金(Jupiter China Fund)的经理菲利普?埃尔曼(Philip Ehrmann)表示：“否认中国经济形势大好的人又出现了，他们向那些愿意聆听的人发出警告：中国由债务拉动的增长终将失败。”他认为这些担忧是没必要的。“中国新一届政府已明确表示，将展开切实改革，应对经济中越来越明显的（不管有意与否）过度现象。”
今年1月底就发生过这种事，中诚信托(China Credit Trust)险些酿成中国10年来规模最大的此类破产案。最终，投资者拿回了本金，因为该机构在春节前得到了纾困。这令外界担心，投资者将无法从中吸取关于违约风险的教训。
Generali Investments首席经济学家克劳斯?威纳(Klaus Wiener)的态度更为乐观。他预测，今年夏季将出现一些违约事件，“但它们都会属于个别情况，不会引发系统性反应。”