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28 November 2023

China to avoid Japan-style bust

By Allison Jackson

China is expected to raise interest rates and let its currency appreciate in the coming months as policymakers resort to more aggressive measures to prevent the economy overheating, analysts said.

Moves by the central bank in the past two weeks to rein in a surge in bank lending signalled a policy shift that would help the world's third-largest economy avoid Japan's boom-bust experience of the late 1980s, they said. "I believe we are at the beginning of a new phase of policy tightening – we will see more tightening coming in the next few months," said Peng Wensheng, head of China research at Barclays Capital in Hong Kong.

After repeated calls for banks to moderate their lending activity, the People's Bank of China took action last week, raising the minimum amount of money that banks must keep in reserve for the first time in more than a year.

It has also in recent days raised interest rates on one-year and three-month treasury bills in a bid to curb record lending.

The fiscal tightening moves caught analysts by surprise and came after state media reported banks had extended Y600 billion ($88bn, Dh322.9bn) in loans in the first week of January.

That amount was not far off the combined Y674.6bn in new loans given out in November and December. New loans in China nearly doubled in 2009 from a year previously to Y9.59 trillion, government data showed.

The central bank did not give a reason for its moves but analysts said they showed the government wanted to rein in a credit expansion that has led to concerns over inflation, asset bubbles, bad loans and economic overheating.

"Growth was last year's problem – it is dealing with the consequences of growth and the policies that China successfully reflated the economy with that are the issues for 2010," said Eric Fishwick, a Hong Kong-based economist at CLSA Asia Pacific.

"China no longer needs to have a hyper-stimulatory policy – I would argue that it no longer needs a stimulatory policy, period."

In addition to more bank reserve ratio rise, Beijing is expected to raise interest rates and allow the currency – effectively pegged to the US dollar since mid-2008 – to appreciate in the coming months, analysts said.

"As we have argued for several months now, higher benchmark lending rates and a stronger yuan will need to be part of the package," said Brian Jackson, a Hong Kong-based senior strategist at the Royal Bank of Canada. "We continue to believe that an initial move around the end of the first quarter is likely."

Calyon Credit Agricole agreed, saying in a note that policymakers appeared to have reached "a consensus... on the pace of the monetary tightening and this may open the door to move on the currency sooner rather than later". In the past year China adopted what it called a "moderately loose" monetary policy and embarked on an unprecedented Y4trn spending spree to keep the economy growing amid the global downturn.

It also urged banks to pump up lending, but after the amount of new loans subsequently surged, the government in recent months reversed course and called for "reasonable" lending as inflation fears rose. The consumer price index, a key gauge of inflation, rose in November after an almost year-long bout of deflation. "I've never seen a government stimulate an economy as aggressively as China has done, which means the need for reduction is more than anywhere else," said Fishwick.

"Preemptive policies stand the best chance of working."

Last year's stimulus measures have borne fruit. China grew 8.9 per cent in the third quarter – the fastest pace in a year – after expanding by 7.9 per cent in the second quarter and 6.1 per cent in the first three months.

Economic data due to be released this week are expected to show the economy grew by 8.5 per cent in 2009.

China's strong growth and soaring asset prices have led to comparisons with Japan in the 1980s – but analysts said Beijing's swift action to contain inflation and cool the property market would help it avoid the boom-bust experience of its Asian neighbour.

"I think the chances of China repeating what happened in Japan is not impossible but it is unlikely," said Pu Yonghao, head of Asian economic and investment strategy at UBS.

"China is taking action to prevent such an asset bubble."

Peng said Chinese policymakers were trying to "strike a balance" between controlling inflationary pressure and maintaining economic growth.

"They will tighten policy in a phased manner," he said.

"They do not want to threaten the sustainability of the recovery." (AFP)


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