While commentators fret about the fragility of the apparent recover in Western economies like the US and Europe, it is important to remember that much of the new found confidence propping up our wounded financial markets is derived from events in Asia.
Principally, those watching energy and commodity prices in particular, look to China and the success – or otherwise – of its "command stimulus" model, where the local authorities have quite literally ordered an increase in spending and investment in order to counteract the collapse in demand from the West experienced in the second half of last year.
So my eye was caught by a breezy tome issued late last week by Jay Bryson, the global economist at American brokerage Wells Fargo Securities. Is China the next bubble?, Bryson asked – a fair enough question in the current circumstances.
Recent data from the Middle Kingdom shows the annualised growth rate of the Chinese economy rising from 6.1 per cent in the first quarter of 2009 to 7.9 per cent in the second – a rate of recovery that politicians in London and Washington can only dream about. (See Chart 1)
The obvious question is whether these sorts of growth rates are sustainable, but first why is the Chinese economy accelerating again?
Bryson says that answering that is not straightforward when a breakdown of real gross domestic products into its underlying components is not available. But monthly data does offer some clues:
"First, foreign trade is starting to stabilise. The swoon in exports in the second half of 2008 and early this year exerted a powerful drag on the Chinese economy. Now that foreign trade is starting to stabilise, Chinese real GDP growth is returning to its underlying "run rate." In addition, growth rates of retail and investment spending have also strengthened over the past few months."
So why are both Chinese consumers and Chinese businesses so confident? Have they not been reading the papers?
Bryson notes that the Chinese government responded very quickly and aggressively to the global financial crisis, so policy stimulus and accompanying tax cuts on top of a rather sizeable infrastructure spending programme have certainly helped to boost investment. Interest rates were cut substantially and, crucially, the government lifted lending restrictions that were put in place early in 2008 when everyone thought runaway inflation was the real problem.
Bryson notes that the growth of bank lending has simply exploded over recent months and now exceeds even the super-charged rates seen earlier this decade when the government was last trying to stimulate the economy. (See Chart 2)
But isn't this dangerous? Should we not be worried that in its zeal to jumpstart the economy, the Chinese government is sowing the seeds of yet another bubble, with potentially disastrous consequences for the global economy as a whole?
The Wells Fargo man, it should be said, is not overly concerned.
"Yes, loan growth has been robust over the past few months. However, there is no shortage of deposits to lend in China. Indeed, the loan-to-deposit ratio of the Chinese banking system has trended lower over the past decade or so, and it is well below the comparable ratio for the United States. Not only are Chinese households consummate savers, but the relative immaturity of the country's capital markets forces most individuals to hold the bulk of their liquid wealth in the form of bank deposits."
So there's plenty of cash, internally, available to lend. And, what's more, the non-performing loan rate in the commercial banking system stands at just two per cent – the lowest rate in years.
Yet doesn't the very abundance of excess liquidity raise concerns that banks may now be making ill-advised loans? After all, that has been the Chinese experience on many occasions since its economy was first opened up to the forces of capitalism. Says Bryson: "Although we have no way of determining the soundness of new Chinese loans at present, we can analyse whether important sectors of the Chinese economy are overleveraged. Excessive amounts of leverage now could spell trouble down the road."
He points out that loans to consumers are equivalent to less than 20 per cent of Chinese GDP, well below the 97 per cent ratio found in the United States at present. The very immaturity of Chinese capital markets – and the relative difficulty of securing a mortgage or other forms of credit locally – means there is little chance of the Chinese household sector "blowing up" in the manner seen in the West.
In terms of Chinese business, Bryson says when looking at individual sectors, he have found few signs of excessive leverage. Bryson's conclusion is that Chinese leaders really have learnt from their policy mistakes in the past. The government has, quite literally, got better at implementing its "command/control" model.
But the Wells Fargo man also warns: "Given its success in engineering a "soft landing" in the last cycle, the government may feel confident that it can clamp down again when the appropriate time comes. However, determining when the appropriate time has arrived could prove difficult. Global growth probably will be sluggish over the next year or two, and the Chinese government could keep the lending taps open to ensure that real GDP growth in China remains supported. If credit growth remains robust for an extended period of time, a number of ill-advised loans surely will be made. These loans could eventually come back to haunt the Chinese government."
But we must ask: is China the next bubble? "If it is, we probably are in its very early stages," Bryson says. "If we had to list five things that keep us lying awake at night, worries about the imminent bursting of a credit-fuelled bubble in China would not be on that list. That said, if Chinese credit growth remains unabated over the next few years, our nights may eventually become more restless."
So maybe Bryson should catch up with his sleep while he still can.
Click here for graphics.
- Paul Murphy is associate editor of the Financial Times
Keep up with the latest business news from the region with the Emirates Business 24|7 daily newsletter. To subscribe to the newsletter, please click here.