- China has experienced rapid credit-led growth in recent years. This growth has been an important contributor to global economic recovery.
- Many commentators anticipate that the rapid nature of Chinese credit growth, allied to a capital allocation process led by political direction and undertaken at highly subsidized rates of interest, will inevitably end in a credit bust.
- Further, these critics point to the opaque nature of China’s banking system, rapidly growing off-balance-sheet exposures and an overblown real estate sector as evidence of a fragile Sino financial system overdue for a crisis that will, in turn, cripple world growth and extended financial systems elsewhere.
- While we are sympathetic to much of the logic behind these fears, we believe that these concerns float on some flimsy analysis. As one example, we cite the mismatch between the oft-cited story of 65 million empty apartments nationwide in China and the inconvenient truth that market estimates indicate that only 60 million apartments have been completed in the last decade.
- More importantly, we believe that the “panda bears” overlook the fact that much of the expansion in China’s financial balance sheet has been quasi-fiscal lending and that such lending is backed and guaranteed by a system that is experiencing rapid growth in income and starting from a low level of overall debt.
- Domestic savings rates are high — indeed, excessive at over 50% of GDP. While external capital has funded much of the rise in banking system liabilities over the last 12 months, China also runs a current account surplus, is largely domestically funded and lacks many of the vulnerabilities that undid Western credit systems in 2007–08.
- We agree that bad debt levels in China will rise — in fact, in a worst-case scenario, there could be as much as 7 trillion RMB of bad loans in the system at present, according to our estimates. But bank balance sheets are strong, profit growth is subsidized by fixed lending and deposit rates, and economic growth itself should be strong enough to absorb most reasonable estimates of losses without serious challenges to financial system stability.
- Bank deposits are the main source of domestic savings. We are confident that Beijing will seek to avoid social discontent arising from any threat to the security of deposits with vigor and resources that would make Western bailouts appear puny by comparison. Our concern is that savings growth rates will slow over the next few years and that deposit growth will be much more pedestrian than over the last decade. The recent consolidation of data on funding growth under the banner of Total Social Financing (TSF) presents a clearer picture of the efficiency of deposit mobilization in funding growth. Even allowing for shortcomings in methodology, the incremental growth per unit of financing — Financial Incremental Capital Output Ratio, or FICOR, as we term it — has deteriorated over the last decade.
- As a consequence of slower savings rates and reduced FICOR, we expect a slowdown in trend growth over the next few years to 7-8% rather than the 8-10% level of recent times. State-led capital allocation and rate fixing was a feature of both Korea and Japan in the past. In both cases, financial crisis arising from this policy mix was triggered by financial reform. We believe the same holds for China, but will take a number of years to unfold.
Read full report Can China´s Savers save the world
Source: BlackRock / Carral Sierra, 12.07.2011
Filed under: China, Market Data, Risk Management, Uncategorized, BlackRock, China 中国, Consumer Credit, Credit Crisis, Currency, ETF, FX Foreign Exchange, Inflation, Market Analysis, NPL Non Performing Loan, Performance Report, Real Estate, Regulation, Retail Investors, Risk Management
