Warning on China

China's Economy Facing Risks, Warn Officials
Dexter Roberts
BusinessWeek
January 5, 2009

More signs that China’s red hot economy is facing potential problems: on a central bank-run website called China Finance, People’s Bank Governor Zhou Xiaochuan warned yesterday that industrial overcapacity could “pose a risk to the quality of bank loans.” Even so, China will continue its “moderately loose” monetary policy, Zhou wrote. Yes, there is a tension there: even while Chinese officials recognize the risks of their pump-priming policies, they are far from weaning China off of them. Domestic consumption today still only accounts for about one-third of GDP so investment remains a key driver.

Chinese officials have expressed concern for some time about the risks of industrial overcapacity in a range of industries including steel, aluminum, glass, and wind turbine equipment. China’s massive lending boom of more than $1.3 trillion in new loans last year has helped keep mainland economic growth strong, but also contributed to excess capacity in at least six industrial sectors, China’s National Development & Reform Commission announced last year. Bloomberg BusinessWeek wrote about the rising chorus of concern in early December.

Also alarming: the prospect that China’s lending boom could be helping inflate unsustainable assets bubbles in stocks and particularly real estate (see Bloomberg BusinessWeek’s December 30 piece on that here).

The worry is that asset bubbles too could raise the risk of bad loans cropping up in China’s banks. In a commentary in Bloomberg published yesterday, Liu Mingkang, chairman of the China Banking Regulatory Commission, wrote that “with the strong rebound in real estate and stock markets, structural bubbles also threaten to emerge.”

But in the same commentary Liu also stated that China’s banking system is “now more than adequately capitalized.” Liu continued by outlining steps his agency has taken to ensure banks remain strong: “When overcapacity was detected in certain industries or regions, we issued directives to alert banks to the potential risks associated with relevant project financing. Similarly, when we found bank loans were channeled into the property or stock markets for speculative trading, we stepped in to stop that.”

Those are certainly important moves, but concerns remain. Fitch Ratings warned in December that off-balance sheet transactions and the resale of bank loans to other financial institutions both were rising risks to China’s banking system. Central bank governor Zhou’s comments published yesterday are just the latest warning.