Why China’s Loan Spike Matters
China has long been known for its cost-effective mass-production of goods for the rest of the world. Meanwhile, its culture, in general is one of saving. It raises eyebrows that following the fallout of the Hang Sen market crash in 2015, that now lending in China has spiked.
It has far-reaching ripples that rattle investors even more. The concern is that the country’s money, a source of stability to any nation, is teetering on collapse.
The number one rule of politics, economics, the markets, or anything in life, is not to pander to any fear mongering. Instead, it is wise and important to put the lending situation in China into perspective.
Imagine The Wealthy Chinese Reaction
Again, China is a nation of savers. If they lose faith in their own monetary system, they will not dig a hole, and hide their heads. They still have money. It is just a matter of where they will invest that matters.
Talking about billions of people with savings means that collectively they could have a tremendous buying power throughout the world. In fact, that is one concern the People’s Bank of China has about the market crash.
What happens when the Chinese look to invest internationally is interest rates at home might have to increase to prop up the yuan, its currency.
The lending that is going on could actually be a sign of the nation’s bank performing some expected behind-the-scenes efforts — pumping money into the system. What investors were not expecting was the 73 percent increase in financial support. The total financing was 3.42 trillion yuan. Trillion. You read that right. It is the equivalent of 520 billion U.S. Dollars.
It seems, China’s government is underpinning growth at a rate of 13 percent versus last year, which is double its normal gross domestic product expansion.
In principle, this was a more prudent way for China to let liquidity into its system than cutting the reserve ratio requirement for banks—a more structural and less flexible measure which the markets had been calling for since before Chinese New Year.
The excess liquidity needs to be reeled in before it causes a catastrophe to its economy and the world. That’s what most would come to think, anyhow. For one, the first reassurance is the fact that China has hundreds of trillions of yuan to toss into its economy so readily. In the big picture, such a support of money may reflect a transition stage, where China may have outgrown its dependence on investment. That means it may be jumping into a diversified climate where the Chinese are ready to become consumers. The nation’s policymakers perhaps shying away from necessary changes to create a sustainable and steady plan for growth.
Leverage Of Long-Term Loans
Others are looking at the length or terms of the loans China made. They were long-term and medium in length, which is not a sign of desperation, as some made it seem. Compared to other similar economic climates, this type of lending is considered a healthy sign of recovery.
This is one time that may not be happening. Here is why. There is an apparent economic slowdown where the investment-driven economics are no longer working for China. Consumption is now more important.
Some of the lending could proabbly be attributed to companies and banks wanting to make and receive loans. While it seems unlikely that all the companies in China collectively would require hundreds of trillions of yuan in loans all at the same time, the central government is pressuring its state-owned enterprises and the localized governments to borrow money as a means to boost growth. This would again only account for a minute segment of the trillions that were released into the economy.
The banks could also be playing a role in halting the potentially devastating effects of a systemic default. Increasing the flow of credit eases the burden on state-owned operations that are running at a perpetual loss. This appears possible given the substantial increase in credit and CHina’s record drop in the growth of its gross domestic product. While it is nominal GDP growth it is still a downward signal from China, which has long been the manufacturer for the world. Meanwhile, what also supports this notion is that there has been an ongoing long-term lag in the service sector. In general, there had been almost no credit demand.
Something else is afoot beyond borrowing, and beyond the people switching to becoming consumers. An additional transition is probably occurring from a US-dollar-based-loans to a switch to its native currency. It is a protracted devaluation of the yuan. Overall, what this means for the yuan and the financial system is actually neutral or positive impact going forward. This is both from the perspective of the economy as a whole as well as on China’s financial system.
The complexity of China is in its close and integrated duality of state-run companies and government-run banks. It is challenging the country’s need for a more open economy. This might explain — at least partly — the huge increase in lending. The nation opened up financially and poured money into the economy. Now it is easy to see why the potential reasons for this huge increase in lending is not that a warning sign, but a sign of growth.