[12/7] Tighter Chinese credit policy threatens financial instability.. China’s State Council announced a series of policies last Friday aimed at reducing the country’s vast credit bubble created by the stimulus measures introduced in the midst of the 2008-09 global financial crisis. A credit crunch, however, threatens to trigger a wave of bankruptcies and destabilise the banking and financial system, which is burdened with high levels of bad debt. Although the State Council statement insisted the state-owned banking system would keep the credit supply at a “reasonable level”, it is widely understood in financial circles that the new policy will end the massive injections of credit seen in the past four years. The guidelines indicated support for advanced manufacturing and promising new industries, rather than traditional sectors such as steel and shipbuilding that have huge overcapacities. This will inevitably lead to widespread restructuring, factory closures and mass lay-offs. The Chinese Communist Party (CCP) regime faces a monumental dilemma. Credit ballooned to 200 percent of gross domestic product (GDP) in 2012, or $23 trillion, up from 75 percent of GDP before the global financial crisis in 2008. Local governments, as well as the corporate sector, have stacked up massive debts, which, if uncontrolled, will lead to a financial meltdown. However, the very measures undertaken by China’s central bank to reduce credit last month produced a credit crunch that pushed short-term inter-bank lending rates to record highs (see: “Credit crunch hits China”). The central bank was forced to intervene in the market to prevent the banking system grinding to a halt. Nevertheless, the new policy announced last Friday will significantly restrict credit. According to a survey of economists by US Bloomberg News this week, the cash supply this year will be reduced by $122 billion—a sum equivalent to the size of Vietnamese economy.
Posted on: Fri, 12 Jul 2013 05:44:45 +0000
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