Analysts fear China financial crisis China’s inflation rate picked up slightly in December but remained sharply below the official target, signalling persistent weakness in the world’s second largest economy as a US investment bank warned that a credit crunch in China is “highly probable” this year. Annual consumer inflation edged up to 1.5% last month from 1.4% in November, according to the National Bureau of Statistics, still less than half the 3.5% target. Economists said there was a chance China could slip into deflation, increasing the likelihood that policymakers at the People’s Bank of China would respond by further cutting interest rates. The Bank cut rates for the first time in more than two years in November in an attempt to boost the economy. “Deflation this year is definitely a risk,” said Minggao Shen, economist at Citi in Hong Kong. “We continue to argue that deflation provides more room for policy easing.” Economists polled by Reuters are predicting China’s annual economic growth slowed to 7.2% in the fourth quarter, the weakest since the depths of the global financial crisis. Full-year growth is expected to be below the official 7.5% target. Bank of America Merrill Lynch predicted that a credit crunch in China is highly probable this year as slowing economic growth prompts a surge in bad debts. Chinese president Xi Jinping this week trumpeted the “new normal”, referring to slower growth as the government tries to rein in the credit boom – which has led to a debt of $26tn – and rebalance the economy from its overreliance on exports and investment towards consumer spending. Bank of America Merrill Lynch strategists David Cui, Tracy Tian and Katherine Tai argue: “Few countries that had grown debt relative to GDP as fast as China did over the past few years escaped from a financial crisis in the form of significant currency devaluation, major banking sector recap, credit crunch and/or sovereign debt default (often a combination of these).” The analysts believe the government has unlimited resources to bail out banks and other organisations as the debts are mostly in renminbi, and the country’s central bank can always print more money. They argue: “We suspect that the most likely scenario for China is a bad debt surge as growth slows, followed by a credit crunch in the shadow banking sector as investors become risk averse, and followed by a major financial system recap engineered by the government with the People’s Bank of China playing a central role.” The US investment bank’s research report– “To focus on the three Ds: Deflation, Devaluation and Default” – notes that China had to pump money into the banking sector to the tune of 15% of GDP in the mid 2000s after a smaller debt surge in the late 1990s. Beijing is expected to come up with more stimulus measures to avert a sharp economic slowdown which would trigger a wave of job losses and companies defaulting on their debts, after the People’s Bank of China cut interest rates for the first time in over two years in November. However, China’s economic planning agency on Thursday ruled out a repeat of the fiscal stimulus programme started in 2008. China will publish 2014 growth figures on 20 January that are set to miss the government’s economic target for the first time since 1998. Economists forecast the country grew 7.3%, below the target of 7.5%, with growth likely to slow further this year. world.einnews/article__detail/243541771?lcode=3uGspiZFt8f-4e_zd_UHvw%3D%3D
Posted on: Sat, 10 Jan 2015 06:19:59 +0000
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