Column: China may still prevaricate

Feb 12 2014, 02:22 IST
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SummaryChina’s stressed financial system is out of control with new credit creation expanding at a frightening pace

The Chinese authorities’ ‘plan to have a plan’ to reform and rebalance the Chinese economy finally delivered the expected ‘plan’ following the completion of the CCP’s so-called Third Plenum. While much of the media, not least the foreign, faithfully repeated the expected clichés over how ‘sweeping’, ‘ambitious’ and ‘unprecedented’ the reform blue-print is, the bulk of it is old wine in new bottles. As we stressed following its release, much of the plan simply regurgitates language and reform aspirations that the authorities have been mulling, and prevaricating over, since at least the 11th Five Year Plan which was drafted back in 2005. Key objectives then included rebalancing GDP growth away from excessive reliance on investment and boosting consumption, the ‘construction of market-based economy’, greater openness to foreign competition and an urgent five-year programme of financial reform including reform of the state banks, interest-rate liberalisation and progressive capital account liberalisation.

Reforms can no longer be delayed given both the scale and the urgency of the challenges now faced. There can be little doubt that 2013 was a deeply disappointing year for the Chinese economy. While the authorities would no doubt point to GDP’s expected growth last year of around 7.7% as evidence of a job well done, growth has come at a high cost with the economy’s already wild imbalances and addiction to cheap credit intensifying further. First, and foremost, China’s increasingly stressed and complex financial system remains largely out of control with the pace of new credit creation continuing to expand at a frightening rate. Despite repeated attempts to rein in the so-called ‘shadow banking’ system, the net new flow of credit—Total Social Financing (TSF)—looks on track to register its fifth successive year of growth of

30-35% of GDP. Our estimates imply that the total stock of credit is growing at almost 20% in the final months of 2013. That there has been no decisive cooling in the pace of credit growth is shown by the fact that TSF growth in November was the strongest for that month on record.

Taken at face value, the authorities’ stepped-up reform rhetoric signals that they recognise that further delay only ensures that the macro trade-offs available deteriorate further. But the willingness to take decisive action still remains unclear however. Actions ultimately speak louder than words: the scale and speed of action in three inter-related areas this year will largely determine whether the authorities’ reform blue-print

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