A while back on one of my earlier postings I wondered whether one of the first acts of Wang Qishan, the country’s new economic czar, might be the try to reduce capital inflows by more rigorously enforcing capital controls. I really didn’t think this kind of administrative response to a monetary problem would be likely to work for more than a few weeks, but this kind of strategy does seem to mesh with the bureaucratic instincts typical of government officials.
I have no idea if this is in fact part of his plan of attack, but clearly someone out there is worried about illegal capital inflows. In the “Comments” section of my last posting one of the readers, he uses a pseudonym but I suspect it is one of my former students now trading at one of the large banks, left me this message:
I saw this sign while I was at a golf resort with a friend in Shenzhen last week: due to SAFE’s requirement, starting from April 1, all golf clubs in Shenzhen are not permitted to accept HKD.
Ouch! When the State Administration of Foreign Exchange starts interfering with the ability of China’s business elite to pay golf club dues with unwanted foreign currency, you know that things are getting just a little out of hand. What next? When they start telling me that I can’t use $100 bills to light my cigar but instead must use large-denomination RMB bills, I guess it’ll be time to panic.
Meanwhile the fight against inflation continues. According to today’s Bloomberg:
The government this month ordered state-owned Sinopec Group and China National Petroleum Corp. to boost fuel supplies to end shortages. Demand has increased since factories reopened after the Lunar New Year holiday and because of reconstruction work prompted by the worst snowstorms in half a century.
The article reports that in order to ease the fuel supply shortages that are spreading around China the country’s oil refiners have been told to reduce production of things like liquefied petroleum gas and propylene in favor of increasing the production of gasoline. I am not an expert on the subject but I wonder if the switch (besides causing losses at the refiners, who have to switch out of the production of goods with no price controls and into the production of goods whose prices are set way below costs) will have any real impact on inflation. It might simply cause the cost of those other goods to rise. For an orthodox economist this may be a text-book illustration of the consequences of price controls: shortages plus price hikes in related products.
China Daily is also listing anti-inflation measures. In an article today they report that the government is taking steps to boost agricultural production as a way of cooling inflation:
China promised on Wednesday to increase financial support for agricultural production as part of a larger effort to cool an inflation surge blamed on food shortages. “Reinforcing agriculture has a pivotal role in maintaining sound and fast economic development, curbing inflation and safeguarding stability,” the State Council, or the Cabinet, said in a statement.
The Cabinet agreed in an executive meeting chaired by Premier Wen Jiabao that China would “immediately” increase the subsidies for farmers’ purchase of production materials and seeds, and raise the government’s purchasing prices of grain.
I definitely think it is a good idea to provide farmer support if this helps the government’s income redistribution strategies, but I am not sure that it is likely to have much impact on food prices this year. Of course I am not a farmer, but I would guess a food-production incentive – even if it became effective immediately and resulted in cash outflows tomorrow – would still take several months, and perhaps even a year, before it actually resulted in higher food production.
None of these reports give me much comfort that inflation is going to come down. One analyst who like me has been persistently bearish about inflation prospects is Dong Tao at Credit Suisse. In his report today he mentions the “surprising” fact that reserves were up $119 in the first two months of 2008:
China’s foreign exchange reserves had a surprisingly strong surge over the first two months of this year, according to China Business News. This Shanghai-based newspaper suggested that China’s FX reserves increased by US$61.6bn in January and $57.3bn in February, raising the total FX reserves to $1.65tn. If the numbers are confirmed, that would make them the highest and second highest monthly increases in FX reserves. The increments were roughly about 26% of the total increase in 2007. China’s FX reserves accumulation was very rapid during 1H07, but had moderated in 2H. China Business News is known for leaking out unreleased data, that, in most cases, were proven correct later on. The People’s Bank of China and the State Administration of Foreign Exchange usually reveal quarterly FX data only, although from time to time government officials do cite monthly numbers.
After trying to list the known components of the surge he then draws the same conclusion Logan Wright and I drew when we first saw these numbers six days ago (I guess we were a little quicker on the draw to get the information): “Still, the surge in reserves is too large for us to explain; if the data are proven to be true, there might have been acceleration in hot money inflows.” He then concludes with something with which my readers knew I would concur:
The latest FX reserves data would add more pressure on RMB appreciation, in our view. While we do not see any imminent (i.e., in the next couple of weeks) one-off currency revaluation, that risk is on the rise in the medium term. With limited space for maneuver in interest rates amid a global easing cycle, as well as the rising inflation threat, it is our view that Beijing will lean more towards the exchange rate as a monetary policy tool.
On a slightly different note, there was a time – until last summer, basically – when I spent a lot of time worrying on this blog about problem loans in the banking sector. The acceleration of inflation and the upsurge in anxiety among the financial authorities has sort of pushed non-performing loan concerns into the back pocket, but of course that doesn’t mean that concerns about the health of the banking system are no longer relevant.
They are, more than ever, I think. One almost inevitable consequence of the wild and accelerating monetary expansion we have witnessed in the past few years is a tendency for bank loan portfolios to become increasingly risky, and I am more worried than ever that a sharp slowdown will cause a surge in non-performing loans.
I was reminded about this by an interesting article by Jake van der Kamp in today’s South China Morning Post. He mentions a report claiming that “the bad debt ratio of leading mainland banks could fall to 5 per cent this year from 6.2 per cent last year, China Banking Regulatory Commission chairman Liu Mingkang said in Hong Kong yesterday.”
Van der Kamp comments”
I can tell you that six years ago the central bank governor said that 25.37 per cent of the loans at the four biggest state-owned commercial banks were non-performing, which makes 6.2 per cent last year look very good. Things seem to have improved dramatically. But stop and think about this. Banks do not keep non-performing loans on their books forever. If borrowers still cannot make interest payments after a stipulated period, then lenders write these loans off or, as has too often happened on the mainland, saddle the central government with them.
I do not know what the average period on the mainland is between first classifying a loan as non-performing and finally writing it off, but it is definitely a good deal shorter than six years. The 6.2 per cent non-performing ratio last year must therefore represent relatively fresh lending that has gone sour rather than the rump of old loans that are still not being serviced.
And this I certainly find difficult to understand. How can the financial system of an economy that has registered double-digit annual growth rates for the past six years have any non-performing loans? You may say that there are always a few borrowers in any system who cannot repay their borrowings but they must be precious few in an economy that has expanded by 80 per cent in real terms in just six years. If not, their bankers must be spectacularly incompetent.
…You just have to ask the question. If this is what it was during the best possible times for financiers, what might it be during bad times?
Good question, and one that many of us have asked. There is an old banker’s saying that I have repeated here often enough: Bad loans are made during good times. I doubt that this time will be much different.
