China has been very successful in maintaining GDP growth in the midst of one of the worst global downturns on record. In 2009, the concern was how an export collapse would trigger slow growth and unemployment. But as 2010 begins, for the Chinese economy, it is overheating and inflation that most are worried about. Chinese Academy of Social Sciences economists Yao Zhizhong and He Fan are reported to have said:
If the government continues with the same strength of macro-economic stimulus as in 2009, there will be notable economic overheating in 2010.
Indeed, they see growth as high as 16% if government stimulus continues on the same path. There are stories everywhere pointing to galloping inflation and overheating. Below are a few sample headlines from just the past day:
- China faces curse of a too-rapid recovery – Telegraph
- China lending said to jump, fanning overheating fears – Reuters
- Oil price touches 15-month high on demand from China – BBC News
- Chinas Wirtschaft läuft heiß – Financial Times Deutschland
- Schaarste koophuizen in China – Financieele Dagblad
- China Cracks Down on Banks’ Loan – Sale Practice – Wall Street Journal
While this may be a perfect example of herding, I think the financial press are on to something. And the Chinese central bank (PBOC) does as well because it is now taking steps to rein in excessive credit growth.
First, the central bank has increased reserve requirements by 0.5% effective 18 Jan 2010. Bloomberg reports:
Reserve requirements will increase by 50 basis points from Jan. 18, the central bank said on its Web site this evening. The existing levels are 15.5 percent for big banks and 13.5 percent for smaller ones.
Chinese lenders added a record 9.21 trillion yuan ($1.3 trillion) of loans in the first 11 months of 2009, driving an economic rebound after the global financial crisis slashed exports.
These measures were taken because credit growth is through the roof now. There were 600 billion yuan (nearly $90 billion) of new loans granted in the first week of this year alone. That is double the average over the preceding six months.
But the central bank is also increasing interest rates. Last week, the PBOC increased 3-month bill rates by 4 basis points. Today, the PBOC increased 1-year bill rates by 8 basis points above the rate set in August 2009, selling benchmark bills at 1.8434%.
And, to top it off, the PBOC is now aggressively draining liquidity from the credit system. For example, today it sold 200 billion yuan (nearly $30 billion) in 28-day bills, the largest repo operation since 2004.
So, the chorus of media pundits talking about excessive credit growth and bubbles in China are on the mark and now the Central Bank is taking steps to address these problems. The question is whether the expansionary fiscal policy is at odds with this newfound tighter monetary policy. Finance Minister Xie says the government will continue adding stimulus. Let’s see, then, where this heads.