The Chinese central bank has ordered commercial banks to adjust their reserve ratios upward to 16 percent, leaving them unable to lend out some of their money. The central bank has also increased the interest on inter-bank loans and short term treasury bonds.
“These are the first, but unmistakable, signs that the Chinese authorities want to prevent the economy from overheating in 2010,” said Andy Xie, an independent Chinese economist. “Some even predict that the economy will grow by more than 16 percent in 2010 and inflation will go through the roof if no measures are taken.”
The Chinese authorities have acted far quicker than expected; a move mainly explained by the fact that major banks issue most loans in the first quarter of the year.
Stimulus money fed real estate boom
Xie has pointed out the risk inherent in the Chinese stimulus plan that was put together in record time in November 2008, when national and provincial governments started pumping 585 billion dollars into the Chinese economy. Banks were ordered to lend without limits, which they promptly did, providing debtors with 1,500 billion dollars before and into early 2010.
Research by the Chinese Academy for Social Sciences has shown that the government money is mainly being spent on infrastructure projects - China sometimes seems little more than a huge construction site – but that the private loans to enterprise and private individuals have largely been used to finance the purchase or construction of real estate. The Chinese stock market rebounded by 80 percent as a result, and all of China’s cities are still seeing major construction. Data have not been released on the number of loans that went sour.
Xie, himself a resident of Shanghai, said the Chinese government moved too late to prevent rapid inflation in 2010 and especially 2011, which will cause a panic and social disruption. “I think the authorities are lagging behind the curve. They need to slam the breaks on now,” Xie said. He expects the costs of production will rise in China due to a shortage of labour and rising real estate prices.
Inflation will skyrocket
Xie thinks inflation will rise to as much as 20 to 25 percent in the coming years. Inflation, currently at 0.6 percent, might seem well under control in China, but almost every economist employed by Hong Kong’s think thanks and business banks predicts it will go up fast in the coming months.
Salaries and real estate prices are on the increase, and in all major Chinese towns the apartment market is in a frenzy. Prices of newly constructed flats only rose by 7.8 percent nationally between 2008 and 2009, but in major cities by more than 60 percent. This year, prices are expected to go up 10 percent nationally, and again by 60 percent in the major cities. Economists all over china are worried about the real estate bubble.
“Still, we don’t expect the monetary authorities to put the brakes on by raising interest rates and stopping banks from lending entirely,” economist Wang Qing of the Morgan Stanley business bank in Hong Kong said. Morgan Stanley expects that the Chinese authorities hope to achieve a 10 percent growth rate in 2010, as do most other international banks and organizations.
Only economists with the Chinese Academy for Social Sciences, colossal government think tank, expect 11.6 percent growth. “We think the growth will be tapered slowly and carefully, in very small steps. There will be no brake-slamming,” Wang Qing said.
China will soon be second world economy
From a political perspective, such a move would not be expected. In 2009, China became the biggest car market in the world, with 13.6 million sold. It also overtook Germany as the largest exporter of goods. Exports rebounded in the last months of 2009 by 17.7 percent. Imports grew by 55 percent. The latter figure offers particularly strong evidence of an upswing in Chinese production.
China will overtake Japan as the second largest economy in the world, after the US, this year. Together, these results are a source of national pride, and they strengthen Chinese leaders in their conviction that the Chinese model of socialism has succeeded where Western capitalism has failed.
The only drawback to Chinese growth, the state media report, is the increase in the number of corrupt party functionaries. In 2009, some 100,000 officials, party secretaries and executives, including a few ministers, were fired, transferred or suspended for abuse of stimulus funds. Not a day goes by without the Chinese media publishing stories about party secretaries dining lavishly or treating their relations to visits to casinos and brothels.
But in a party with 70 million members, in a country of 1.3 billion (or perhaps even 1.5, as this year’s census may show) that is small price to pay.
