Emerging Markets Weekly
China's economy is starting to run hot again thanks to a significant fiscal and monetary boost over the past six months. Lending jumped by roughly 30% in March and April, a total of US$758-billion in new bank lending in the first four months of the year.
The positive implication of the loan expansion is economic recovery. Steel production ramped up in earnest at the end of the 2008, rising by 24% since late December. The retail autos sector has also rebounded -- nearly doubling in monthly sales volume since last summer.In fact, China is experiencing a broad-based economic recovery with the exception of the export sector. The manufacturing purchasing manager's index fell off a cliff late last year with the collapse in exports but now points to economic expansion.
Investors concerned that the major rise in lending could lead to a banking crisis are misplaced however. The banking sector was very well capitalized heading into the current downturn according to Peter Bottelier, Senior Adjunct Professor of China Studies at John Hopkins Univeristy in a recent conversation; non-performing loans will obviously rise says Bottelier but will not lead to a US style banking problem. For one thing, the consequences of this rampant loan growth are potentially more benign for China than for the developed world because private sector credit penetration is obviously far lower in China.
Moreover, China has already undergone effective bank recapitalization this past decade in China as a result of bad loans to unproductive state owned enterprises in the 1990s. These non-performing loans across China's banks were estimated to be as high as 40% of total loans outstanding. To fix the problem, authorities disposed of the non-performing loans by transferring them to four government funded asset management corporations (AMCs), a version of the much vaunted Swedish model that was used to fix that country's banking system in the early 1990s.
China's banks were again cleared of bad loans and recapitalized prior to public stock flotations in 2005 and 2006. Since that time, banks balance sheets have looked better than ever and non-performing loans (NPL) plummeted. The ratio of NPL to total assets for China's largest banks was down to 2% in April from over 12% in March, 2005.
We continue to believe China will lead the world out of the current economic crisis and current data confirms our view the current excessive rise in bank lending notwithstanding.
The positive implication of the loan expansion is economic recovery. Steel production ramped up in earnest at the end of the 2008, rising by 24% since late December. The retail autos sector has also rebounded -- nearly doubling in monthly sales volume since last summer.In fact, China is experiencing a broad-based economic recovery with the exception of the export sector. The manufacturing purchasing manager's index fell off a cliff late last year with the collapse in exports but now points to economic expansion.
Investors concerned that the major rise in lending could lead to a banking crisis are misplaced however. The banking sector was very well capitalized heading into the current downturn according to Peter Bottelier, Senior Adjunct Professor of China Studies at John Hopkins Univeristy in a recent conversation; non-performing loans will obviously rise says Bottelier but will not lead to a US style banking problem. For one thing, the consequences of this rampant loan growth are potentially more benign for China than for the developed world because private sector credit penetration is obviously far lower in China.
Moreover, China has already undergone effective bank recapitalization this past decade in China as a result of bad loans to unproductive state owned enterprises in the 1990s. These non-performing loans across China's banks were estimated to be as high as 40% of total loans outstanding. To fix the problem, authorities disposed of the non-performing loans by transferring them to four government funded asset management corporations (AMCs), a version of the much vaunted Swedish model that was used to fix that country's banking system in the early 1990s.
China's banks were again cleared of bad loans and recapitalized prior to public stock flotations in 2005 and 2006. Since that time, banks balance sheets have looked better than ever and non-performing loans (NPL) plummeted. The ratio of NPL to total assets for China's largest banks was down to 2% in April from over 12% in March, 2005.
We continue to believe China will lead the world out of the current economic crisis and current data confirms our view the current excessive rise in bank lending notwithstanding.
Posted at
5/29/2009
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