domingo, 26 de octubre de 2014

domingo, octubre 26, 2014
Review & Outlook

China’s Missing Business Cycle

A slowdown will make the real health of the economy clearer.

Oct. 22, 2014 7:03 p.m. ET

China's former central bank governor Dai Xianglong speaks at an international forum on China and globalization on June 15, 2000 in Beijing. Agence France-Presse/Getty Images 


News that China’s GDP grew at 7.3% in the third quarter, its slowest rate since early 2009, is stirring renewed fears about the health of the world’s second-largest economy. As euro-zone economies flail and the U.S. recovery underwhelms, most analysts don’t want to think about China falling out of bed.

So they aren’t. The consensus view among China-watchers is that the country has undergone a shift into a slower phase of its development. Having banished the business cycle, Beijing will maintain steady growth, albeit at a slightly less blistering rate.

It’s true that the last time China’s economy slowed for a significant period was more than a decade ago. But there is good reason to suspect that the wise men of Beijing haven’t repealed the laws of economic gravity. In particular, the costs of state-directed growth are emerging in the form of an enormous debt overhang from the post-2008 credit binge.

Beijing can still goose investment at critical moments and try to engineer a soft landing. The central bank has recently eased credit controls and injected liquidity into the banking system, leading to an uptick in new lending in September. Supreme leader Xi Jinping also laid out a creditable program to reinvigorate economic reform at last November’s Third Plenum meeting. Privatization of smaller state-owned enterprises continues and private firms are increasing their share of the economy.

Yet most of the reform initiatives have erred on the side of caution, or have been mainly cosmetic.

More worrying is the way the financial system has reverted to statism over the last six years as the government encouraged banks to lend and corporations to borrow.

China’s credit statistics now look strikingly similar to those of Japan in the late 1980s and South Korea in the mid 1990s. When catch-up growth based on urbanization and imported technology falters, the East Asian development model encourages the use of leverage as a substitute fuel.

That can lead to a balance-sheet recession or even a financial crisis. Once a slowdown starts, problem loans come to the surface. There is some evidence this is happening in China, although the totals remain relatively small.

One reason Chinese banks look healthy is that the government continues to bail out failing companies and local governments rather than let them default. The latest example is the troubled solar-panel maker Chaori, which was rescued by a state-owned firm this month. The aptly named Great Wall Asset Management guaranteed 788 million yuan ($129 million) of Chaori’s bonds.

Beijing might be able to engineer and finance another restructuring of the banking system to avert a crisis. But as with the last bank recapitalization in the early 2000s, wiping the slate clean involves warning the banks that this is their proverbial last supper. With no more easy credit to prop up growth, China will have to reconcile itself to the vicissitudes of the business cycle.

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