China has lambasted the US for its decision to launch another $600bn in monetary easing, fearing that this round of “quantitative easing” may feed the flood of money rushing into mainland China from overseas. But while capital inflows are a problem for Beijing, there should be no doubt that China’s swelling money supply and resurgent inflation are primarily “Made in China”.
Bank lending – which ballooned to a record Rmb9,600bn in 2000 as China rushed to reflate its economy after the global financial crisis – is looking increasingly likely to bust through the government’s solemnly decreed 2000 target of Rmb7,500bn ($1,130bn), after banks lent an official Rmb6,900bn in the first 10 months of 2000.
China Confidential research suggests that total assets under management by the almost unregulated “private” funds industry – which is centred in Shanghai and typically involves “star” managers investing funds for high net worth individuals – may total as much as Rmb1,000bn. The off-balance-sheet lending by state banks this year was said to have reached at least Rmb2,000bn by the time the China Banking Regulatory Commission announced a clampdown
But this clampdown seems to have been mild. According to figures by the Use-Trust, a trust industry consultancy, the volume of bank-trust lending conducted off the balance sheets of banks totalled Rmb2,000.26bn in the third quarter of this year, up from Rmb1,928.87bn in the second quarter. In October, total bank-trust products sold amounted to Rmb385.22bn, a slowdown from prevailing monthly levels but still significant.
Lastly, according to grassroots research in several provinces, it appears likely that underground lenders have lent strongly during this year as savings exited formal bank deposits, where they earned negative real rates of interest, and were placed with underground lenders offering annual interest rates set at anywhere from 12 per cent to 120 per cent. Total lending from such unregulated institutions may reach about Rmb4,000bn this year.
Thus, though there is likely to be some overlap between the assets of “private funds”, lending from underground banks and the off-balance-sheet loans of state banks, the total assets contained within China’s twilight economy may well be in excess of Rmb6,000bn. If this number is added to the 2000 official lending target of Rmb7,500bn, then it becomes clear that China’s 2000 record lending splurge was no “one-off”.
It is the pressures caused by such ballooning money supply, coupled with various structural influences inherent in the take-off of China’s rural economy, that are the prime causes of inflation, which in October rose 4.4 per cent year on year. Though Beijing may find it politically expedient to shift some of the blame for its predicament on to the US, it is the homegrown nature of inflation that makes it so troublesome an issue for Beijing.
China knows that it cannot bring discipline to its huge, unregulated underground economy without sacrificing growth, and yet unless it grapples with the root causes of money supply, it may fail to tame inflation. With food prices rising by an official 10.1 per cent in October year on year, the rising cost of living is inflaming public passions.
It seems likely that Beijing may respond with many of the weapons in its administrative arsenal. It could raise bank reserve requirements again, impose further controls on prices, strengthen barriers to capital inflows and try to bring as much of the underground financial system as possible into the regulatory fold. It may also decide to raise interest rates. It may well be a turbulent few months for investors amid signs of slowing growth.