China Herald: lending

Tuesday, December 06, 2011

Relaxing money lending is the wrong policy - Shaun Rein

Shaun Rein

In a surprise move China's financial authorities decided last week to abandon their tight money lending policy and losend the reigns for its banks again. Wrong policy, says business analyst Shaun Rein in CNBC, who has been praising the government handling of inflation and overspending in the past. Shaun Rein:

The net result [of past policies] is that China has so far staved off the worst of the world's economic ills. Retail sales have grown 16-18 percent annually. The stock market almost doubled from its lows, and GDP has grown around 9 percent annually.

China’s good times, however, might end after a major policy mistake by the central bank last week that could spur rampant inflation and trigger a speculative and very dangerous bubble in the real estate sector. The central bank dropped the reserve ratio requirement for banks by 50 basis points,signaling an end to the tight monetary policies needed to stave off inflation...

By loosening the monetary policy so early, China’s central bank also sent the signal to local officials that real estate would continue to be a major revenue stream – both by land sales and tax revenue. This is unhealthy as far too many local governments generate the majority of tax revenue from the real estate sector. This reliance on easy tax revenue has stopped them from promoting actively enough small and medium enterprises, which should be the backbone of job creation.

The central bank should have kept a tight monetary policy not just to stave off inflation but also to send a clear message to real estate developers, speculators, and local officials that the real estate sector cannot play such an outsized role in the economy.

More in CNBC

More links to Shaun Rein opinions on China's economy in Storify

Shaun Rein is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

Why Obama triggers a trade war with China - Shaun Rein (chinaspeakersbureau.info)
China should not become Europe's white knight - Shaun Rein (chinaspeakersbureau.info)
Europe split on how to deal with China - Shaun Rein (chinaspeakersbureau.info)
Only Europe can save Europe, not China - Shaun Rein (chinaspeakersbureau.info)
Ambassador Nicolas Platt endorses "The End of Cheap China" - Shaun Rein (chinaherald.net)
Global brands must to local to win - Shaun Rein (chinaspeakersbureau.info)

Friday, November 18, 2011

China should not ease lending too fast - Victor Shih

Victor Shih

Dropping inflation, a bumper harvest, falling food prices and other good financial news does not mean China's financial institutions should leave their policies of tight lending, writes financial analyst Victor Shih in the Financial Times. Even though many industries anticipate easier lending soon.

Victor Shih:

The sell side community is already priming for macroeconomic loosening in the form of reserve requirement ratio reduction or even a drop in interest rates.

To be sure, some liquidity would alleviate pressure in many quarters.

The entire Rmb1,000bn railroad construction industry faced mass bankruptcy until the central government ordered banks to lend Rmb200bn to bail-out the Ministry of Railroad and its contractors.

Wen Jiabao had to fly to Wenzhou to order banks to keep lending to small and medium enterprises. Some are hoping that the government will do the same for infrastructure and real estate through more general easing.

Yet, policymakers should think twice before easing too much. Inflation remains high, and food inflation for the year remains at over 12 per cent, which especially high pressure on low income households.

Aggressive general easing, such as a rapid lowering of RRR, would once again build up inflationary expectation in China and international expectation for high commodities prices. China could be back in a high inflation situation in a year’s time. Moreover, any aggressive easing now would render macroeconomic tightening incredible in the future.