Wednesday, March 03, 2010

Financial Times Editorial Comment: Moral hazard, Chinese style

Financial Times Editorial Comment: Moral hazard, Chinese style
Copyright The Financial Times Limited 2010.
Published: March 2 2010 20:14 | Last updated: March 2 2010 20:14
http://www.ft.com/cms/s/0/93016f96-262c-11df-aff3-00144feabdc0.html


The world has watched in awe as China has sailed, seemingly without effort, through the worst global financial crisis in decades. In 2009, the economy barely paused for breath, racking up 8.7 per cent growth. This year, Beijing’s challenge is to prevent overheating without slamming on the brakes too hard.

But China’s never-ending-growth story is not magic. It has been achieved through a huge public-sector stimulus, most tellingly a massive expansion of credit by the state-controlled banking system.

Indeed, problems have begun to bubble to the surface. Last week, banks rushed to raise Rmb76bn ($11bn) from public markets to shore up their balance sheets. They will need a whole lot more. Their need for cash has been triggered by state moves to raise banks’ capital requirements, an implicit acknowledgement that much of last year’s unprecedented Rmb9,600bn in lending will turn sour.

An overheated property market and vast overcapacity in industries such as steel have not deterred new lending. Far from it: until the state warned them off, banks were falling over themselves to lend in the first weeks of January. Since the bulk of profits comes from the spread between state-decreed lending and borrowing rates, they have a perverse incentive to lend as much they can, safe in the knowledge that the state stands ready to catch them. Moral hazard is not a solely western phenomenon.

None of this means China’s banking system is about to implode. If fast growth and urbanisation continue, some overcapacity will melt away. A decade ago, the state proved it had the resolve and resources to clean up the financial system. If needed, it will do so again.

But, one way or another, the cost must be met. In the west, the strains of keeping the economy afloat are visible in soaring deficits and sovereign debt crises. In China they will show up on the balance sheets of banks. Just as there is no free lunch, there is no such thing as a free stimulus package.

0 Comments:

Post a Comment

<< Home