The unravelling of the Chinese financial system has been predicted on numerous occasions since 2011. The latest social financing numbers from China will do nothing to ease these fears. Shadow lending is rising quickly again.
Nevertheless, the positive structural changes underway in the Chinese economy continue to be underestimated. A sharp rise in wages over the past decade reflects the speed at which China is reinventing itself as a high-tech economy, challenging the US. Alibaba and Huawei have joined Google, Apple and Facebook in the world’s top 10 most valuable technology brands.
The PBoC faces a choice. Previous attempts to slow the pace of lending have largely centred on a variant of cheap, but tight money – ‘lending controls’. They could persist with this framework, but it has been largely unsuccessful. They may be forced to raise rates more quickly if the recent rise in inflation persists. It is ironic: a year ago, pessimists worried that China was slowing due to a failure to reform. The opposite is true: rapid growth in a range of services is pushing wages and the core CPI higher. The PBoC may take the view that a small number of rates hikes now would accelerate the shakeout in ‘zombie’ companies and ensure the current recovery endures. The prospect of a tighter US monetary policy is not deterring equity investors. The same may be true of China.
Summary
- Structural changes in China underestimated
- But lending controls have been largely unsuccessful
- Small number of rate hikes could be positive for economy
