China: China's reported growth rate of 8.9 per cent in the third quarter is pretty impressive - even if it wasn't a big surprise to the market. The world’s third-biggest economy is clearly enjoying a revival. How this has happened is now a familiar tale. Beijing has commanded banks to lend and local governments to spend, as well as unleashing a $585 billion fiscal boost to plug the gap left by falling exports to the West. The achievements of these policies are laudable, but they bring with them an inflationary threat.
While China’s economy is pumped up, any declaration of a full recovery would be premature. Net exports and consumer prices are still falling year-on-year, so it’s too soon to stop the stimulus. And yet asset bubbles are starting to form. Residential property prices in Shanghai and Shenzhen have increased almost 50 per cent in a year. The Shanghai stock market, while nowhere near its valuation peak in 2007, has risen two-thirds so far in 2009. Policymakers need a plan. The usual tool for fighting inflation is higher interest rates, but in China that won’t do. The lending habits of state-controlled banks, not rates, dictate liquidity. Borrowers have been lured by the availability of credit more than its low cost. Nominal policy rates are barely below their ten-year average, according to an HSBC analysis.
Higher rates might even damage the recovery. They would put strain on companies that have borrowed from banks but remain inches from distress, making them vulnerable to a second dip in demand.
That leaves Beijing with a more awkward alternative: a patchwork of curbs and controls to keep the economy growing at a controlled pace. The state council is already asking banks not to lend to industries like steel and cement that suffer from overcapacity. Market controls of old may also be reinstated, such as stricter mortgage lending restrictions and stamp duty increases on share trades.
Each new control is a step back from the long-term goal of establishing a functioning financial market that is self-calibrating. It’s unfortunate that while other governments consider their exit strategies, the Chinese authorities look set to get their tentacles stuck ever deeper into economic macro- and micro-management.
