It is not often that we get a chance to test theories, at least not when it comes to the economy. But we have such a chance right now, and it relates to China, and whether or not China is experiencing its own credit crunch, or something altogether less serious.
Critics of Mervyn King and Ben Bernanke said that they misread things before the crisis of 2007/08 erupted. These critics say that during the build-up of the credit bubble, central banks should have hit the brakes, and upped interest rates. In short, like the very best party pooper, take away the punch bowl just as things start to get going.
Right now, in China, it appears that the central bank – presumably under instructions from the government – has taken away the punch bowl. The markets don’t like it, but then maybe on this occasion that is how it should be.
The interbank rate in China – that is the interest rates at which banks lend to each other –has soared. Déjà vu say those who recall what it was like in 2007 and 2008 in the West, when the words credit and crunch first started to appear in the same sentence.
It is just that some say China is not at that stage yet. Sure, signs of a credit bubble are clear, but it is not like the UK and the US during the height of their bubble – not yet.
The People’s Bank of China, or PBC, published a note last week saying: “Liquidity for the banking system as a whole remains at a reasonable level.” And since the PBC tends to follows the dictates of government, it is generally assumed that is the view of China’s government too.
China’s State Council recently stated: “We must promote financial reform in an orderly way to better serve economic restructuring.” Again, this suggests the government wants to rein back all that borrowing.
There is one major difference between China’s credit bubble and the one we experienced in the West. In the economy behind the Great Wall, it is local government and state owned companies that are hitting the credit button.
What China needs is for less money to be thrown at investment projects and more to trickle down into wages. In the case of China, squeezing credit may boost consumer spending – in the long run at least. It is all part of the process of adjustment China must go through as it shifts from investment to consumer led growth.
China’s government appears to understand this.
Interest rates are going up – at least that’s the way it looks. They are going to go up in the US, as the Fed has suggested, and they appear to be rising in China, as the government wants.
In the case of the US, if rates rise it will be because of good news on the US economy. If they rise in China, it is because the government is trying to learn from the lessons of Alan Greenspan and Ben Bernanke.
© Investment & Business News 2013