Please send in your suggestions…
Here are a few reasons off the top of my head – I will add more when they come to mind:
1. China’s downturn was only partially caused by the US downturn. In 2008 domestic spending was squeezed by higher food and oil prices. These are a higher % of Chinese household expenses compared with the US and EU countries. In 2009, commodity prices are down, easing one constraint on private consumption.
2. Pre-US meltdown, China had a tight credit policy aimed at curbing inflation and preventing overheating (esp in construction and real estate). The US had a lose credit policy. Thus, in 1H09 China was able to increase lending by relaxing its stricter policy.
3. Chinese households have a lower debt burden than their US counterparts. As a result tax reductions and stimulus measures are more readily spendable by Chinese consumers, whereas US households are more likely to save.
Growth spurred by lending
Last week economists were busy increasing their 2009e China GDP forecasts to around the magic 8% figure. The hike in new credit during 1H09 was surely a major contributing factor. During the first half of the year Chinese banks lent a record Y7.37bn, 300% larger than 1H08, and 47% higher than the government’s full-year 2009 Y5bn target.
Walking the tight-rope
The government is walking a tight rope, and will have to manage the economy to prevent assets bubbles, bad loans, and inflation, whilst simultaneously accounting for potential deflation (currently a concern in the US), and damaging shocks to the flow of capital.
President Hu Jintao told the Politburo on Thursday that the recovery was still nascent, and as such China would maintain its “relatively loose” monetary policy and proactive fiscal policy. On Saturday the People’s Bank of China (PBOC) said it “would guide loans to grow appropriately” and “will aim at better allocation of credit in the real economy.
Mopping up liquidity: Y100bn of notes announced
The PBOC has announced the issue of Y100bn of one-year bills to prevent a surge in lending in 3Q (note: July is historically China’s slowest month for new loans). According to Caijing magazine the PBOC has ordered the Bank of China (the county’s third largest lender) to purchase Y45bn of the notes, after the bank lent more than any of its competitors during 1H09. The notes carry 1.5% interest rate (lower than the general 2.25 deposit rate).
Expectation: measured approach – reserve rates to rise
I expect the government and its organs to continue taking a measured and pinpointed approach to ensure growth and suppress bubbles. As well as the new notes, I see banks reserve rates increasing from their current 15.5% for larger lenders, and 13.5% for smaller banks. I see an increase in reserve rates most likely to wait until 2010, unless data for credit extended in July and the coming months exhibits any significant spikes.