Balance is key

The recent IMF outlook for the global economy may come as a relief for Beijing: It plays down fears of asset bubbles in the country. 

Jörg Decressin, chief of the IMF’s world economic studies division, said that although there were some localized problems in China, the IMF did not see a serious risk of asset bubbles, even as property prices increase and new lending continues to worry officials in Beijing. Earlier, the IMF said in its updated Global Financial Stability Report that the rise in asset prices in some emerging markets could not yet be considered excessive and widespread.

In many ways the IMF is correct. In the property sector, for example, there has been a rapid increase in prices in certain areas – Beijing and Shanghai saw prices rise by 50% in 2009 – but overall demand remains strong. China is still a developing country, and its property sector is much, much more than the sum of Beijing and Shanghai alone. High levels of liquidity contributed to last year’s rapid rise of the stock market as lending boosted both confidence and the amount of cash investors had in their pockets, but China is still well-placed to absorb shocks in what is still a developing and volatile market. 

The IMF believes that these asset price increases are manageable, but the concern remains that China will overreact to worries about excessive lending and an economy growing more quickly than it would like. In doing so, it could undermine not just its own recovery, but the recovery of the global economy as a whole. Beijing has already tightened credit lines in the country by actively reining in lending. As recently as Wednesday it was revealed that Industrial and Commercial Bank of China (ICBC) and China CITIC Bank have ordered some of their branches to halt new loans for the rest of January, this coming off the back of the government’s decision to raise reserve requirements earlier this month. Some banks have had their reserve requirements raised still more in an apparent punishment for over-eager lending early this year.

Some people have been spooked by these actions. In the words of Kathy Lien, director of research at GFT Forex, "Reports that Chinese banks have begun to restrict new loans and the sheer reality of this happening is making traders realize that China is getting very serious about slowing their economy."

They should not be too worried: Few argue that Beijing should not gradually cut back on stimulus and loan growth. But for the health of the Chinese and global economies, it must do so carefully.