The revelation that Chinese banks lent out US$670.9 billion, a full 91.6% of the country’s lending target for the year in the first quarter had some rightfully worried about where that money was going, and if it was being directed into areas conducive to a long-term recovery.
The sharp reduction in lending in April – to US$87 billion from US$278 billion in March – could be seen as a return to a degree of normalcy. Not as far as the People’s Bank of China (PBoC) is concerned. The central bank advocates a continued loose monetary policy on the grounds that a real economic recovery has yet to take hold.
Increased liquidity may help in the short term, but it presents serious long-term risks. A possible non-performing loan crisis down the road has been highlighted by many – not least the PBoC – but it may be the least of China’s problems.
It is an acknowledged fact that China’s industries suffer from overcapacity and inefficiencies, a reality reflected by government consolidation drives. They have had mixed success. The 15-year-old policy to promote the consolidation of automakers has been unable to prevent the proliferation of new companies in the industry. And while steel industry consolidation is finally – and painfully slowly – taking place, overcapacity is likely to amount to nearly one third of total capacity this year.
Readily available liquidity will not help China to overcome these systemic problems. Rather, it may reinforce the worst excesses of state-owned enterprises, channeling investment where little is needed.
An emphasis on investment and growth may also exacerbate a continuing lack of accountability in the corporate sector. For example, plenty of property developers found themselves overextended, but the boost in bank lending – along with bailouts from state-backed entities – has given them a second wind. If these companies aren’t forced to learn their lesson about prudent financial planning the hard way (which may result in some much-needed consolidation as the cowboys are frozen out), will they ever learn it?
There are some encouraging signs in the steel industry, at least. Aware of the risks, and anticipating no pick-up demand in the short term, Beijing has asked banks to scale back lending to steel mills operating outdated facilities. The Ministry of Industry and Information Technology has also called for industry-wide limits on steel.
As important as steel is, however, it is just one industry; the problem of sustainability extends to the broader economy. The PBoC has said new lending has been over-concentrated on government projects and has neglected small businesses. If Beijing hopes to make the recovery stick, that cannot continue.