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The fundamental reason why money is tight is that Beijing is now starting to let the economy adjust. Then Premier Wen Jiabao did not allow adjustments when the global downturn hit China in 2008. His successor, the newly installed Li Keqiang, is starting this critical task. "Their choice is not whether to tighten or not, but when to tighten," says Zhang Zhiwei of Nomura. "The earlier they act, the lower the cost. If they waited longer, there would be more bad loans to deal with." The oft-quoted Zhang makes it sound as if China is starting early. The new premier, to his credit, is starting in the first days of his tenure as premier, but Beijing should have begun tightening long before he was formally installed in March. The primary constraint Premier Li faces is China's massive debt. Total credit looks like it reached an incredible 198% of GDP by the end of last year. By 2015, that number will hit 245%, according to Francis Cheung of leading brokerage CLSA Securities. Fitch Ratings has just sounded an extraordinary warning on China's credit creation. Li Keqiang has few options, and none of them are good. True, he can avoid a day of reckoning by just continuing the lax monetary policy. That course, however, aggravates the underlying debt problem by keeping money cheap and thereby permitting even more bad investment decisions. China has long passed the point of diminishing returns when it comes to debt. In 2007, Wen Jiabao created 83 cents of gross domestic product for every dollar of credit he authorized. Today, Premier Li gets just 17 cents of output for every dollar.
The oft-quoted Zhang makes it sound as if China is starting early. The new premier, to his credit, is starting in the first days of his tenure as premier, but Beijing should have begun tightening long before he was formally installed in March.
The primary constraint Premier Li faces is China's massive debt. Total credit looks like it reached an incredible 198% of GDP by the end of last year. By 2015, that number will hit 245%, according to Francis Cheung of leading brokerage CLSA Securities. Fitch Ratings has just sounded an extraordinary warning on China's credit creation.
Li Keqiang has few options, and none of them are good. True, he can avoid a day of reckoning by just continuing the lax monetary policy. That course, however, aggravates the underlying debt problem by keeping money cheap and thereby permitting even more bad investment decisions. China has long passed the point of diminishing returns when it comes to debt. In 2007, Wen Jiabao created 83 cents of gross domestic product for every dollar of credit he authorized. Today, Premier Li gets just 17 cents of output for every dollar.
Bank of China Ltd. (3988) announced on its microblog that it made all payments on time today and has never had a capital default. A spokesman for Industrial & Commercial Bank of China Ltd. (601398) declined to comment on whether the lender received any financing from the central bank. Maturing notes added a net 28 billion yuan to the financial system this week, down from 92 billion yuan last week. Chinese banks need to step up efforts to support economic reforms and do more to contain financial risks, the central government said yesterday after a meeting led by Premier Li Keqiang. "The market's move is not just because of liquidity but due to a policy stance that won't change," said Zhou Hao, a Shanghai-based economist at Australia & New Zealand Banking Group Ltd. (ANZ) "After Li's statement yesterday, the market now sees the crunch lasting longer. Until after mid-July, liquidity won't get better significantly."
Maturing notes added a net 28 billion yuan to the financial system this week, down from 92 billion yuan last week. Chinese banks need to step up efforts to support economic reforms and do more to contain financial risks, the central government said yesterday after a meeting led by Premier Li Keqiang.
"The market's move is not just because of liquidity but due to a policy stance that won't change," said Zhou Hao, a Shanghai-based economist at Australia & New Zealand Banking Group Ltd. (ANZ) "After Li's statement yesterday, the market now sees the crunch lasting longer. Until after mid-July, liquidity won't get better significantly."
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