CHINA appears to be unshaken by the global credit crunch and its leaders are beginning to see the crisis as nothing less than an opportunity to reorder global finance.
“This crisis hides a huge opportunity for China,” said a comment piece in the People’s Daily. “There will be a reconfiguration of international capital. We believe that the golden key to resolve the sub-prime crisis may be in China’s hands.”
The Chinese bagged one of their first trophies this month when their new sovereign wealth-management fund, China Investment Corporation, secured a $5 billion (£2.5 billion) stake in Morgan Stanley, the wounded Wall Street giant, that will ultimately give Beijing a 9.9% holding.
But the reasons why China has so far avoided the worst of the turmoil are, in fact, bound up with its own economic challenges – too much credit, not too little. Awash in liquidity – cash from individual depositors and corporate export revenues converted into yuan – Chinese lenders have been on a credit binge.
Financial regulators are trying to restrain lending growth but the latest figures suggest they are having mixed success. Widespread corruption involving loan officers, company executives and local-government officials has bedevilled attempts to rein in credit growth, fuelling real-estate and stock-market bubbles. Credit is hard to curb.
On the virtuous side, the Chinese financial system is simpler than its global counterparts. Markets in derivatives and sophisticated instruments are less developed. So there is less exposure to exotic transactions that could get banks into trouble.
Some big Chinese banks have admitted having limited holdings of US sub-prime mortgage securities. They include Bank of China, ICBC and China Construction Bank, Chinese media reported. But financial institutions have been insulated by China’s capital controls and its official restrictions on overseas investments.
“This crisis has rung an alarm bell for the Chinese financial system,” said Fang Gang, a member of the monetary policy committee, quoted by the Shanghai Securities Daily. “Financial innovation carries risk, bubbles burst sooner or later and we should never think that markets only go up.”
If anything, the US property crunch is strengthening the arguments of those Chinese unwilling to open up the economy too fast. “Yes, Chinese enterprises must go abroad, but prudently,” said Liu Chun-hang, of the China Banking Regulatory Commission. “We also need to think cautiously about how to develop assets into securities. That’s why we have a strict risk-management system,” he said, according to the state news agency, Xinhua.
Suspicion of Wall Street’s financial wizardry has also awakened a latent nationalist streak among some Chinese analysts. Gong Yuhuan, an independent analyst, said there had been a rush to copy “American thinking” after US banks bought stakes in Chinese financial institutions.
“Of course, these foreign banks encouraged Chinese banks to buy sub-prime credit securities, thus it can be seen that under the guidance of American economists, China’s financial industry is opening the door to dangerous outsiders,” he said.
China’s rulers have their own challenges in the year ahead: slowing explosive growth and saving its ruined environment.
The Asian Development Bank thinks China will grow 10.5% in 2008 after achieving 11.4% this year. Export growth slowed to 22.6% in the four months from July.
In part that was due to the slashing of tax rebates for manufacturers. But it was mainly the result of a rise of more than 11% by the yuan against the dollar since China adjusted its exchange-rate policy in 2005. Last week the yuan hit 7.31 to the dollar. Some economists predict it will appreciate to about 6.8 by the end of next year.
That may be some consolation for Henry Paulson, the US Treasury secretary, who has been criticised in Congress for failing to achieve results on currency and trade issues despite his reputation as a “China hand” from his years at Goldman Sachs.
Higher costs for raw materials and labour are also putting pressure on the fabled “China price” as factories and foreign buyers fight over margins.
Tightening financial conditions present the Chinese government with a delicate task of balancing growth against inflation, which hit 6.9% this year. The central bank has tightened regulations on mortgages to crack down on property speculation in a bid to avert a real-estate crash.
The state council, China’s cabinet, has ordered teams of investigators to probe the housing markets in major cities and come up with measures to curb price rises.
The central bank has raised reserve requirements no fewer than 10 times this year. Chinese banks must now set aside 14.5% of their deposits as reserves.
The bank has also pushed through six interest-rate rises to take the one-year benchmark lending rate to 7.47%, the highest since 1998.
Bankers say there is market gossip that regulators could even resort to loan quotas allocated to individual banks, a step back towards the old days of management by Communist party fiat.
The unpredictable chemistry of state intervention and market forces makes it difficult to see where China’s mixed economy is heading. But on any realistic analysis, the transformational forces at work in Chinese society are too enormous to restrict and channel by the issuance of regulations.
China is engaged in the greatest project of mass urbanisation in human history. The government is committed to building public housing for millions of people over the next decade. Demand for raw materials and business for construction firms is practically infinite.
Three new special economic zones designated by the central planners are expected to experience nominal GDP growth of 17%-20% a year over the next three years, according to research by a foreign investment bank.
One is the gigantic metropolis of Chong-qing, in southwest China, which is adding 2m people a year to its population and is destined to house 22m citizens in its central districts by 2020.
The second is Chengdu, not far away in the misty bamboo forests of Sichuan province, the birthplace of the economic reformer Deng Xiaoping. Rapid industriali-sation and the movement of peasants to the city will expand its population by 35% to 15m in the next 15 years.
Tianjin, already a flourishing logistics centre for northeast China, standing between Beijing and the ocean, will convert to a special economic zone with huge demand for roads, ports, real estate and utilities to supply the new industrial com-plexes in the area.
The effect of all this could be seen in Hong Kong this month, when a little-known Chinese company that happens to be the world’s largest supplier of cement-making equipment raised £270m in a flotation.
The firm, China National Materials Co, also known as Sinoma, sold its shares at the top of the estimated price range. Demand from institutional investors was more than 200 times the available shares.
The float followed a debut on November 30 by the enormous construction company China Railway, which surprised forecasters when its shares surged 30%, netting more than £2.5 billion in Hong Kong and Shanghai.
China intends to spend more than £80 billion on upgrading and expanding its rail network over the next three years. Analysts assume that China Railway will enjoy an advantageous position in bidding for contracts on the project.
Some £50m of the shares were scooped up by the China Investment Corporation, the buyer of those Morgan Stanley shares. It was set up by the state council to manage £100 billion in assets and is taking its first tentative steps into the global market.
If the People’s Daily is right, opportunity beckons.
