China’s central bank chief on Thursday issued a stark warning about asset bubbles in the world’s second-largest economy, which looks set to clock its first acceleration in annual growth since 2010, driven by public spending and record bank lending.
Speaking on the sidelines of the closely-watched, twice-a-decade Communist Party Congress, People’s Bank of China Governor Zhou Xiaochuan spoke of the risks of a “Minsky moment” in the economy, referring to a sudden collapse in asset prices after long periods of growth, sparked by debt or currency pressures.
Mr. Zhou’s comments refer to a theory on prices derived by American economist Hyman Minsky and follow official data that showed China’s economic growth slowed in the third quarter from a year earlier, as expected, but remained on track to post the first full-year pickup in seven years.
‘Credit bubble’
Coming on the 30th anniversary of the Black Monday Wall Street crash, the comments from the governor, who is likely to retire soon, echo concerns expressed in the past by international economic bodies about relative levels of corporate and household debt in the economy.
But while hedge funds sometimes refer to Minsky in warnings about a China credit bubble threatening the global economy, China has so far proven doomsayers wrong.
“I would doubt they really think China is in for a Minsky Moment, but maybe he is tying to impress (other leaders in Beijing) on the need to start reining in credit growth,” said Louis Kuijs, head of Asia economics at Oxford Economics in Hong Kong. “It’s not really up to (the central bank)... We would have to look at what the leadership says about these things.”
Recent efforts to curb financial risks and cool the property market are beginning to weigh. While the economy grew a solid 6.8% in the third quarter as expected, growth in new construction slowed and property sales dropped for the first time in more than two-and-half years in September.
In all, growth was still on track to comfortably beat the government’s target of about 6.5% for this year and 2016’s rate of 6.7%, which was a 26-year low.
‘Urgent’ reform needed
Analysts and global economic bodies such as the International Monetary Fund warn Beijing is stimulating credit too heavily in its aim to meet fixed growth targets. Rating agencies estimate the overall debt burden at almost three times economic output. Data on Saturday showed Chinese banks extended more loans than expected in September, backed by demand from home buyers and companies.
While household loans accounted for a smaller percentage of total new loans, their value jumped more than 10% to 734.9 billion yuan last month from August, according to Reuters calculations.
“China’s high debt burden is an area where reform is most urgently needed but progress has been the slowest,” said Chi Lo, senior economist at BNP Paribas Asset Management.
There are, however, signs that policymakers are making needed changes in other parts of the economy. Beijing’s push to consolidate and restructure its industrial sector has paid dividends as factory output beat expectations, while strong fiscal spending and sustained public investment helped boost domestic demand. The economy slowed slightly from 6.9% in the second quarter, however, and analysts say it could ease further due to an expected softening in property investment and construction as more cities try to cool housing prices, while a government campaign against riskier lending pushes up borrowing costs.
“Unequivocally, the property boom has peaked,” said Rosealea Yao, a property analyst at Gavekal Dragonomics.
China’s economy has surprised global financial markets and investors with robust growth so far this year, driven by a renaissance in long-ailing “smokestack” industries such as steel and strong demand from Europe and the U.S. At the same time, there are concerns about the state’s growing role in the economy: the acceleration in year-on-year state investment growth outstripped private investment growth in September.
In the opening speech of congress this week, President Xi Jinping said China will deepen economic and financial reforms and further open its markets to foreign investors as it looks to move from high-speed to high-quality growth.
However, while expressing support for market reform and private firms, Mr. Xi also called for stronger, bigger state firms.
While policymakers’ efforts to curb property market speculation and cut debt are hurting growth in some parts of the economy, activity has been supported by better-than-expected expansion in trade and bank lending. Beijing has set a modest growth target of around 6.5% for 2017, theoretically allowing policymakers more room for structural reforms.
China’s factory output grew 6.6% in September, beating expectations, while fixed-asset investment expanded 7.5% in January-September, missing forecasts. Retail sales rose 10.3% in September from a year earlier, beating expectations. Disposable income grew 7.5% in the first nine months of the year, the fastest rate in two years.
Data last week showed China’s import and export growth accelerated in September, suggesting healthy momentum in trade. China’s banks also extended more loans than expected last month, buoyed by demand from home buyers and companies.
“Given that the growth outcome is above the government’s target, there is room for some more reforms and it might come after the politburo meeting,” said Besa Deda, chief economist at St George Bank in Sydney.
