I am getting very bullish about the growth of capital markets issuance, loan securitization and alternative forms of investment intermediation (both formal and “informal”) in China.Yesterday the China Securities Journal reported that the PBoC had set the total new-lending target for the banking system this year at RMB 3.63 trillion, against last year’s RMB 2.9 trillion – this represents a fairly tough cap on loan growth (I think about 12% but I need to check).This comes a week after their two-day conference in which the PBoC failed, surprisingly, to announce new loan quotas.It seems that if there was a fight over the policy decision, that fight has been resolved.Separately I read that Reuters claims that December inflation (which will probably be officially reported next week) is likely to come in at 6.5%, which is lower than November’s 6.9% but still much higher than expected (and for statistical reasons represents no real reduction in the rate of inflation).Maybe this is the reason why the fight has been resolved in favor of tough constraints.
Meanwhile new loan issuance in November and December dropped substantially to RMB 87 billion and RMB 48 billion.For all but the last three months of 2007 new loan issuance has ranged between RMB 200 billion and RMB 600 billion.This drop is not as dramatic as it seems because new loan issuance is often low at the end of the year, and surges again in the first quarter, but it does suggest that the PBoC is a lot more serious than it has been about constraining credit growth.
If they are able to keep it up will it matter to the economy and to their fight against overheating?Probably not.Companies are flush with cash, stock and bond issuance are likely to rise, and I expect that as long as China is forced to monetize large capital and current account surpluses money is going to flow into alternative forms of intermediation.Still, so far it seems my skepticism that the PBoC would really be able to enforce slower loan growth was unwarranted.The real test comes after the establishment of the new leadership in March.Will we not see the traditional investment surge, or will the loan growth caps be ignored (or perhaps more likely, will the new provincial leaders discover the joy of financial engineering)?
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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Comments (2) for "China’s loan constraints are...
- 1/15/2008 6:33 AM
November, 2007