According to a report I just received from Credit Suisse the PBoC has apparently begun asking commercial banks to submit quarterly loan plans for next year in order, ostensibly, to smooth out loan activity.In the past, loan quotas were made on an annual basis.Banks would then rush to make loans early in the year because they wanted to maximize interest income, but the result would be that roughly 40% of the annual quota (and typically more) was lent in the first quarter, and nearly all the rest by the third quarter. The banks then asked for quota increases and the authorities, faced with the prospect of a total loan freeze, would grant the new quotas.
Not surprisingly, credit growth always exceeded the PBoC’s already high annual targets.
Will this new tactic work?I am skeptical, but I guess it depends on how you define success.It may reduce excessive loan growth, but will it reduce the problems associated with excessive loan growth?If we assume that the source of China’s explosive growth in industrial production, fixed asset investment, the trade surplus, and the speculative investment bubble is the unconstrained eagerness of Chinese bankers to lend money to their friends, then a measure to enforce a little discipline on those bankers can’t help but be a good idea.
But if the problem is uncontrolled money growth fueled by the country’s currency regime, than I am not sure how quarterly loan quotas are going to make much of a difference in the underlying problem.It may discourage bank lending, but what about other effects?Where does the money go?If the commercial banks continue to gain deposits, they will have to put the money to work somewhere, and if they can’t lend the money they will be forced to purchase government bonds from the market.This will keep interest rates low and of course will deposit the cash, which was otherwise to have been lent, into the hands of the previous owners of the government bonds, who will then be forced to something with the money.Either way bank profitability should decline.
If the banks act in ways to discourage deposits, are those deposits likely to end up in informal banks who are, according to a lot of anecdotal evidence, a fairly large segment of the banking market and are largely unregulated?Or will the money go into direct investment.
I am not sure how this plays out, but it seems to me if the problem is unconstrained money growth caused by massive capital and current account inflows, then the only way to address the problem is by reducing those inflows.
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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December, 2007
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