China Will Tighten Policies to Cut Crisis Risk, Nomura SaysRichard Frost
China will probably tighten policies this year to contain the growing risks of a “systemic” financial crisis, according to Nomura Holdings Inc.
China is displaying the same three symptoms that Japan, the U.S. and parts of Europe showed before their respective financial crises, economists Zhang Zhiwei and Wendy Chen wrote in a note dated yesterday. These signs are a rapid build-up of leverage, elevated property prices and a decline in potential economic growth, they said.
“Our base case is that the government will tighten policies,” Zhang, Hong Kong-based chief China economist, and Chen wrote. “If a loose policy stance is maintained and these risks are not brought under control, strong growth of above 8 percent in 2013 is possible, but that would heighten the risks of high inflation and a financial crisis in 2014.”
People’s Bank of China Governor Zhou Xiaochuan said this week the country should be on “high alert” over inflation, and monetary policy was “no longer relaxed.” While the central bank has left interest rates and lenders’ reserve requirements unchanged since July last year, it withdrew capital from the financial system this week for the fourth week and hasn’t issued bills that add cash since Feb. 7.
The State Council intensified this month a three-year campaign to control home prices, sending property stocks tumbling, and outgoing Premier Wen Jiabao set a lower 2013 target of 13 percent for expansion of M2, the country’s broadest measure of money supply.
Leverage in China’s economy, as measured by the credit-to-gross domestic product ratio, has reached its highest level since data was made available in 1978, according to Nomura, while the risk of a property-price bubble bursting is increasing. At the same time, a declining labor force and weaker productivity growth may drag on the economy, the analysts said.
Zhang and Chen’s outlook contrasts with that of HSBC Holdings Plc., which said on March 10 that the central bank will probably keep monetary policy “relatively accommodative” in coming quarters as inflation pressure remains “modest,” helping to support the economic recovery.
China’s retail sales and industrial output had their weakest combined start to a year since the global recession in 2009, adding to signs of a moderating rebound in the world’s second-biggest economy. February inflation, distorted by the weeklong Lunar New Year holiday, accelerated to a 10-month-high of 3.2 percent. That’s less than China’s target of 3.5 percent growth in consumer prices for the year.
Concern that monetary tightening and property curbs will slow expansion has dragged the benchmark Shanghai Composite Index down 6.4 percent from this year’s high on Feb. 6, wiping out almost all of 2013’s gains. The gauge trades for 12.6 times reported earnings, 22 percent cheaper than the MSCI All-Country World Index.
The government will “gradually” bring down growth in M2 and total social financing, a broader measure of funding in the economy, starting as early as the second quarter of this year, Zhang and Chen estimate. It will also tighten controls on so-called shadow-banking activities and local government financing vehicles, and raise interest rates twice in the second half of 2013, they wrote.
The cost of such tightening would be a slowdown in economic growth to 7.3 percent in the second half of the year compared with a year earlier, from 8.1 percent in the first six months, according to Nomura. China’s GDP grew 7.8 percent in 2012, the least in 13 years.
“As history has repeatedly shown, the slower the policy response to financial excesses, the greater the risk of a systemic financial crisis and the more challenging it will be to avoid a hard economic landing,” the Nomura economists wrote.