China’s Great Money Ball Has More Bubbles in Sight for 2017by , , and
Property and corporate debt most likely targets, analysts say
Credit still outpaces growth, creating surfeit of money
Call it China’s Great Ball of Money, Whac-a-Mole Finance, or simply a whole lot of liquidity. Whatever term you use for the excess credit trapped in China’s financial system, few would deny that predicting its sometimes erratic movements can be a money-maker for analysts, traders and investors.
After a string of market bubbles in recent years, China will again see assets threatened in 2017 by prices detaching from fundamentals.
That’s the opinion of all but one of 14 economists surveyed by Bloomberg late last month. Half penciled in the risk of a real-estate bubble inflating, despite efforts by policy makers in recent months to avoid exactly that outcome. An additional four saw the corporate bond market as most vulnerable to becoming a bubble, again even as officials take steps to raise costs and reduce a build-up in debt.
“It’s a very challenging task of balancing the need to reduce leverage and to maintain a certain growth rate, while ensuring the stability of the financial system,” said Teck Kin Suan, senior economist at United Overseas Bank Ltd. in Singapore. “Liquidity that remains in the system would still have to look for returns, and the reduced opportunities to invest overseas could exacerbate the asset bubbles.”
Regulators the world over struggle to head off irrational exuberance. Making things all the tougher for China are the increasingly tight capital controls limiting the money that can be invested abroad. That leaves a large stockpile of cash seeking a home in domestic assets.
And with a slowing economy and a still-powerful pace of credit growth, the money ball is only getting larger. The problem began, arguably, when the Communist leadership unleashed a record surge in credit to shore up the economy during the global crisis. The following series of charts tracks the progression of assets roiled since then.
First, a look at the growing size of the liquidity excess:
The blowout in credit initially came at the local-authority level, with provincial and municipal officials overseeing an explosion in the local government financing vehicles that became a poster child for China’s lack of transparency. Much of the money flowed into real estate, sparking a boom in prices, especially in the largest cities. Wary about affordability and potential social unrest, Beijing has periodically moved to rein in its property industry, only to relax again when economic-growth targets came under threat.
The state also had a hand in an epic equity bubble -- a surge that saw the benchmark CSI 300 index more than double in about eight months. As property prices were coming down in mid-2014, official media encouraged investors to put money in stocks. While state media later adopted a cautionary tone, People’s Bank of China Governor Zhou Xiaochuan extolled the stock market for serving as a channel for companies to raise funds -- speaking less than three months before the market collapsed.
Other bubbles have had more of a random quality to them, akin to the tulip-bulb craze that hit the Netherlands in the 17th century:
- There was what one former U.S. Treasury official deemed the “great garlic bubble” that kicked off in late 2009. By May 2010, the national planning agency was blaming speculative funds for what state media said was a more than tripling in garlic prices within weeks. Another favorite foodstuff at the time: mung beans.
- Later in 2010, the soaring prices of items from art to particular types of tea spurred economist Patrick Chovanec to warn about excess money growth.
- In more recent years, diamonds and fine wine saw their prices plummet as Chinese President Xi Jinping launched an historic anti-corruption campaign. Read about that here.
It’s harder to strip out evidence of leverage at work in the credit markets, as prices of assets such as corporate bonds are already seen as artificially inflated thanks to the perception of implicit government guarantees. Looking at one source of fuel for bets in credit -- outstanding repurchase agreements in China’s interbank market -- there’s plenty of reason for worry.
In commodity markets as well, policy makers have had to intervene with stricter rules as signs of speculative excess emerged. But reining in risk-loving spirits can be difficult, and once regulators have driven down one bubble another one tends to pops up. Transaction fees for thermal-coal futures were the preoccupation of Beijing’s bureaucrats in September. A welter of further steps have been taken, including higher fees placed on some trading by the Shanghai Futures Exchange.
What will 2017 bring? While authorities have taken measures to curb speculative lending in money markets, only one of the 14 Bloomberg survey respondents said there was no material bubble risk in Chinese assets this year. Yet even that analyst -- Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong -- added the proviso that he was defining bubble as a market that bursts in 2017.
“None of the asset classes would crash by end-2017,” Hu said. “Small-cap stocks are most vulnerable,” he added.
China on Thursday reported that credit continues to expand, with aggregate financing rising 1.63 trillion yuan ($236 billion) in December, against the median estimate for 1.3 trillion yuan in a Bloomberg survey.
It’s not just Chinese investors with interests at stake in the health of China’s markets, as disruptions there have had an increasingly nasty habit of reverberating round the world. Frederik Kunze, chief economist for greater China at the state-owned German lender Norddeutsche Landesbank, worries about Chinese fixed-income.
“Growing debt levels of Chinese corporates might become a major concern of international financial markets,” said Kunze, who in the survey regarded a bubble in company debt as “somewhat likely” this year. “The overall effect on the Chinese economy should also not be overestimated,” he said.