A column in Forbes Magazine column published on Monday depicted those who predicted the Chinese economy’s hard landing as geniuses. China is currently experiencing a liquidity problem. Printing of trillions of Yuan has resulted in an increase in the national state-owned bank’s deposits. Between four and five state-owned banks dominate the nation’s lending portfolio and hold the nation’s finances under firm control. Now, China has entered into crisis mode, which has made people think this is a crisis of financial hard landing.
As indicated in this article, although some market participants believe that this is a hard landing, more people still believe that the Chinese government can deal with the situation. Investors will continue playing tug of war with the Chinese government. So far this has put one in the lead for this “battle.”
Similar to the FTSE, the China iShare exchange-traded such as market popular China-related funds, this financial hard landing may appear to be in large-scale fluctuation. If this problem continues in China, the world’s second largest economy, the country’s solution to the liquidity problem will not satisfy the market.
On June 17, 2013, the People’s Bank of China created guidelines for commercial banks to strengthen their liquidity management mechanisms. These guidelines were posted on the central bank’s website on Monday. It has been the reluctant policy of the People’s Bank to relax liquidity to drive down the interest rates since the latest signals. The set of guidelines “said the overall liquidity situation is still at reasonable level,” and requires banks to “manage prudently a rapid expansion of risk in credit and liquidity,” to “proper[ly] control of the speed and bill financing loan” and to “apply the stock of money and credit to support the economy.” In short, China’s banking industry—at least for now—can only rely on itself.
Some people think that China was just posturing. If China had said that people have the body temperature of 98 degrees Fahrenheit (37 degree Celsius), China might have been redefining what the temperature of fever is, which is 103 (39 degree Celsius). Altogether the investors might be waiting for death.
On Monday, Chinese economist Zhang Zhiwei, from Normura Securities in Hong Kong, said that statements from the central bank show that it still maintain its stance of tightening monetary policy. Interest rates will not fall soon. The website on which these statements are published shows that the People Bank of China wishes to reiterate its policy stance. Zhang Zhiwei said he still maintained his stance, stating that given the growth rate of China’s GDP in the second half of 2013, there is a 30% probability that there will be a 7% fall in GDP below forecast.
China is experiencing an increase in pain. To some extent, there might be an urgent desire to transform a low-cost manufacturing and export-orientated economy to a more value-added consumer-driven one. In promoting full employment of the workforce, overspending on infrastructure and manufacturing seems to create bad consequences. Not all international investors that think these economic trends are what have been desired over the past years. China’s booming economy might be considered a death sentence.
Chinese authorities have the power to inject liquidity into the interbank market to end these recent tensions at any time they deem necessary. If the pressure continues to increase, the Chinese authorities may choose to inject liquidity. But so far, the authorities have decided not to intervene. Especially in the interior of reverse repro market, due to the tension that exists in the Chinese financial market, this decision is to suppress small and medium banks by means of interbank market regulatory arbitrage.
Focusing on investment in emerging markets, British economist Jane Deen (Jan Dehn) at the Ashmore Group says, “this is a prudent central bank’s measure.” He thinks this measure is considered a type of “tough love.” Transitioning from the old credit-driven and export-led growth into a more sustainable domestic demand-led growth is difficult. China’s heyday of 8% growth rate is gone. China can rectify its actions, which may be not a bad thing; many people still believe China can do it. Jane Deen says, “We are still very strongly influenced by what we see as an encouraged development of the situation for China; we haven’t seen any systematic risk.”
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