The term “gray rhino” has become popular in China after the National Financial Work Conference last month.
It refers to large and obvious problems that are ignored until they start moving fast, as compared to black swans that refer to highly unpredictable and unexpected events.
Now, what are those gray rhinos in China at the moment?
Well, property bubble, local government debt and shadow banking are some of them.
Beijing unveiled a 4-trillion-yuan stimulus package in the wake of the 2008 financial crisis to keep the economy afloat. While that was effective in restoring growth, it also left a side effect — loose monetary policy.
Loose monetary policy since then has become the new norm. And endless money-printing has led to asset bubbles.
China’s broader money supply or M2 has expanded at double the speed of GDP over last decade.
Against such backdrop, skyrocketing home prices is almost given.
Other problems like high corporate leverage and local government debt problem basically have their roots in the overly expanding monetary policy.
China’s debt-to-GDP ratio has already soared to nearly 200 percent at present from around 80 percent a decade ago.
The credit-driven economic growth led to high inflation. China’s inflation rate once hit a record 6.5 percent in 2011. Fortunately, it has eased gradually thanks to technological advance and the proliferation of online shopping.
Everyone is happy during an asset bubble. However, the party will come to an end eventually when asset prices start to decline. Corporates will struggle to repay debt and banks could be hit by a surge in bad debts.
Chinese financial regulators are certainly concerned about these obvious risks. Therefore, they would rather find the right opportunity to tackle the risk before the bubble bursts.
China’s M2 growth has moderated to single-digit since the second half of last year, which means the authorities have started to tighten the monetary policy.
And the National Financial Work Conference has mentioned risk as many as 31 times and regulation 28 times. Therefore, the direction shift of the monetary policy is fairly obvious.
When deleverage is the policy direction, asset prices would be hard to sustain. Not to mention that the US is also tightening at the same time.
If Chinese corporates and local governments now are focusing on repaying debt rather than investing, it will unavoidably dampen economic growth and corporate earnings.
That said, despite the hiccups, I’m still positive about the nation’s economic growth in the long run.
This article appeared in the Hong Kong Economic Journal on Aug 9
Translation by Julie Zhu
[Chinese version 中文版]
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