China can outgrow overcapacity, at least for now
– Wei Gu is a Reuters columnist. The opinions expressed are her own —
China watchers are worried that excessive lending leads to massive overcapacity. However, the risk of Beijing pressing too hard on the brake is even greater. At least for now, China should be able to growing its way out of its bad debt problems.
Banking regulator Liu Mingkang recently told a conference that China’s banks should lend out 6-7 trillion yuan next year, equivalent to about one fifth of China’s annual output. Some think that is too much. However, these fears are overdone. Indeed, if new lending falls below 10 trillion yuan, bad debts will soar, private investment will be crowded out and the economic recovery may be derailed.
Since the stock of loans has been enlarged by this year’s explosive credit growth, the regulator’s target represents a 15 percent increase in China’s loan base. This is in line with past trends, but marks a sharp slowdown from this year’s 30 percent growth in total loans.
Just to keep funding current ongoing projects, the economy would need 8.3 trillion yuan in new loans in 2010, according to Nomura estimates. So the current goal implies that here would be no money left for new projects, and some current projects will not receive funding.
Setting the credit growth target too low will make it hard for new borrowers, because banks naturally want to keep funding current projects. That puts private sector borrowers, who are expected to invest more next year following strong government investment this year, at a disadvantage.
What’s more, if the banks sense the government might tighten lending targets next year, they are likely to lend as much as possible at the start of the year. This will increase the volatility of credit.
Wei Gu focuses her attention on new capacity, while the concern of most analysts is on the old capacity that is now obsolete, and growing more inefficient every day. China needs to develop new plant and equipment, naturally, just to remain competitive in the global market. However, many believe an equally pressing need is to close and consolidate obsolete buildings and companies. In my view, companies could strongly benefit from providing workers with a year’s income as a severance package, to prevent protests when the companies close down. That kind of investment would show a high return, since clearing the obsolete, inefficient capacity off the map of China is a very intense priority.