Surely, it’s a good thing China is slowly opening up its financial markets to free market forces?
The Chinese money printers have endorsed the idea of cheaper money. At least, the People’s Bank of China (PBOC) has ‘liberalised’ interest rates. Specifically, China’s central bank will now allow lenders to make loans below the benchmark lending rate of 6%.
Well, it would be a good thing if it were true. But we’ll believe it when we see it. Mind you, there are no free markets in money any more. China is not alone in creating an unbalanced banking system backed by unsound money. But it’s done as good a job as anyone.
The latest example is the construction of a ‘mini-Manhattan’ on the outskirts of China’s northern city of Tianjin. Over 43 high-rise projects are planned in the Binhai New Area Central Business District, according to Angus Grigg in this weekend’s Australian Financial Review. Three 100 storey towers are planned, including a Binhai version of New York’s Rockefeller Centre. The grand plan is for 10 million square metres of office space, or double the amount in Sydney’s CBD.
Before we go rubbishing the project as another example of local government loans financing unproductive real estate development – and showing how this blows bubbles in commodity markets which eventually put Australian investors at risk – we should point out that China is not Australia. That might seem obvious. But allow us to explain why it might matter.
China’s great leap forward from poverty to middle class wealth has been engineered by the Communist Party of China. It’s no small feat. Urbanisation and industrialisation, along with globalisation, have transformed China in the last 30 years. The creation of so much apparently excess office space capacity is the extension of China’s development plan. And it’s worked so far, hasn’t it?
Well, to a point. But we’re now at that point. From here, real economic gains in China will not come from starting from a low base (in terms of urbanisation, GDP, and industrial capacity). You can build office towers no one is going to use. But there IS an economic cost. That cost is in the misallocated savings of the banking system. And as our colleague Greg Canavan pointed out to us recently, an emerging middle class whose savings are tied up in non-performing property developments is not a middle class that can consume more and lead China’s much-vaunted-but-not-at-all-visible rebalancing.
Still, we know from past experience that these special economic zones are a way for China to direct foreign investment into new projects that create jobs and more capacity. What’s more, the major cities compete with each other for this foreign direct investment. If you’re an international company, investing in China is a political as it is financial, when it comes to balancing the competing cities.
What’s really at stake here is whether Australian investors can take the investment bubble in China at face value, or whether it will be the catalyst for a major fall in the stock market. If that happens, it will be related to a serious crisis in China’s financial system.
And that raises an even more interesting question of whether you can have a real banking crisis in a command economy where the State owns the banks.
Dan Denning+
Editor, The Denning Report
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