With a global financial turmoil affecting industries and ordinary people, and the west fallen into a crisis with governmental rescue packages launched, they question on all lips is: When will it hit China? Discussions in newspapers are talking about coming blood baths and bubbles to burst.
Of course is China dependent on its export, but it is also in a somewhat different and compared to USA, not as sophisticate financial market. From the financial crisis 2003 China has built up their banking industry and continues to improve it. It is still far behind and different tools to manage it. As a banker in China, 2008 has been an exiting year where you have been able to face several regulatory changes and improvements, plus a limited liquidity on the market driving up prices. It all started December 2007 with a change in monetary policy from prudent to tight. The reason? A rising inflation and rapid growth in GDP and investments. Rather than using interest rates, the government have been relying on tools such as credit quotas, reserve ratios and liquidity ratios for banks to restrict liquidity on the market. The affect of this has especially disadvantaged small and medium sized firms fueling informal and illegal financing methods that has grown up like mushrooms in areas with cash rich companies.
With a large inflow of hot money during the first quarter of 2008, new rules and regulations have been issued for foreign exchange administration control – incoming and outgoing payments have to be declared and supporting documents provided; common financing solutions such as advanced and deferred payments have received quotas; and a decreased amount of capital can be converted and kept on CNY accounts.
During the summer 2008 the effect of these changes and new regulations have also been visible by smaller banks failing to live up to ratios and quotas. The first action from the government was to lower the reserve ratios for smaller banks. Since then several other small changes have been done. When stocks all over the world fell in mid September, the government rapidly removed the stamp duty on stock purchasing and CIC went in and bought shares from the three largest banks. The one year interest rate have been lowered twice in one month from 7.47% to 6.93%. The inflation is reported to be below 5% and the GDP forecast is a decrease to 9.8% 2008 and 8.5% 2009 (according to the economist intelligence unit). The trade deficit was reported to have grown but the question is when we will see the result of this period that most likely is delayed 6 months.
Not much has really been felt in China so far, and until recently even media was pretty quiet. Those affected is mainly those who have had something to invest in the stockmarket. With low deposit rates people have been encouraged to spend money instead of saving which have led most people to buy stocks on a market that now have lost almost 80 percent of its value. The Chinese banks seem to have made it fine so far with little exposure to the sub prime crisis and American banks (but don’t forget their own non-performing loans). Looking at the tight regulations in China it make sense. On the other hand, a global recession will affect China’s export and have negative affect on the economy. With smaller and medium sized companies entering into a recession with decreased demand they will with their low margins face increased cash flow problems. With tight restrictions on liquidity local banks refuse to lend money except for the largest and most credit worthy. This have led the government to encourage banks focus on SMEs and provide loans.
Another of China’s probably more challenging tasks is how to foster its internal consumption. This might be a key for China’s continued growth as it can not depend on overseas consumption. China finished its party congress a week ago and new plans have been made to reform the agricultural system and bring up the rural areas with financing, education and health care.
