Take a banking system that is opaque at best. Add a global financial community well versed in signs of stress following the 2008 meltdown in the west – and on the lookout for them. The result is that every twitch in the system – say, the spike in China’s interbank rates – is a fresh fill-in-the-blank opportunity for China Cassandras to press their favourite theory of doom.
The doom-mongers have a point. Cut data on credit in China almost any way and the numbers are alarming. Even after cooling from its 2009 peak growth of 35 per cent a year, credit is still growing at 20-plus per cent – more than double the rate of the economy. More worrying still, most of the growth is coming from outside the relatively transparent banking sector. Last year, two-thirds of the increase in credit came from sources other than bank loans, such as letters of credit, leasing and other informal lending, according to Fitch Ratings. Perhaps banks cut back and raised their standards. But that implies that many new borrowers have poor creditworthiness. And even if banks are not the lenders, they may still be exposed through selling products, or perhaps lending to outfits that are involved.
Being right about the dangers in the system is one thing. Getting the timing and the impact right is another. China’s virtually closed capital account, and banks’ use of domestic funding, reduce the risks of funds fleeing, as they did in the west. And the tightly controlled system changes the meaning of signals, too. The rise in interbank interest rates is indeed a sign of stress. But since Chinese officials could have eased the stress had they chosen to, it is also a signal of official determination to cool credit growth – a good move but a tricky one. Shares of China’s big banks have undershot the Hang Seng this month. Cassandras still have plenty of material for their prophesies.