For sometime now, China analysts have framed the current economic volatility as a temporary and necessary phase as the country moves from heavy industry to consumer services. When China gets through the long dark tunnel, conventional wisdom has been that it will come out the other side more competitive than ever. But recent events are calling into question whether the tunnel is in fact leading back aboveground. China’s state-owned banks lent nearly twice in May as much as in April according to The Wall Street Journal, but the money went almost exclusively to other state-owned companies rather than to the private sector:
Economists said credit data released Wednesday by the central bank reflected the state of the world’s second-largest economy: Lending was robust for mortgages and infrastructure projects the government is backing, but companies refrained from borrowing for future investment, uncertain about the outlook.
The private sector’s refusal to bite indicates that fears have increased so much, easy money no longer has the stimulative effects it once did. With policymakers running out of effective tools, we’re now witnessing an unprecedented collapse of China’s corporate bond market. The WSJ, again:
The outstanding amount of bonds contracted last month by nearly 40 billion yuan ($6 billion), according lending data out Wednesday from the People’s Bank of China. The last time the corporate bond market contracted was 2010, but that was long before Chinese companies had wide access to bond financing.
The reversal in fortunes for corporate bonds comes days after warnings from the IMF that China’s corporate debt pile, especially that of state-owned enterprises, could become a systemic risk and lead to lower growth and even a financial crisis. More lending doesn’t seem like the wisest move in light of this analysis.
While Beijing flounders, private investors are rushing for the exits. Beijing has been trying to reassure them, pointing to state statistics which it says indicate that the economy is stabilizing. However, with a volatile yuan adding to private sector fears, it’s becoming difficult to avoid the conclusion that this “stability” is a mirage created by Beijing’s frantic efforts to stimulate growth in real estate and heavy industry—an effort it can only keep up for so long.
Making matters worse, Chinese officials are now clearly refusing to follow the playbook they had used (or at least worked hard to pretend to use) for decades. Yesterday, the IMF deputy managing director David Lipton presented an assessment in Beijing highlighting the need for structural reform, especially in state-owned enterprises, to combat capital flight. Just hours after the IMF released a statement trumpeting Lipton’s visit, Chinese state media published articles outlining the Party’s plans to tighten its grip on state-owned enterprises:
“All the major decisions of the company must be studied and suggested by the party committees,” according to an article by the State-owned Assets Supervision and Administration Commission in the influential party magazine Qiushi, or Seeking Truth. “Major operational management arrangements involving macro-control, national strategy and national security must be studied and discussed by the party committees before any decision by the board of directors or company management.”
“It’s effectively returning to the pre-reform times,” says Hu Xingdou, economics professor at Beijing Institute of Technology, arguing that the move violates Chinese corporate law.
If Beijing is indeed reversing nearly its longstanding promises and efforts to reform SOEs, then it’s dismissing what Western economists, businessmen, and investors have long considered a sound long-term strategy. It’s just more evidence that Beijing doesn’t worry about what foreigners think these days. The problem is that Beijing doesn’t seem to have an alternative strategy for addressing what are clearly fundamental economic weaknesses. Instead of acknowledging the wake-up calls and sticking to the prearranged schedule, Beijing keeps popping policy ambien and hitting the snooze button.