Econ 122 Blog Assignment, China Credit Crunch

Nick Fainlight Econ 122 Blog Assignment

            China has been struggling this past month to meet its usual growth rate and the economy has struggled overall due to a necessary credit crunch lately in the country.  The problem has been building for a long time as the government typically responds to economics downturns with high interbank lending to keep the interest rates low so investment can still occur in the economy.  This investment is what drives most of the Chinese economy because the liquidity has been so high lately in China to meet the usual money demand in the market, but with this credit crunch comes a tough time.  The government has put pressure on the banks to keep their lending down and to try and get most of the loaned funds back so the money market can stabilize before the country goes back to its lending ways.  Or, the crunch could lead to an adaptation of a different economic ideal in China based around less lending but keeping investment high, which is a difficult thing to do.  China could fo this by using a fiscal stimulus, but only is that money is reinvested safely this time rather than without care.  This is very similar to the U.S. subprime mortgage problem that started in 2008, as the U.S. banks began lending to bad sources, leading these accounts to default and the loss of too much money for the economy to handle.  The U.S. situation that we are still coming out of is something that the Chinese policymakers can learn from, as they have turned their focus from the usual economic stimulus to stabilizing the economy and keeping the growth rate constant at its current level of roughly 7%.  Although this is a good short-term plan to stabilize the economy’s markets, Barboza is weary of the outlook, “The situation remains volatile. Another benchmark rate for bank-to-bank borrowing costs, the seven-day repurchase rate, opened Friday at 8.1 percent, briefly soared as high as 25 percent and closed at 5.5 percent” (Barboza, 2013).  The rapid change in the interbank lending rates shows that there is still some bad lending going on under the table in the way of wealth management products and shadow bank lending. 

            Wealth management products are bonds, stocks or other financial instruments sold to investors through trust funds in a way that does not show up on companies’ balance sheets, so this is free money that may be paid back but it is truly just a free amount of money for that company to work with.  Interbank lending would usually be used to cover up this type of investment, but with the lack of liquidity between banks brings about the necessary end of the shifty lending or else the country will find itself in a more severe bind moneywise.  The shadowbank lending part of the problem comes from the lack of control over the investments being made by the various banks that are a part of this sector.  These shadowbank investments are sneaking under the table, along with the wealth management products, to create a false safety in the economy as the country’s growth will continue with the investments still being made but the money is not being put back into the economy in the form of more investment and is instead going into the companies directly.  This is good for the individual growth of the companies benefitting from this revenue, but the overall outlook of the Chinese economy remains bleak, as the interbank lending crunch will leave the Chinese government in a tough place policy wise to change their ideas to a more stable plan for the future.

         Barboza, D. (2013, June 21). China's credit squeeze relaxes as interest rate drops. New York Times. Retrieved from http://www.nytimes.com/2013/06/22/business/global/chinas-bank-lending-crunch-eases.html?ref=economy&_r=0