The next Chinese financial crisis

Posted By Daniel W. Drezner Thursday, July 24, 2008 - 4:13 AM Share

For the past ten years, I could usually find at least one article a week, written by some sage analyst, warning that some part of China's financial sector was readdy for imminent collapse. I mention this up to put Jamil Anderlini's story in the Financial Times in the proper perspective:

Chinese officials and government economists have warned domestic banks to tighten their mortgage lending criteria after the US government’s action to prop up Fannie Mae and Freddie Mac, the giant mortgage agencies. Liu Mingkang, China’s top banking regulator, has in recent days urged the country’s state-owned commercial banks to beware of risks in the real estate sector and ordered them to tighten loan approval processes. Others among China’s policy community have also begun to express concerns about the health of the country’s banks amid signs a once-booming property sector has begun to slow. Average house prices in China’s 70 largest cities were up 10.2 per cent from a year earlier by the end of June, according to official figures. But sales volumes in important cities, including Shanghai, Beijing and Shenzhen, have fallen precipitously in recent months. Some analysts fear steep price falls ahead. “If financial institutions of Freddie Mac and Fannie Mae’s calibre could get into such a bad situation, then what does that mean for Chinese financial institutions?” asked Yi Xianrong, a prominent economist at the China Academy of Social Sciences. “The only reason we haven’t seen similar problems here is because property prices have continued to rise rapidly.”

Migration into the cities combined with 10% annual growth combined with a 40% savings rate makes me think this concern is overblown, but I'm willing to be convinvced otherwise by my dear readers.

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STEFAN

12:13 AM ET

July 25, 2008

Interestingly enough, there

Interestingly enough, there have been about two articles a week in Germany for a number of years claiming that everybody needs to invest in China, totally neglecting Chinese bad loans and thus the risks of crisis of the financial market in China. Even when the German Chamber of Commerce in Shanghai reported that 90% of middle sized German companies going to China were not making any profits, the newspapers kept arguing this way. Pretty much the same rhetoric Chancellor Schroeder used for years.

On the contrary financial risks of the Chinese system, or political fears were almost over reported about in U.S. newspapers, seemingly following a domestic political trend as well.

I guess you're right as long as China has literally millions of cheap migrant workers sitting at the train stations of Shanghai, Chengdu, Chonqing and Shenzhen waiting for work in factories, the market will hardly collapse.

DQUART

9:22 AM ET

July 25, 2008

I am no economist and I

I am no economist and I cannot site figures specifically, but my impression on the macro-risks for the chinese economy were two-fold. 1) inflation, and lots of it. With rising inflation and imperfect markets, the real wealth of that 40% savings rate is not as high as it seems and 2) insufficient domestic demand. With the U.S. economy tanking, Fx depreciations, chinese goods don't seem as attractive as they once had. But, the chinese economy isn't sufficiently developed internally to maintain that growth...

Anyways, those are the risks I tend to notice

TMLUTAS

12:37 AM ET

July 27, 2008

One other thing to notice is

One other thing to notice is that the PRC factory is highly dependent on a particular profile of chinese worker. 50 year old farm hands are not in demand. What *is* in demand is teenage and 20 something chinese women. They are relatively undemanding in terms of wages and hard working to boot.

The PRC is running short on that particular profile of worker and that's led to significant problems and multinationals shifting to other countries in Asia. PRC factory operating costs are rising at an annual rate of 30-40% and have been doing so for at least three years now.

With the PRC losing ground as an exporter and with it highly dependent on hard currency to buy the raw materials to sustain its economy, it's got a major shift to go through, one that very likely will lead to the PRC's first recession in decades. That's when regime stability is likely to be tested.