This is further indication if a further indication is necessary that the Chinese real estate market is heated up and many of the projects that are funded already will end up as non-performing assets (NAPs) to the banks.
Chinese banking regulator is aware of the flipside of the market since middle of last year and has tightened the controls on loans to property sector. The latest homily is a call to step up risk controls on property development loans. Liu Mingkang, the head of the China Banking Regulatory Commission, is obviously sounding another warning bell to save local government finance companies from potential financial risks.
According to various estimates, the total advances to the property projects are in excess of $1.1 trillion since 2008 when Beijing went into an overdrive with a massive economic stimulus. This is a huge exposure, and has been causing concern amidst reports that the Chinese property bubble could burst soon.
Since October last year, China’s central bank has trying to rein in loan growth and thereby check soaring inflation. It has raised benchmark interest rates four times and tightened reserve requirements seven times. These measures have not yielded results to the extent the authorities expected. This is obvious from the regulator’s latest caution.
Liu said banks must change their past practice of focusing on credit growth and expanding market share. He also wants the bankers to resist the temptation to lure deposits by offering benefits to savers or secretly raising deposit rates. In other words, there is no need any longer to show any preferential treatment to these government instruments.
Since the bankers have their own compulsions in the market place as Beijing is no exception, the regulator may do what most central bankers in the centralised economies do. So another dose of capital adequacy ratio (CAR) will be on the way. Such squeezing of money from the market often leads to a push to stagflation. It looks inevitable since China has lost its major market next door after the massive earth quake pulled down the Japanese industrial edifice and engulfed it in a nuclear radiation.
As a New York Times columnist says, high inflation endangers China’s status as the low –cost workshop for the world. It will also affect the growth plans of American MNCs like General Electricals which are betting on China as the leader of global growth. And within China high inflation is bound to threaten social stability making people think increasingly of the changes that have gripped North Africa. That such a scenario is not idle talk is clear from the latest official figures about consumer price index. Propelled by soaring food prices, the index in March had risen 5.4 percent, its sharpest increase in nearly three years.
