China bear Victor Shih explains Medill Reports from Chicago why China’s growing debts are getting out of hand, despite efforts by the financial authorities to act on the growing concerns. It’s a wash, he claims.
The prudential tightening being undertaken by China’s central bank has not been very effective, he said. China’s central bank is increasing reserve requirement ratios while also buying bonds from the market. “If you put the two things side-by-side, they are a wash,” Shih said.
“In fact, money supply has risen substantially since late last year. It’s growing at a 17 percent” annual pace, he added.
According to Shih, the reason behind the conflicting measures is that there are a lot of nonperforming loans sitting on the banks’ balance sheets, which “they are trying to hide.” One classic way of hiding those bad loans is to allow the banks to roll the loans over.
And this is happening on a large scale in China.
From a bank’s perspective, this is not a trivial event. If borrowers couldn’t repay their loans, soon the bank would find itself strapped for cash to make new loans.
Shih said the only way to keep the whole thing going with “rising illiquidity on balance sheets” is to increase the money supply, which is what the government has done in order to keep banks lending.
This is why there continues to be inflationary pressure in the country, he explained.
“This problem will continue to haunt China,” Shih said. “There will continue to be, maybe not super-high inflation, but an uncomfortable level of inflation.”
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