March data shows the Chinese economy growing rapidly, along with inflation. Lending for the month is up, and the share of alternative forms of financing has continued to grow after a swift rise in 2010. The data shows that whatever success authorities have had in tightening credit, banks and companies keep finding ways to circumvent controls. Contrary to official pronouncements, the recent data indicates there is little appetite for aggressively tackling inflation expectations in China.
Analysis
New economic statistics from China for the month of March show that the government’s tightening policy remains half-hearted. The economy grew at a 9.7 percent clip in the first quarter, though that number is down from 10.3 percent annual rate in 2010. Meanwhile, inflation hit 5.4 percent, the highest since July 2008. High inflation was expected, and the decision by the People’s Bank earlier this month to raise interest rates for a fourth time signaled its awareness of the rising pressures.
But interest rates do not determine credit conditions in China. Most important is the influx of credit, which shows no sign of significant slowing. True, new loans issued in the first quarter totaled 2.2 trillion yuan ($336 billion), down by about 14 percent from the same period last year, revealing a greater degree of control. But March lending rose to 679.4 billion yuan ($104 billion), considerably higher than 506.7 billion yuan in March 2010. This does not support claims by central authorities of more determined tightening.
Crucially, the share of alternative forms of financing (published now for the first time as part of “total social financing” or “national financing”) has continued to grow, after a rapid rise in 2010. This shows that despite any success authorities have had in tightening credit, banks and companies are finding ways to circumvent controls. Bank loans now make up only about half of total financing, and the government has much more difficulty controlling the off-balance sheet and underground lending. The national financing total was 4.19 trillion yuan ($641 billion), showing the massive proportions of the ongoing credit binge. If maintained at the same pace throughout 2011, the total would surpass 16 trillion yuan ($2.5 trillion), greater than the 14.27 trillion ($2.18 trillion) tallied in 2010 (though credit issued in the first quarter tends to be on the high side).
The March data shows that, contrary to official pronouncements, there remains little appetite for aggressively tackling inflation expectations. The central government is ineffective in constraining prices and the monetary and credit forces that contribute to price growth, in part because of resistance from banks and corporations. The government is also wary of excessive tightening amid growing risks to growth. These include high commodity prices, the Japanese slowdown and global unrest.
The central government is still bickering with local governments that refuse to lower their real estate price-growth targets and has so far only threatened vague punishments for those that do not comply. Residential prices rose 6.6 percent on the official measure, while investment in real estate rose 34 percent in March year-on-year. This shows that attempts to curb these rises are meeting with little success, and has fueled fears of highly risky asset bubbles.
The National Development and Reform Commission continues to deny companies the right to raise prices, excepting necessary hikes on fuel and power that it seeks to delay and minimize. Direct price controls on food and consumer goods remain in place and will likely tighten. On April 14, 24 industrial associations announced, under pressure from Beijing, that they would not attempt to raise prices on key consumer goods. Exceptions will occur: the commission approved an electricity price increase in Shanxi and 10 other provinces because power companies were operating at a loss amid high coal prices. Corporations, especially energy companies and utilities, are demanding subsidies to offset the losses caused by purchasing inputs at international prices, then selling at domestically capped levels. This bickering will worsen as Beijing strives to shield the public from higher prices while companies resort to alternative or illegal ways to benefit themselves.
With growth surging, inflation remains the chief risk. The government will continue its marginal attempts to tighten policy in order to avoid losing control of the situation, while relying on price controls to alleviate the hardest hit areas. Economic conditions are pushing social dissatisfaction to new levels. Food inflation remained stubbornly high, at 11.7 percent, despite the government’s heavy hand in controlling grain and vegetable prices since late 2010. That 11.7 percent takes into account the statistical bureau’s attempt to downplay food prices by reducing their weight in the Consumer Price Index by 2.21 percent earlier this year. In any case, most Chinese people feel official statistics significantly understate the rise in food prices.
Still, there are sporadic indications of the government’s anti-inflationary measures achieving a degree of success. Inflation did fall slightly from the previous month. These measures pose a risk to growth. Smaller companies can have trouble obtaining enough financing to meet rising costs or, lacking political influence, cannot offset their losses with subsidies. Given the potential for social unrest, the government could be forced to take more drastic anti-inflationary measures. However, with extensive fears about growth and collapsing asset bubbles, Beijing seems prepared to maintain the high-growth status quo and use harsh security measures to suppress any unrest.
