William Pesek: As goes the US go go China’s exports.
The improving U.S. economy has brought some welcome cheer to officials in Beijing, which reported an unexpectedly high 9.7 percent jump in December exports. If those numbers continued in months ahead, they’d also be good news for a global economy that’s running short on viable growth engines.
China will probably have to loosen monetary policy soon in order to ensure that GDP growth stays above last year’s target of 7.5 percent (it’s currently around 7.3 percent).
Already worryingly high compared to where Japan was 25 years ago when its own bubble burst, China’s GDP ratio will only rise further with additional stimulus. The more China gins up growth in 2015, the more irresponsible lending it will have to service in the decade ahead.
The math simply doesn’t work out. Even if China could somehow return to the heady days of 10 percent-plus GDP growth, its debt mountain would by then be nearly unmanageable.
From Japan to Argentina to Greece, recent decades offer many examples of governments thinking 1 + 1 = 3. It took Japan more than a decade after its bubble burst in 1990 to create the Resolution and Collection Corporation, modeled after America’s Resolution Trust Corporation, to dispose of bad loans. China can’t afford to wait that long to head off a full-blown crisis. It’s one thing for a $24 billion economy like Argentina to blow up; it would be quite another if the world’s second-biggest plunged into turmoil.
Yet for all the official talk about curbing borrowing and adjusting to a new normal of lower growth, Xi’s government still hasn’t shown the stomach necessary to bring China’s debt problems out into the open and deal with them. Even one of the first defaults on an offshore bond by a Chinese developer last week ended happily. Kaisa Group missed a $23 million interest payment, but quickly received a waiver from HSBC.
What should China be doing? First, clamp down more firmly on new borrowing, particularly to the state sector. While that would roil credit markets and crimp growth, it’s vital to gaining control of the financial system. Next, conduct a truly transparent audit of public debt and the shadow banking system.
Finally, China needs to create a mechanism to collect and write down bad assets. Only by doing so can Beijing prod wobbly banks to act openly and quickly to repair balance sheets. There are many ways China could go — a Japan or a Sweden-like purge and bank recapitalization. The point is to address its math problem frontally. However cheery, trade and GDP figures are the wrong numbers to focus on.
