Sunday, 18 January 2009

The Sunday Times gets it on how China is using state owned banks to fight the recession

The Sunday Times today carries an article by Leo Lewis that factually sets out the way in which bank lending in China is now rapidly soaring as a part of its counter-cyclical strategy. This is, of course, in sharp contrast to the situation in Britain - where banks are sharply contracting lending, seriously worsening the economic downturn, despite the fact that they have received tends of billions of pounds in taxpayer bailouts.

The reason for the difference is, as Socialist Economic Bulletin has pointed out, of course that with a state owned banking system, as in China, banks can be instructed to increase lending as a central part of the strategy to fight recession. With a privately owned banking system, as in the UK or US, bail out funds put in by the taxpayer are appropriated by the need to deliver profits to bank shareholders and no increase in lending takes place.

Lewis attempts to present matters from the shareholders point of view - warning that such large scale lending programmes as in China are putting the needs of the economy before that of shareholders. But the needs of the economy should come before those of shareholders. A state owned core of the banking system allows lending to be maintained, or expanded, when faced with a severe economic downturn - which is what is required for the economy. A privately owned core of the banking system, such as in Britain, means bank lending shrinks when confronted with serious economic recession - the opposite of what is required.

Lewis's factual description of what is occurring in China shows clearly that a sharp contraction in bank lending, severely worsening recession, is not 'an act of god' which cannot be avoided. It is a consequence of subordinating the interest of the economy to those of private bank shareholders. The way out is to take the core of the banking system into state ownership and re-commence lending to the economy. Present policy in China shows what is required in this field.

Lewis notes: 'Gripped between the jaws of financial and economic calamity — and knowing that the banks hold the answer to everything — there are two choices a government can take with the sector: caulk and coddle or maim and martyr.

'It is still early days, but with new bank lending soaring 1,000 per cent year-on-year in December, it looks very much as though China is taking the Joan of Arc (maim and matyr) option.

'China’s banks may appear to be more like market-traded, market-led institutions than they did ten years ago, but that view is wishful at best... The biggest exposé of the banks’ true nature comes in the form of a recently produced graph of new bank lending in China, dating back four years. Between April 2004 and October 2008, the line bounces around in much the way you would expect it to in a booming economy with lots of simultaneous investment cycles and bubbles. Between November 2008 and now, it suddenly goes up. Vertically.

'The 1,000 per cent surge — a slew of 772 billion yuan in new loans to companies and projects — dates almost exactly from the moment lending quotas were scrapped and regional banks were told that their loan to deposit ratio could legally drop below 75 per cent. M2 — the sum of all cash and deposits — soared 18 per cent in the same month... as CLSA’s China strategist Andy Rothman puts it: “in China, there is only a credit crunch when the political leadership wants one.”... For those who truly believe that restarting the lending cycle again is a guarantee of sustainable Chinese growth above 8 per cent, the unfettering of the country’s banks could even be more significant than the government’s $580 billion spending package... The China Banking Regulatory Commission... endorsed a massive increase in lending to small firms...

'What sort of post-dated cheques has Beijing written out as guarantees to the banks that are now loyally doing the government’s bidding? Lurking behind the scenes, there must be informal absolutions offered for the banks that lend themselves to death. Good for them, good for Beijing and, probably, good for longer-term stability in China.'

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