China

Triggers of 2008 financial crash now seen in China

China is displaying symptoms similar to the ones that triggered the 2008 financial crisis in the United States, according to a research note issued recently by Nomura, a Japanese financial research firm.

WantChinaTimes,

27 March, 2013

Despite the country's status as the world's second-largest economy, China has an underdeveloped financial market which is failing to meet the growing demand that comes with economic development.

As of the end of last year, outstanding bonds in the Chinese market stood at 36 trillion yuan (US$5.8 trillion), while the figure in the United States was around 250 trillion yuan (US$40.25 trillion).

Such a wide gap between the two figures reflected the lagging development in China's bond market, which has led to local companies' excessive reliance on credit offered by banks and thus high leverage ratios in the country.

The easing monetary policy introduced in the mainland after the 2008 financial crisis has further pushed the ratio from 121% in 2008 to 155% in 2012, up 34 percentage points in just four years. In comparison, the US saw a jump of 30 percentage points during the five years before the 2008 crisis.

China also faces several economic challenges, with the topmost being a possible rebound in housing prices, which presents decision makers with a dilemma of choosing between stabilizing the economy and cooling down the property market.

While the introduction of tightened monetary policies would prevent the housing market bubble from inflating further, such measures might hurt the country's economic growth and create possible panic among investors.

People's Bank of China governor Zhou Xiaochuan recently announced that monetary policy will shift from easing to neutral, and reduced the forecast growth of the M2 money supply to 13%.

The announcement shows that regulators understand the need to phase out easing measures gradually, as China is still experiencing the consequences of excessive money supply in the market and faces the threat of influxes of speculative hot money.

If China tightens its monetary policy too rapidly but does not have fiscal policies which stimulate the economy, it could result in capital flight, leading to a crash in the value of assets and a sharp depreciation in the country's currency.

With the Asian Development Bank's recent warning about the risks created by growing hot money inflows to emerging East Asian economies, governments in Asian countries should be cautious that a flight of capital from China and subsequently from the region may again cripple the global economy.