LeveragedBuyout
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Not up to the WSJ's usual standards (the issue of bad debt is the entire point, one cannot just gloss over it like Gruenwald does), but generally optimistic about China's chances. So am I.
Can China Fix Its Financial System Without Derailing Its Economy? - China Real Time Report - WSJ
This post originally appeared on Real Time Economics.
The headquarters of China’s central bank, the People’s Bank of China, is pictured behind an iron chain in Beijing.
Reuters
China can weather the storm. So says Paul Gruenwald, chief economist of Standard & Poor’s Rating Services’ Asia Pacific region.
One of economists’ biggest fears is whether China’s credit boom will end in a U.S.-style financial crisis, sending shockwaves across the global economy.
But Mr. Gruenwald says China has built up sufficient buffers to protect against a collapse in the country’s financial system, pointing to the $4 trillion in foreign-exchange reserves and the big banks’ cash stockpiles.
“They’ve got cushions in there that are going to help to mitigate any downturn,” he said in an interview. “That doesn’t mean it’s painless, but I think it means that it’s probably more manageable.”
That isn’t to say there won’t be troubles. The financial system could see an avalanche of bad loans from wealth-management products created outside the banking system. “If those go bad, that’s the unknown,” said Mr. Gruenwald.
More In financial crisis
At the same time, if everyone thinks the government is implicitly guaranteeing the whole financial system, that is likely to continue to push cash into questionable investments. That is why authorities have allowed a small number of defaults—helping to introduce risk into the market—and interest rates at some banks are slowly rising.
“Moving a China-size economy from a model where there’s a huge amount of moral hazard to where markets and interest rates play an informational role is going to take time,” Mr. Gruenwald said.
The People’s Bank of China has acknowledged the risks, warning that corporate debt ratios are too high. The International Monetary Fund says not fast enough, and authorities should pick up the pace of reining in credit even if it comes at the cost of slower growth.
Mr. Gruenwald believes China can afford to move at a measured pace because of the cash cushions in the system. Still, he expects Beijing to increasingly allow more defaults.
“I don’t think that a couple of defaults are going to distill risk mentality into the Chinese system,” he said.
But the chief economist said it is still an open question whether China can manage the transition without a major clean-out of the non-banking sector.
“This is the big distinguishing factor between the sort of the good scenario and the less good scenario,” he said. “Can this be achieved in a way that can keep growth on track?”
–Ian Talley
Can China Fix Its Financial System Without Derailing Its Economy? - China Real Time Report - WSJ
- June 30, 2014, 11:08 AM HKT
This post originally appeared on Real Time Economics.
The headquarters of China’s central bank, the People’s Bank of China, is pictured behind an iron chain in Beijing.
Reuters
China can weather the storm. So says Paul Gruenwald, chief economist of Standard & Poor’s Rating Services’ Asia Pacific region.
One of economists’ biggest fears is whether China’s credit boom will end in a U.S.-style financial crisis, sending shockwaves across the global economy.
But Mr. Gruenwald says China has built up sufficient buffers to protect against a collapse in the country’s financial system, pointing to the $4 trillion in foreign-exchange reserves and the big banks’ cash stockpiles.
“They’ve got cushions in there that are going to help to mitigate any downturn,” he said in an interview. “That doesn’t mean it’s painless, but I think it means that it’s probably more manageable.”
That isn’t to say there won’t be troubles. The financial system could see an avalanche of bad loans from wealth-management products created outside the banking system. “If those go bad, that’s the unknown,” said Mr. Gruenwald.
More In financial crisis
- Double Dip: Would China Bail Out the Global Economy Again?
- Fed's Yellen Blaming China for Financial Crisis?
- Chinese Shoppers Hitting Their Stride?
- In China, 'Wall Street: The Documentary'
- EU: China Cooperating on Sensitive Issues
At the same time, if everyone thinks the government is implicitly guaranteeing the whole financial system, that is likely to continue to push cash into questionable investments. That is why authorities have allowed a small number of defaults—helping to introduce risk into the market—and interest rates at some banks are slowly rising.
“Moving a China-size economy from a model where there’s a huge amount of moral hazard to where markets and interest rates play an informational role is going to take time,” Mr. Gruenwald said.
The People’s Bank of China has acknowledged the risks, warning that corporate debt ratios are too high. The International Monetary Fund says not fast enough, and authorities should pick up the pace of reining in credit even if it comes at the cost of slower growth.
Mr. Gruenwald believes China can afford to move at a measured pace because of the cash cushions in the system. Still, he expects Beijing to increasingly allow more defaults.
“I don’t think that a couple of defaults are going to distill risk mentality into the Chinese system,” he said.
But the chief economist said it is still an open question whether China can manage the transition without a major clean-out of the non-banking sector.
“This is the big distinguishing factor between the sort of the good scenario and the less good scenario,” he said. “Can this be achieved in a way that can keep growth on track?”
–Ian Talley
