Prospect of China’s future economy growth
The prospect of China’s future economy growth based on the current economic situation, foreign exchange reserves and country’s national power.
Presently, China's central bank, the People's Bank of China (PBOC), indicated that if the yuan is not devalued or its value does not fall in order to stimulate the economy and ease market pressures, then capital account liberalization should be considered. Recently, PBOC governor Zhou Xiaochuan said local governments should invest outflow reserves into fixed-income assets instead of buying foreign currency to stabilize their international exchange rates due to a weaker dollar. This led to a plunge in U.S. Treasury yields and a selloff in the U.S. dollar. Both the PBOC and the State Administration of Foreign Exchange (SAFE) have been intervening to stabilize the yuan despite lowering their daily midpoint rates by over 1%. The central banks have built up their foreign exchange holdings since 1994, while they have also sold some of their gold reserves to protect their local currency since 2010. The foreign exchange reserves of China have risen gradually since 2001 as follows:
Total Foreign Exchange Reserves: USD1,200 billion in 2001, USD2,200 billion in 2008, USD3,600 billion in 2011 and USD3,500 billion as of October 2014. Recently China's central bank announced that its foreign assets amounted to $3.8 trillion at the end this month. Therefore, the reserves were $4.8 trillion as of October 2014, reflecting a net increase of $900 billion since 2011. The source of foreign assets is mostly from both foreign direct investments and portfolio investments. China's foreign assets increased by about $750 billion between 2008 and 2010 (in US dollar terms). The largest source of net liquidity was portfolio liquidation, which has accumulated since FY2011 from selling U.S. Treasuries and other securities in the wake of sharp declines in those markets, after having been a net seller during that period until 2007 and 2008.
According to the National Bureau of Statistics of China, Gross Domestic Product (GDP) is expected to grow by about 7% this year, which will be China's slowest growth rate since 1990 and below the government's target of around 7.5%. In 2013, China grew by 7.7%, a slower pace than the previous 7.8% in 2012 and 8.1% in 2011 and 2010. In addition, 6 million new urban jobs have been created every year over the past decade; however, only half of them have been filled in 2014 due to factors such as high home prices and rising wages. Meanwhile, both wages and property prices have increased significantly in recent years leading to severe pressure for further increases in interest rates. The IMF projects that China's economy will grow by 6.8% in 2015, which would be the slowest pace since 1990.
As the Chinese economy slows, Chinese banks have increased amounts of loans relative to deposits. In 2013, total loans in China reached a new high of RMB3 trillion and deposits rose by RMB1 trillion to RMB3.1 trillion (15% of GDP). In 2014, the bank lending rate was maintained at 3% for the first half-year after a decrease from July 2013 and an increase from May–June 2013. In June 2014, banks continued to lend loans at over 20%, which was unusual due to low economic growth rates in recent years.
Chinese authorities are concerned about the economic situation. The export-driven economy relied on low public debt levels and high bank reserve ratios. The PBOC had built up its foreign exchange reserves since 1994 and continuously sold its gold reserves since 2010 to protect the yuan. China has been sterilizing US$8 billion in monthly capital outflows, which was a major role in supporting the Yuan's value against a weak dollar. In addition, China's central bank governor Zhou Xiaochuan said that local governments should invest outflow reserves into fixed-income assets instead of buying foreign currency to stabilize their international exchange rates due to a weaker dollar. This led to a plunge in U.S. Treasury yields and a selloff in the U.S. dollar. Finally, foreign exchange reserves of China have increased gradually since 2001 as follows:
Total Foreign Exchange Reserves: USD1,200 billion in 2001, USD2,200 billion in 2008, USD3,600 billion in 2011 and USD3,500 billion as of October 2014. Recently China's central bank announced that its foreign assets amounted to $3.8 trillion at the end this month. Therefore, the reserves were $4.8 trillion as of October 2014 reflecting a net increase of $900 billion since 2011 (in US dollar terms). The source of foreign assets is mostly from both foreign direct investments and portfolio investments. China's foreign assets increased by about $750 billion between 2008 and 2010 (in US dollar terms). The largest source of net liquidity was portfolio liquidation, which has accumulated since FY2011 from selling U.S. Treasuries and other securities in the wake of sharp declines in those markets, after having been a net seller during that period until 2007 and 2008.
Given the country’s rapid growth, China’s total debt reached nearly 200% of its GDP in 2014 (compared to 130% for the US) with an increase of 12.2% over the past six years (versus an increase of 97% in the US). Total debt includes household loans, corporate debt, government debt and international liabilities.
Current debt situation in China presents some risks such as:
The People's Republic of China does not have a monetary policy as the country's Central Bank, The People's Bank of China, sets its key lending rate based on the economic policy objectives primarily focused on inflation and growth. Therefore, Monthly FX reserve & gold data is used as one of the key indicators to assess current liquidity situation in China. This indicator has been highly correlated with bank lending rates (as interest rates are low in China). However, there is no direct correlation between M2 money supply and bank lending rates because loan growth opportunities are very limited in most sectors due to high competition among Chinese banks. In fact, households have been the primary borrowers of this credit boom. The House Price to Rental Ratio has increased tremendously in recent years reflecting the growth of this sector. High property prices may increase the risk of a sharp slowdown in housing market and thus further increase deposit demand by households.
There is no strong direct correlation between short-term money supply (M2) to bank lending rates because loans growth opportunities are very limited in most sectors due to high competition among Chinese banks. In fact, households have been the primary borrowers of this credit boom. With such limited loan growth opportunities, it can be easily seen that the M2 money supply has been closely following CPI levels rather than bank lending rates. The House Price to Rental Ratio has increased tremendously in recent years reflecting the growth of this sector.
Conclusion:
China's expansion of credit has been very consistent in recent years. The aggressive monetary policy (with a 2-day 6.5% cut of bank lending rates and approximately RMB1 trillion capital injection into the country's four major banks) to reduce interbank interest rates and stimulate loan demand will help the country to combat deflationary pressures on its economy. On the other hand, significant economic slowdown in Mainland China could significantly reduce export demand for Hong Kong with negative impact on HKD and HKD-based currencies such as USDHKD, EURHKD and JPYHKD.