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fan gang profEssor of Economics at BEijing univErsity and thE chinEsE acadEmy of social sciEncEs,
dirEctor of china’s national Economic rEsEarch institutE, sEcrEtary-gEnEral of thE china rEform foundation,
and a mEmBEr of thE monEtary policy committEE of thE pEoplE’s Bank of china
the illusion of a chinese Bubble
on thE EvE of chinEsE nEw yEar, thE pEoplE’s Bank of china (pBc) surprisEd thE
markEt By announcing – for thE sEcond consEcutivE timE in a month – an incrEasE
in Banks’ mandatory-rEsErvE ratio By 50 Basis points, Bringing it to 16.5%.
hortly before that, china’s government acted to stop government has acted with such determination, while the legacy
over-borrowing by local governments (through local of a functioning centralized system may explain why it has
state investment corporations), and to cool feverish proven capable of doing so decisively. after all, although modern
regional housing markets by raising the down-payment ratio market economics provides a sound framework for policymaking
for second house buyers and the capital-adequacy ratio for – as chinese bureaucrats are eagerly learning – the idea of
developers. a planned economy emerged in the nineteenth century as a
This latest round of monetary tightening in China reflects the counter-orthodoxy to address market failures.
authorities’ growing concern over liquidity. In 2009, M2 money Some people would prefer china to move to a totally free
supply (a key indicator used to forecast inflation) increased by market without regulation and management, but the recent
27% year on year, and credit expanded by 34%. In January crises have reminded everyone that free-market fundamentalism
2010, despite strict “administrative control” of financial credit has its drawbacks, too. No one has proven able to eliminate
lines (the PBc actually imposed credit ceilings on commercial bubbles in economies where markets are allowed to function.
banks), bank lending grew at an annual rate of 29%, on top But if the fluctuations can be “ironed out,” as John Maynard
of already strong expansion in the same period a year earlier. Keynes put it, total economic efficiency can be improved.
While inflation remains low, at 1.5%, it has been rising in recent
months. housing prices have also soared in most major cities.
These factors have inspired some china watchers to regard
the country’s economy as a bubble, if not to predict a hard The leverage of financial investments remains very low
landing in 2010. But that judgment seems premature, at best. compared to other countries. Using bank credits to
To be sure, china may have a strong tendency to create speculate in equity and housing markets is still mostly
bubbles, partly because people in a fast-growing economy forbidden. There may be leaks and loopholes in these rules,
become less risk-averse. Thirty years of stable growth without but firewalls are in place – and are more stringently guarded
serious crises have made people less aware of the negative than ever before.
consequences of overheating and bubbles. Instead, they are so So is a Chinese bubble still possible? Perhaps. But it has not
confident that they often blame the government for not allowing appeared yet, and it may be adequately contained if it does
the economy to grow even faster.
There are also several special factors that may make Government investment, which represents the major part of
china vulnerable to bubbles. china’s large state sector (which china’s anti-crisis stimulus package, should help in this regard.
accounts for more than 30% of GDP) is usually careless about roughly 80% of the total is going to public infrastructure such
losses, owing to the soft budget constraints under which they as subways, railways, and urban projects, which to a great
operate. local governments are equally careless, often failing extent should be counted as long-term public goods. as such,
to service their debts. In addition, various structural problems they will not fuel a bubble by leading to immediate over-
– including large and growing income disparities – are causing capacity in industry.
serious disequilibrium in the economy. Moreover, roughly 40% of the increase in bank credit in 2009
But a tendency toward a bubble need not become a reality. accommodated the fiscal expansion, as projects were started
The good news is that chinese policymakers are vigilant and prior to the budget allocations needed to finance them. Over-
prepared to bear down on incipient bubbles – sometimes with borrowing by local government did pose risks to the banking
unpopular interventions such as the recent monetary moves. system and the economy as a whole, but, given china’s currently
Whatever one thinks of those measures, taking counter- low public-debt/GDP ratio (just 24% even after the anti-crisis
cyclical policy action is almost always better than doing nothing stimulus), non-performing loans are not a dangerous problem.
when an economy is overheating. Whereas some policies may Indeed, they may be easily absorbed as long as annual GDP
be criticized for being too “administrative” and failing to allow growth remains at 8-9% and, most importantly, as long as local
market forces to play a sufficient role, they may be the only government borrowings are now contained.
effective way to deal with china’s “administrative entities.” Finally, the leverage of financial investments remains very
In any case, the new policies should reassure those low compared to other countries. Using bank credits to speculate
who feared that china’s central government either would in equity and housing markets is still mostly forbidden. There
simply watch the bubble inflate or that it lacked a sufficiently may be leaks and loopholes in these rules, but firewalls are in
independent macroeconomic policy to intervene. The place – and are more stringently guarded than ever before.
consequences of burst bubbles in Japan in the 1980’s and in So is a chinese bubble still possible? Perhaps. But it has not
the United States last year are powerful reasons why china’s appeared yet, and it may be adequately contained if it does.
March 2010
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