New York Times reporter Keith Bradsher may know something about Austrian business cycle theory, talked to someone who does (perhaps Dong Tao at Credit Suisse First Boston?), or maybe he is just a good observer:
China’s central bank expresses growing alarm that reckless bank lending, reminiscent of the pattern that preceded the American savings and loan collapse in the late 1980’s, may be causing an unsustainable boom that could end badly. In a rare statement on Aug. 23, the central bank said its economic policy units “unanimously think that the loans right now are increasing too fast.”
Chinese banks issued more new loans in the first seven months of this year than in all of last year, and the pace is still accelerating.
Yet in a sign that China remains stuck halfway between Communism and capitalism, the central bank has found itself with curiously little power to stop the runaway lending. Chinese financial markets are not well-enough developed for the central bank to do the kind of trading in overnight credit markets that the Federal Reserve uses to move short-term interest rates.
The bank has also renounced the authority that, under central planning, gave it the power to dictate how much could be lent to certain sectors of the economy, and by whom....
The lending is fueling rapid growth in capital investment. China’s huge steel, chemical, construction materials and mobile phone industries are each forecast to double its capacity in the next three years. If that happens, another wave of Chinese exports can be expected.
But the scale of such investment will allow factories to increase output so much that prices for their products may fall, making it less likely that the projects will earn enough for the borrowers to repay the banks. This could set off another round of loan defaults, said Dong Tao, a China economist with Credit Suisse First Boston. While few economists predict the Chinese economy might actually shrink, lending problems could be a severe brake on growth for years, increasing unemployment....
Gauging whether the Chinese economy is overheating is hard because official statistics show practically no inflation. A comparable frenzy of business activity in a Western economy would, if accommodated by the central bank, result in companies bidding up the prices of scarce materials and the wages of workers.
Oddly enough, official Chinese statistics show that the overall price level has changed little this year.
