•China Must Avert Asset Bubbles Fueled by Record Lending, World Bank Says

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China Must Avert Asset Bubbles Fueled by Loans, World Bank Says
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By Bloomberg News

Nov. 4 (Bloomberg) -- China’s policy makers must avert stock and property market bubbles after lending swelled to a record $1.27 trillion this year, the World Bank said.

The Washington-based lender raised China’s economic growth forecast for this year to 8.4 percent from 7.2 percent and Beijing-based senior economist Louis Kuijs said the central bank will “eventually” have to rein in credit to ensure resources are properly allocated.

The Shanghai Composite Index has surged 72 percent this year after Chinese authorities enacted a $586 billion stimulus plan, lowered banks’ cash reserve requirements and reduced the one-year lending rate to a five-year low. The World Bank also said China will need to do more to rebalance the economy toward consumption and services and away from investment and industry.

“Risks of asset-price bubbles and misallocation of resources amidst abundant liquidity need to be addressed,” Kuijs said. While there’s currently no need for a “major tightening,” the costs of sustaining the current expansionary policy stance “will increase over time,” he said.

China may tighten monetary policy from the second quarter of next year because of stronger growth and rising consumer prices, Goldman Sachs Group Inc. said Oct. 29. Li Dongrong, an assistant governor at the central bank, said on Nov. 1 that China will maintain a “relatively loose monetary policy.”

Faster Growth

Stimulus spending and the surge in lending helped gross domestic product grow 8.9 percent in the three months to Sept. 30, the fastest expansion in a year.

The World Bank said the economy will grow 8.7 percent in 2010, more than an earlier estimate of 7.7 percent. Rebounding housing construction and a turnaround for exports will help the economy pick up next year even as overall growth in investment falls by about half, the lender said in today’s report.

“More policy measures will be needed to rebalance growth in China,” the World Bank said. “Structural reforms to unleash more growth and competition in the service sector and stimulate more successful, permanent migration would be particularly welcome.”

Recent initiatives to increase investment in health, education and the social safety net, as well as improving access to finance for small and medium-sized enterprises, are steps in the right direction, the World Bank said. China is likely to record growth over the next five years of about 8 percent annually, it said.

‘Undervalued’ Yuan

International Monetary Fund Managing Director Dominique Strauss-Kahn said he anticipates China will address its “undervalued” currency to achieve greater dependence on domestic demand rather than exports.

China has prevented the yuan from appreciating since July 2008, stoking tensions with American manufacturers. Over the previous three years, the Chinese government had allowed the currency to advance 21 percent against the dollar.

The exchange rate needs to appreciate “in the coming years but I think that the process which is now at work is a process which goes in this direction,” Strauss-Kahn said in an interview yesterday on Bloomberg Television in Washington. The global financial crisis has already started rebalancing the world economy as U.S. consumers are saving more and China moves toward a “more domestic-led” growth model, he said.

Exports, meanwhile, are likely to resume contributing to China’s economic growth next year, the World Bank said.

Exports to Contribute

Shipments abroad may make up 0.4 percent of growth in 2010 after slicing 3.4 percentage points off this year’s expansion, the lender said. Domestic demand will contribute about 8.2 percentage points to growth next year, down from 11.9 percentage points this year, it added.

“China’s export growth is likely to resume, helped by strong fundamental competitiveness and the recent depreciation of the nominal effective exchange rate,” the report said.

Domestic demand has buoyed imports this year, narrowing the current account surplus. The gap will shrink to 5.5 percent of GDP this year and 4.1 percent in 2010 from 9.8 percent last year, the lender said.

Manufacturing investment will remain under pressure next year because of spare capacity in China and abroad, the World Bank said. That excess capacity will help keep “underlying inflationary pressures” largely absent, the report said.

Recent increases in prices of food items including pork and grain are unlikely to cause sustained general inflation, the lender said. Growth in M2, the broadest measure of money supply, may slow to 17 percent in 2010 from an estimated 27 percent this year, the report said.

New loans amounted to an unprecedented $1.27 trillion in the first nine months of 2009.

To contact the Bloomberg News staff for this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net
Last Updated: November 3, 2009 23:00 EST

 

That will be an interesting additive to the withdrawal of the "future taxpayer" funded "spend now" programs in the US, Aus and Europe. China's export competitiveness might not help much if the rest of the world goes into a post spendup pullback.

Add that to the reduction in the "house sellers bonus" in Aus and we should see a very interesting 2010.