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CHINA'S impressive economic growth amidst global recession is being bought at the cost of severe overheating in Chinese asset markets, experts warned at a Tokyo conference yesterday.
They sounded the alert one day after regulators ordered banks to ensure that the huge volume of loans they are pouring into China's economy are not being used to finance speculation.
'Asset bubbles are already racing ahead, particularly in (China's) equity and housing markets,' Osamu Tanaka, a visiting professor at the University of Tokyo, told a conference organised by the Asian Development Bank Institute.
Conventional wisdom says that central banks should not take action on asset prices, he said. 'But if asset bubbles are driven primarily by liquidity conditions, the central bank has to make a response unless it is prepared to accept huge bubbles and their likely devastating consequences.'
Chinese stocks in Shanghai and elsewhere have rocketed in value by 85 per cent so far this year, analysts note, while property prices are also surging under the impact of liberal bank lending. At 7.4 trillion yuan (S$1.6 trillion), loans extended by Chinese banks in the first half of this year are already 150 per cent of the total extended in 2008, Mr Tanaka noted.
The dramatic surge in bank lending in the first half of this year creates the danger of a flood of new non-performing loans developing in the Chinese banking sector, Mr Tanaka suggested.
The danger of an asset bubble was also flagged at the conference by Yiping Huang, a professor at Beijing University's national school of development.
On Monday, Chinese banking regulators ordered banks to monitor the uses to which loans are being put so that credit does not leak into stock or property market speculation. Wu Xiaoling, recently retired deputy governor of the People's Bank of China, has predicted that bank lending in China could expand by 12 trillion yuan this year alone.
Chinese authorities are putting too much emphasis on economic growth, Mr Tanaka charged. 'Since the Asian financial crisis, 8 per cent has become a magic number of China's GDP growth,' he said. This growth rate is in turn justified as being the minimum needed in order to maintain social stability.
This 'may be a costly way of achieving social stability', Mr Tanaka said, citing China's extreme dependence upon new capital investment, especially in the manufacturing sector, to provide 90 per cent of total GDP expansion, and also the country's heavy dependence upon export-led growth.
Over-capacity, inefficiency, waste and non-performing loans are likely to accompany massive spending in a rush, he said. 'Asset bubbles are already running way ahead of improvement in (China's) fundamentals, given excessive liquidity injection.'
New initiatives are needed to achieve more sustainable economic growth in China, Mr Tanaka said. 'Domestic demand should play a greater role going forward. The declining share of consumption in GDP definitely needs to be reversed in coming years.' Improving social security is an essential component of reform, he added.
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