China needs an “urgent” tightening of monetary policy to prevent the huge stimulus measures introduced this year from inflating stock and property bubbles, one of the country’s leading bankers has warned.
Qin Xiao — chairman of China Merchants Bank, the country’s sixth-biggest — says in Thursday’s Financial Times that the government should not be afraid of a “moderate slowdown” in the economy. “Monetary policy must not neglect asset-price movements,” he writes. “Therefore it is urgent that China shifts from a loose monetary policy stance to a neutral one.” Mr Qin’s unusually frank warning comes ahead of the publication on Thursday of third-quarter gross domestic product figures that are expected to underline the rapid recovery in China’s economy, with analysts forecasting growth of nearly 9 per cent compared to last year. According to calculations by the Financial Times and independent economists, China’s stimulus measures could amount to 15-17 per cent of GDP this year if government-induced bank lending is taken into account — by far the largest among major economies. The Chinese government has used its control over the banks to engineer a massive increase in lending this year, with new loans in the first nine months of the year 149 per cent higher than last year at Rmb8,650bn ($1,260bn). Much of this investment has gone into infrastructure projects. The M2 measure of money supply is up 29.3 per cent, year on year. The giant investment programme has polarised critics, with some predicting inflation and warning that excessive bank loans were causing sharp rises in share and property prices, while others have argued the lending binge would exacerbate over-capacity and encourage deflation. The State Council, China’s cabinet, gave its first clear hint Wednesday evening that it was considering a tighter monetary policy when it said that policy should focus both on managing inflationary expectations as well as securing stable growth — the first time it has mentioned inflation since the global economic crisis hit China last year. “This is the first thing you would expect the authorities to say before they begin to moderate policy,” said Stephen Green, economist at Standard Chartered in Shanghai. But any increases in interest rates or controls on lending were unlikely before Chinese New Year in February, he said. Tomo Kinoshita, an economist at Nomura International, said in a report on Wednesday that China risked creating an asset bubble similar to Japan’s in the 1980s if it continued with aggressive lending at the same time as deregulating its financial markets.