If you have been following China economic news lately, you have probably noticed a massive quantity of articles referencing China’s credit problems, shadow banks, and recently, interest rate deregulation. This year could very well mark a turning point in China’s economic structuring.
For the past twenty-plus years, China’s economy has been centered around exports, cheap labor, and inexpensive goods. This export market helped to propel China into its position as the number two ranked GDP in the world. However, if one considers China’s GDP per capita, he will find that this ranking is much lower, around eighty-second overall.
Currently, China’s state owned banks have been offering cheap credit at the government-set rate of around 6 percent to its state owned enterprises. This rate allows China’s massive companies to take out loans that are very easy to payback. Also affecting the net overall cost is the availability of cheap labor. Over the past twenty-plus years, migrant workers have been flooding major Chinese cities to work low paying, labor intensive jobs.
Now, however, the cheap labor is beginning to run out. Most migrant workers have already migrated. These workers are beginning to expect higher wages. The government is beginning to realize it can no longer rely on its export oriented economy, as foreign factories have begun moving to countries with cheaper labor, such as Cambodia, Vietnam, and Myanmar.
China wants to change its economic structuring to focus less on cheap exports and more on domestic consumption. In order to do so, China needs to turn its attention towards fostering small and medium sized business growth and encouraging its citizens to spend, rather than save.
Currently, China’s bank regulations limit its four major government owned banks from extending cheap credit outside of large SOEs. Small and medium sized enterprises are more often than not forced to go to shadow banks to receive loans at rates of up to 24 percent. Clearly, this is not beneficial to fostering private sector business growth.
China’s slow deregulation of interest rates will inevitably encourage investors to begin investing in banks again. With this will more than likely come a real estate market crash. Because of the mass amounts of investment in real estate, prices are above what many consider the actual market levels to be. As this investment stops, prices will drop, and many Chinese citizens will see their life savings disappear before their eyes. This could usher in social instability.