China?s GDP growth for the September quarter has decelerated to a single digit to 9%. This is likely to remain so on a year-on-year basis. The main drag on growth has been due to the fall in exports, which have been loosing steam because of weakening consumption in the US and Europe. Investment also appears to have slowed down, as FDI growth has been decelerating. FDI inflows for the March quarter were up 61.3% from a year earlier, but the annual pace for the first three quarters moderated to 39.9%. Also, China?s economy is externally driven and hence, the global financial turmoil is all set to put pressure on its export earnings.
However, the latest Citigroup?s Vulnerability Index shows that China is the most resilient economy among Bric countries, the World Economic Forum has also accorded the highest rank to the dragon-nation in its annual global competitiveness 2008-09 report.
While in sync with the view that the slowdown may affect India and China, the UK-based Economic Intelligence Unit feels that these neighbouring countries will grow rapidly as against global standards. Indeed, a good show for the country, which has already shown its mettle by bagging the highest number of medals in this year?s Olympics games. But, this laurel comes with a note of caution. The analysts warn that the deceleration in exports?a fall out of the financial tsunami may affect the country?s exports badly.
The impact on the banking sector of the country is clear from the fact that the banking regulator of the country, China Banking Regulatory Commission, has, on Friday, issued detailed instructions to help banks meet the requirements stipulated in the Basel II agreement. The guidelines cover credit risk, internal controls, operational risk and capital base.
An agency report says that the regulator was toughening its guidance on capital adequacy requirements earlier for certain lenders to contain risks as the global financial crisis escalates and the domestic economy slows down. Under this backdrop, some of the measures being taken by the Chinese authorities are praiseworthy such as cutting down of the interest rates twice.
The People?s Bank of China (the Chinese central bank) has acted by reducing one-year lending and deposit rates by 27 basis points and reduced the reserve ratio to 17% freeing more capital for lending. It also scraped the 5% levy, it charged on individual savings.
It is clear that the government will loosen its monetary policy further to bolster investments in infrastructure. China Construction Bank, its second largest bank, had the steepest drop of 12.36% besides China Merchants Bank, which dropped close to 12% in Hong Kong Stock Exchange following the crisis. However, the interest rate cut will help the bottom line of all Chinese banks.
The controller of banking has effective control over Chinese banks. However, many experts consider stocks of Chinese banks a good bargain as the return on equity is 10% to 20% and PE ratios have been above 10. Shanghai Composite Index recovered from 5.23% drop on Monday to 0.73% drop on Tuesday (last week) in the midst of the global crisis. Against the backdrop of a large number of discredited and vilified American and European banks and FIs, we find that Chinese banks are secure.
?China is very cautious about its position in times to come,? says PS Deodhar, president, India-China Economic and Cultural Council. As the world?s biggest holder of forex reserves, ?China will have an important role in cushioning the unprecedented global financial shock even though as a country, China is rather well sheltered,? stresses Deodhar, fresh from a trip to China. The fact remains that nearly half of China?s toymakers have shut down this year with 7,000 workers losing their jobs.
Although the country?s entire banking sector was growing at a fast pace, the smaller banks? growth was much faster than their ?top? peers. According to a media reports, the aggregate pre-tax profits of this year?s top-100 Chinese banks? listing almost doubled compared to last year?s listing rising by 95.7% to Rmb 570.5 billion from Rmb 291.6 billion last year. Interestingly, the key growth was not from the big four (ICBC, Bank of China, China Commercial Bank and Agriculture Bank of China), but from the remaining 96 banks. While the profits for the big four rose by 55.9% to Rmb 339.5 billion, the profits of the others rose dramatically, more than tripling to $ 31.6 billion.
Bric economies may have a large domestic market, but a sharp deceleration in exports will still drag down the overall GDP growth. Take China for example, exports to the US and Europe (both battling a severe downturn) account for over 50% of the total trade revenue. ?So a moderation in demand from these economic powerhouses hurts China?s trade performance badly, which may, in turn, slow manufacturing activity and curb job creation,? says Sherman Chan, economist, Moody?s Economy.com. However, the fact that Bric economies can stimulate their large domestic market will help somewhat offset the downside impact of the global meltdown. But a notable slowdown in overall growth is inevitable, cautions Chan.
Different economies are tackling the crisis differently. If inflation permits, monetary loosening is certainly the answer. ?So, the gradual slowdown in inflation in China has enabled its central bank to begin loosening monetary policy by cutting interest rates and encouraging credit growth,? adds Chan.
It is speculated in Beijing that the country will hold on its vast dollar resources helping the bailout efforts. It has $1.2 trillion in US treasury and other bonds. So the US certainly needs China?s cooperation. However Chinese media openly blames the US as it lashed US for its lax, short-sighted monetary policy. It has reported that China is caught in an unavoidable predicament and may have to help the US.
According to Chinese researchers, Beijing should press Washington to open US markets wider to mainland firms and seek more powers in global financial institutions like IMF.
Indeed, the time is ripe for the Chinese banking sector to learn a few things from the Indian banking sector. At a meet organised this year under the aegis of Indian Banks? Association & China-India Financial Conference, which was held in May in Mumbai, a high-powered delegation from China visited India.
The two countries are likely to set up a working group consisting of representatives from both sides to decide the areas of common concerns on the issue. The economic co-operation between India and China has increased tremendously in the last decade. But, this co-operation is more or less confined to the trade between these countries. Banking and financial sector are the few among several areas where bilateral co-operation is yet to be explored.
