The way capital is allocated in China makes investment there inefficient, say analysts.
Capital is being misallocated. Local branches of China’s big banks have lent mainly to state-owned enterprises (SOEs) or those run by politically well-connected managers.
Thus companies that already tended to be inefficient because of their ownership have had access to large amounts of cheap capital. Meanwhile, the rest of the private sector was starved of credit.
Zhou Xiaochuan. head of the central bank, is deregulating interest rates. On Jan. 1, 2004, banks will be allowed to widen the range of interest rates they charge on commercial loans. The benchmark lending rate is 5.3 percent, and in the new year banks will be allowed to charge as much as 70 percent more up to 9 percent.
Although China’s banks have a load of bad loans, loan growth is running at 20 percent. Fixed-asset investment was up 29.6 percent in the first 11 months of 2003, and November consumer price index figures show inflation year-on-year hitting 3 percent, up from 1.8 percent in October.
The government is building infrastructure, banks are giving out loans to expand production capacity and property developers are building new office buildings and villas.
But analysts fear that the demand simply won’t be there, and there could be a recession as unneeded investments are liquidated.
Source: Hugo Restall,China’s Not Overheating, It’s Wasting Capital, Wall Street Journal, December 22, 2003.
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http://online.wsj.com/article/0,,SB10717914656193200,00.html
For more on China http://www.ncpa.org/iss/int/
FMF Policy Bulletins/30 December 2003
