CHINA'S REFUSAL TO INJECT CASH A MANOUVRE TO CLEAR ILLEGAL LENDING PRACTICES OR MISTAKE?

 

China's economy might have hit its first serious snag.  Plagued by credit and lending problems from shadow banking practices, it seeks to restrict cash flow to slow down or halt the illegal practice. 

But the timing is not in its favor.  Just as the move was implemented, economic signs started to show economic fatigue.  The great engine that is China's economy needs a break.

The reason might be overseas more than internal.  With Europe in a serious slump, with most of its economies either in deep debt or struggling, China is losing a large market share. US exports are not doing that great either.  Exports are sagging, and manufacturing is slowing down. 

What's worse, credit default swaps insurance has soared, a problem reminiscent of the US's own woes of 2008.  With insurance soaring, the central bank was expected to ease pressure by infusing cash into the system. But that's exactly what it did not want to do in the first place. The central banking authorities are sticking to their guns.  They removed nearly 350 billion dollars from the market.  Their objective in the end, is still to shut down the spigot of illegal lending.  

But is this the right move at a time when the economy is flagging? Without the ability to tap into the illegal borrowing market, and the higher costs of borrowing from the central banks, the small businesses will feel a squeeze that might send many over the brink. 

The picture however had been changing for a while.  This year the projected GDP is only 7.5%, nothing to sneeze at compared with some other large economies, but a far cry from the roaring 13% or double digit growth it enjoyed for more than a decade. 

The Central Bank for its part is undeterred.  They have exhorted private banks to contain financial risks, or 'shape up' as it may, and to support economic reforms.  

The great boat that is the economy of China is being steered by a strong hand, that is without doubt.  The Central Bank feels that the pain of a crunch of cash flow that could last all summer, might be just the cure the country needs.  But China is also a developing economy with much of the same problems, and some novel ones, as other large world economies, and such drastic measures might not play out as well as the government would like to believe. 

Source : The Guardian /  6.23.13