At the beginning of 2016 global financial markets panicked. The feeling was that China had lost control of its exchange rate and a serious devaluation of the Chinese Yuan looked all but inevitable.
Since those early nervous days however tighter controls on capital flows by the Chinese authorities have made it easier to manage the currency and with signs that growth is stabilizing, the case for an aggressive currency decline is waning.
Nevertheless according to Richard Jerram, Chief Economist at Singapore based private bank, The Bank of Singapore, credit is still growing much faster than economic activity. A situation that is far from sustainable. The latest figures out of China, showed GDP rose 6.7 percent in the first quarter of 2016 compared to the 6.9 percent growth reported in 2015, indicating growth stabilizing.
China's Credit Bubble
A decade ago, each additional Renminbi (RMB) of new lending produced about the same increase in GDP. Now it takes three times as much additional lending to produce an extra unit of output, a scenario that is producing a huge credit bubble.
The International Monetary Fund (IMF) has also raised its concern in its latest report, the Global Financial Stability Report.
Jerram’s view is that China will need support for growth from as many avenues as possible for some time to come in order to produce an environment conducive to economic transition, while managing the credit bubble. He also believes the Chinese government is already taking appropriate steps to protect the banking system from the inevitable rise in non-performing loans.
