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Counting the Cost

China's credit crunch

Could China's growth be the next victim of the debt crisis?

Last Modified: 29 Jun 2013 14:42
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During the financial crisis the world looked to China to stabilise the global economy, and with a massive $586bn stimulus programme, it did just that.

Much of the money went to local authorities for infrastructure programmes, but another subsequently large amount went to the banks leading to a credit explosion.

It therefore came as a shock to the banking system, markets and investors alike, when China appeared to be facing the same fate that befell Lehman Brothers in the US.

The credit markets almost froze as the People's Bank of China set out to very publically tame the banking sector in order to avoid its own North-Atlantic style financial crisis. Particularly in the firing line were the 'shadow banks' - leasing firms, pawn brokers and underground banks - which according to JP Morgan Chase, lent $5.8tn [about 70 percent of the country's GDP] between 2010 and 2012.

Its so-called investment trusts have $1.4tn under management. It also has $3.4tn in foreign reserves, but the money can not be used to fix banking problems as it would involve selling foreign currencies and buying up its own currency, the yuan. This poses a problem for exports.

The People's Bank of China is determined to promote less speculation in property and stocks, and the new Chinese leadership is in search of quality of growth and not quantity.

There is a possibility that China will miss its growth target for the first time since the Asian financial crisis in the late 1990s.

For some explanation and analysis Marshall Mays, the director at Emerging Alpha Advisors in Hong Kong tells Counting the Cost where the problems stem.

"This is what I call an experiement. It's also part of the new administration trying to exert its influence, its reform ideas and its plans for the future. One of the problems is there's been an excess amount of unregulated financing vehicles in the market in the last four or five years, which have caused a little bit of a havoc. Traditionally the system works from the banking system being this major supplier of funds, but that's only now half the major supply and much of that money flows through the banking system and it's still not easy to control. There's a second problem related to this which is a lot of corruption ... and the goverment has been trying to squeeze both of them out of the system," explains Mays.

Beijing also has the desire to use the yuan in global trade and finance - to challenge the dominance of the dollar and the euro. It is not willing to let the currency free-float at present, but has been signing up countries to use the yuan for trade.

Stephen Cole sat down with HSBC's Middle East chief economist, Simon Williams, to discuss the rising use of the yuan in global trade.

"I think it's a long term story. The growth of the Chinese economy is hardly a new trend .... When you have that shift in the structure of the global economy, it's inevitable that the structure of the world's currency will change with it and that the reminbi [the yuan] will become part of that global currency mix," says Williams.

Brazil's misused windfall

Brazil is a nation that became synonymous with the rise of the southern hemisphere. But has it misused that windfall of the last decade? Any man or woman on the street who is protesting would probably answer with a definitive 'yes'.

The current lack of infrastructure is leading to huge frustrations.

The transporation system is not integrated due to a lack of urban planning and record car sales in recent years.

"Mass transport is not a priority. Statistics say only 25 percent of the people in Rio use public transportation, the rest is buses and cars. So we have a system that is congested, does not integrate, and does not allow fast travel, that's why the passengers have to pay high costs in travelling," says Orlando Santos, a specialist for urban planning at Rio de Janeiro Federal University.

 
Watch each week at the following times GMT: Friday: 2230; Saturday: 0930; Sunday: 0330; Monday: 1630. Click here for more Counting the Cost.

Follow Kamahl Santamaria @KamahlAJE and business editor Abid Ali@abidoliverali

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Source:
Al Jazeera
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