Wednesday, September 15, 2004
On a whole, I think the economy will not face a sudden crash due to Wen's policies. The declining money supply and fixed-asset investment growth figures released recently suggest a gradual decline in investment fever. The danger in the next couple of quarters, in fact, might be that money supply growth would pick up once again. We actually witnessed this in1993 after the first round of Zhu's austerity measures. After a few months of tough PBOC policies, local governments began to borrow at a torrential rate again, causing high inflation in 1994. The collapse of retrenchment in 1993 was brought about by Deng's displeasure with Zhu's policies. Similarly, we hear stories today of elite division over Wen's austerity measures, which might trigger a fresh wave of lending and investment on the east coast. Although growth in fixed asset investment has slowed, it is still growing at 26%, which is quite high.
Also, austerity measures are not costless. According to a piece on SCMP today, 4150 investment projects involving over 800 billion yuan were stopped. This means that banks that provided funding to those projects will see little of their money returned. Again, a lot of non-performing loans were generated in the last retrenchment, and I suspect a new wave of NPLs is being produced by the current austerity period.