Huge financial assets pose alarming threat

• Source: The Global Times
• [11:13 May 26 2009]
• Comments

By Paul Kong

We need to be on guard against a Chinese financial crisis. This is not just alarmism: the risks posed by China’s huge financial assets are real.

After reform and opening-up, China’s financial assets experienced extremely rapid growth. Official estimates put China’s total financial assets close to 60 trillion yuan ($8 trillion). If we count in non-governmental financial assets of banks, the number grows to roughly 70 trillion yuan ($10 trillion), which is 5 to 6 percent of the world’s total financial volume.

China’s US dollar reserves have grown during this period as well, to more than $2 trillion. The huge surplus of funds is a burden to the economy and causes credit liquidity issues.

China’s buying US treasury bonds is the inevitable result of both a relative surplus of funds and “not knowing what to buy.” Isn’t it ironic that a developing country lends financial assets equivalent to 40 percent of its GDP to the richest country in the world? But the harm in buying US T-bills is far less than that caused by the fact that China can’t inject 50 trillion yuan($7 trillion) into its own financial system. This is the key issue.

In the early stage of reform and opening-up, China’s basic financial problem was a lack of funds and projects. It was necessary to attract investment to meet the heavy dem a n d s of industry. But after 30 years’ rapid growth, China’s industries have developed. Most of China’s regions are richer than 30 years ago and are not in desparate need of money like they were in the past. They need more investment in cutting-edge technology.

This means that the range of investment possibilities in China is narrowing. The investments made in the early years of China’s reform have paid huge returns, meaning that now there is a relative surplus of funds.

Some Western economists ascribe the hardship suffered by Western economies to the insufficient domestic demand of China. This viewpoint doesn’t take into account China’s real situation, something Chinese economists must be aware of.

Western economic thought has some Chinese economists calling for increased government investment and stimulation of domestic consumption. While it’s somewhat reasonable to believe China’s economy can keep growing strongly with a boost in domestic demand, it’s important to realize that this won’t solve the problem of China’s surplus funds.

As mentioned above, China now has 50 trillion yuan ($7 trillion) in excess funds, an amount no traditional industry in China can responsibly consume.

Increased government investment would help some traditional industries develop, but not to the point that they would make a real leap forward. That will require a structural revolution in the Chinese economy, one capable of lowering China’s surplus cash.

To be more concrete, we must form new core industries to propel rapid growth.

The author is a Chinese scholar living in Australia. This article was translated by Wang Buzhi

Illustration: Liu Rui