No economic crisis in China in the near future, a possibility of a hard landing for China"s economy, and non-performing assets in Chinese banks will continue to rise. These are the predictions of Ben Bernanke, Chairman of the U.S. Federal Reserve, as reported by Reuters on September 2. Whether his predictions are accurate or not remains to be seen. It is beneficial, however, to analyze the reasons why Bernanke made these remarks and examine the facts. Zuo Xiaolei, Chief Economist of China Galaxy Securities Co. Ltd., shares her views.
　　
　　Economic crisis
　　
　　A widely held definition says a recession occurs when real gross domestic product declines in two consecutive quarters.
　　This definition, however, is not applicable to an emerging economy like China. Therefore, generally speaking, an economic crisis in an emerging economy means that for two consecutive quarters, economic growth fails to ensure basic employment. For instance, if China’s economic growth rate remains below 6 percent for several quarters, it indicates a looming economic crisis.
　　Nevertheless, the fact is that China’s economic growth rate hit 10.2 percent in 2005 and in the first and second quarters of 2006 reached unexpectedly highs of 9.9 percent and 10.9 percent, respectively. More importantly, there is no indication that China’s economic growth will fall below 10 percent in the near future. Therefore, our deduction from this is the same as that made by U.S. Federal Reserve Chairman Ben Bernanke. China’s economy will not suffer an economic crisis in the near future.
　　We have noticed that the phrase “economic crisis” is frequently seen in other countries’ analyses of China’s economy, despite its continuous economic growth in the past decades---there is also no distinction between this phrase being used to emphasize the possibility or impossibility of a crisis. This reflects the international community’s worry about the fragility of transition economies and emerging markets, the insufficiency of dialogue and communication between China and the rest of the world, and also the lack of economic information about China in the international market.
　　The lack of information may prevent foreign investors from developing a correct estimation about China’s economic environment. They may fail to secure objective opinions on problems in the country’s development, misunderstand its economic policies and misjudge China’s economic situation. All these will add to their uncertainties of China’s economic prospects and could trigger an “economic crisis.” The increasing transparency of economic information will help to dissolve these suspicions and help the Chinese economy to interact more closely with the global economy.
　　
　　Hard landing
　　
　　It’s our belief that there are two reasons why Bernanke believes that China’s economy may have a hard landing. First, the concept of “hard landing” is related to China’s current macro-control measures. China has adopted a series of policies to regulate the imbalance in its economy. In addition to the hike in the loan rate in April, the required deposit reserve ratio of commercial banks was raised by half a percentage point in July and August, respectively. Later in August, the central bank increased its benchmark deposit and loan rates by 0.27 percentage points, together with relevant administrative policies. According to past experience, when the intensity of regulation becomes tougher than it needs to be, scorching growth can very quickly cool down. 　　Second, the United States seems to believe that the possibility of a hard landing for its own economy may have an impact on China. The U.S. Federal Reserve called a halt to its two-year steak of interest rate hikes in early August. This has led to speculation in the market that the Federal Reserve feels changes have taken place in the U.S. economy.
　　Actually, in order to boost economic growth that was badly affected by the September 11 terrorist attacks and to reverse the downturn in the capital market caused by the Nasdaq bubble bursting, the Federal Reserve cut the benchmark interest rate 13 times after 2001 and kept it at 1 percent for more than two years. Such a low rate not only stimulated real estate investment, but also encouraged people to pay off loans they took when the lending rate was high and helped them to pay less for their home mortgage loans. Expanded consumption drew the U.S. economy out of a recession.
　　After three years’ economic growth, and due to soaring oil prices, inflation concerns began to prevail in 2004. The ensuing increment on 17 occasions by the Federal Reserve has lifted the interest rate from 1 percent to 5.25 percent. Increasingly rising borrowing costs mean investment in real estate is no longer profitable, impacting this industry and also reducing people’s disposable incomes, previously high due to rolling mortgage loans at low interest rates. Consumption is directly affected. Recent statistics show that home sales in the United States have seen a sharp drop and consumer sales have also declined compared with the same period last year.
　　If the real estate bubbles burst, it will mean a heavy blow to both investors and consumers, and a large shortage of aggregate demand is likely to incur a hard landing for the U.S. economy. As China-U.S. economic ties are becoming increasingly stronger, a hard landing in the United States means China’s economy will surely suffer. In this sense, it’s reasonable to predict a possible hard landing in China.
　　As far as an economic hard landing is concerned, we are not as pessimistic as those on the other side of the Pacific. What China does need to face up to in 2006 is an “overheated” economy, shown in the booming import and export volumes, ballooning bank loans, excessive investments in fixed assets and rise in consumption. None of the three engines for economic growth has given signs of slowing down, so it’s seemingly unnecessary to worry about a hard landing. We should be more concerned with whether the country’s economy is able to maintain its current momentum.
　　However, we must prepare for a possible hard landing in China as a result of that in the United States. If the U.S. economy turns sour, the direct result is a shrinking consumption market. A declining demand for imports in the United States can absolutely affect China’s exports. In addition, a dismal U.S. economy will deal a heavy blow to Japan and Europe, which will in turn reduce the two markets’ demand for China’s exports. 　　If we see a soft landing, then the impact on China’s economy will turn out to be mild. What’s more, slightly falling export and economic growth may help to curb China’s excessively rapid growth for the time being. As long as China’s economic growth rate drops from 10.9 percent to 5 or 6 percent, and energy consumption reduction and the transfer of economic growth model change continues, it’s possible that a soft landing for the U.S. economy will be helpful to China’s stable, rapid and sustainable economic growth.
　　
　　Non-performing assets
　　
　　Several years of reforms have helped to improve the capital adequacy ratio of Chinese banks on the whole and contributed to the continually falling bad loans. Quite a lot of Chinese banks, especially overseas-listed lenders, have met the internationally recognized standard in this field. But why do Chinese banks’ non-performing loans keep drawing so much attention from the international community? This may result from different ways of thinking concerning this issue. In our opinion, when asset management companies have taken over bad assets, banks are largely relieved of risks, but in many other countries, shipping off bad assets are still regarded as the responsibility of banks, to be eliminated by the banks themselves.
　　In order to remove the international community’s misunderstandings of non-performing loans in China’s banking system, there must be a breakthrough in the reform of various systems, such as the operational model of banks, the performance appraisal system of GDP growth, the market-oriented resource allocation and the transfer payments of public finances. This will narrow the difference between savings and investment and balance the various sectors of its economy. Of course, the priority is to remake the administrative system.
　　The forecast of China’s economy by U.S. economists is not without flaws, but it has really inspired us to make a deeper analysis and develop more understanding of the international and domestic economy. The U.S. expectation of little probability of an economic crisis in China has strengthened our confidence.
　　China is supposed to have a well-developed mechanism to act about the changes taking place in the U.S. economy. The practice of macro-control may add to banks’ bad assets, but without this practice, more bad assets will inevitably accumulate. The macro control measures, along with various institutional reforms, are likely to contribute to stable and sustainable economic development. In this way, warnings of an economic crisis and hard landings may not be of too much concern to China.

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