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Realignment of Malaysia’s geopolitical priorities necessary Print E-mail
Monday, 06 July 2009 16:19

An asset bubble is being created by the lending bubble, reminiscent of the lending and property bubble in the United States before the crash

WHAT would you do if you were leaders of the Chinese Communist Party celebrating the 60th anniversary of victory in China? In a country where symbolism is important, Chinese leaders are perhaps eager to show an economically strong China in 2009 to placate the people, prolong its mandate, showcase its economic model and boost China’s prestige while those of Western countries are tarnished.

The high-growth Chinese economic model is propelled by three engines of varying strengths – exports, private consumption and investments. The Chinese export engine is broken and represents a drag on growth. Exports, which started declining year-on-year in November 2008, fell 26.4% in May 2009 (See Chart 1).

The private consumption engine is still growing (China’s May 2009 retail sales are up 15.2% year-on-year), albeit only 35% of gross domestic product (GDP) compared with around 70% of GDP for the United States. It is too small to boost economic growth significantly.

This means that China will have to rely on what has always been its main engine of growth: investments.

Investments account for around 40% of China’s GDP and could account for a significantly higher proportion this year.

In the past, much of the investments was channelled into building factories for exports. However, with falling exports and overcapacity, investments have now been channelled into infrastructure and real-estate development.

Investment requires money and as most banks are government-owned, they have been “persuaded” by the government to lend – and lend they have.

China’s banks have forked out 5.9 trillion yuan (RM3 trillion) in the first five months of 2009, or 177% more than the 2.1 trillion yuan lent out in the equivalent period last year.

Total loans outstanding rose 19.4% to 36.2 trillion yuan as shown by Chart 2. If the same lending bubble happens in Malaysia, it would be equivalent to outstanding loans in May 2009 rising by RM141.1bil to RM867.5bil instead of just an RM8.6bil rise in total loans to RM735.2bil at end-May.

Imagine what a RM141bil injection of loans and liquidity would do to Malaysia’s economy. It would certainly be a boon for property and stocks. However, in the hypothetical scenario, Malaysian banks just like Chinese banks now would be exposed to huge potential bad debts when the bubble bursts.

This aggressive lending is exacerbating global imbalances. China has been over-investing while the United States has been over-consuming and with this lending bubble, Chinese over-investment can only worsen.

To boost its growth to close to the 8% target, China is engineering an investment boom fuelled by generous bank lending and a large four trillion yuan (RM2.06 trillion) fiscal stimulus. Its fixed asset investments in urban areas have surged 32.9% in May 2009 from a year earlier.

This strategy is not without risks. First, property prices have recovered by 30% in some cities. And with money supply M2 growing at 25.7% from a year earlier, an asset bubble is being created by the lending bubble, reminiscent of the lending and property bubble in the United States before the crash.

Chinese banks have leaned on their customers to take loans to meet their loan target. If customers fail to draw down their loans, they may face penalties. It is no wonder that some of these loans have found their way to the stock market. A Chinese government economist has been quoted as saying that about 1.16 trillion yuan, or 20% of the 5.9 trillion yuan bank loans, may have been invested in the stock market, resulting in its surge.

With a low government and total debt to GDP, a need for better infrastructure and negative inflation with consumer prices declining by 1.4% in May 2009, the inflationary impact may not be felt straight away. However, things may not be so sanguine next year after the celebration of the 60th anniversary of the Communist Party takeover of China.

When inflation rears its ugly head after months of low interest rates, pump-priming and excessive bank lending, the Chinese authorities may have to press the brakes and accept a much lower growth target below the arbitrary target of 8% GDP growth per year. Social problems will rise and the communist-led Chinese capitalist system will be put to the test.

How does the Chinese lending bubble impact the world and Malaysia? First, China’s growth, though not fully offsetting the severe economic contraction in the United States, Europe and Japan, is limiting the severity of the global downturn.

Second, the excess liquidity generated in China is seeping through its borders and has contributed to higher property prices in Hong Kong and Taiwan as well as higher commodity prices.

Third, Chinese companies have gone on an overseas acquisition spree which has been positive for Australian mining firms.

Malaysia is benefiting from Chinese demand for palm oil. Not many people from China are buying Malaysian properties and only a few Malaysian stocks like Parkson Holdings have exposure to China.

In fact, one of the weaknesses of Malaysia’s economy is its over-dependence on electronics exports to the West. Our primary linkage with emerging Asian economies like China and India is mainly through commodity exports to these countries.

Perhaps we could improve our transport linkages with India and China and boost our marketing efforts to persuade more Indians and Chinese to visit and buy properties in Malaysia. Perhaps China and India could take advantage of Malaysia’s multi-racial strength and good transportation links to build manufacturing plants and services industries. The lack of suitable manpower has been one of Malaysia’s drawbacks.

Perhaps the Malaysia My Second Home Programme could be altered to allow those who bring in capital into Malaysia to work in the country. Bringing in foreign capital and talent will help revitalise the economy and property market while offsetting the brain drain we are facing. One of the major strengths of the United States is its ability to attract capital and talent.

Going forward, how successful Malaysia fares will be dependent in part on how we interact with India and China, which is likely to be the world’s second largest economy by as early as next year. After all, as history shows, it was the special relationship between Malacca and China that enabled Malacca to become the strongest empire in South-East Asia, thanks to Chinese trade and protection.

A realignment of Malaysia’s geopolitical priorities and greater co-operation within Asean are necessities when one is sandwiched between two emerging giants.

Choong Khuat Hock is head of research at Kumpulan Sentiasa Cemerlang Sdn Bhd. Readers’ feedback is welcome. Please email to starbiz@thestar.com.my

Source: http://biz.thestar.com.my/news/story.asp?file=/2009/7/6/business/4254750&sec=business



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