IFA’s at Enable are interested to note that the Chinese too have issues with the spending of their local governments. Last June, the IMF laid out a plan for Chinese state bankers which focused on absorbing excess liquidity and appreciation of the Yuan. But in the same month, the Chinese National Audit Offices announced a $1.6 trillion hole in the balance sheets of local governments.
For some this hole, and a slowdown in global growth, has led commentators to be increasingly cautious on the prospects for the world’s second-largest economy. “The question is whether China will act in time and avoid wholesale capital outflows, a property crash and shattering of confidence.” Said Ewen Cameron Watt chief investment strategist at the Black Rock Investment Institute.
With $3.2 trillion in foreign exchange reserves however and GDP growth of 9.1% in 2011, China still has considerable amount of clout with which to confront a deteriorating economy.
Much of the world is looking to China to prop up the global economy, but it is easy to underestimate how far China itself needs to reform; they do not have a deposit insurance system, for example, meaning its banks do not have to insure savers against bankruptcy. Western banks are hoping China opens its borders but liberalising China’s economy too soon holds dangers, “any major change to the vital banking sector is potentially destabilising in the medium term, given that other countries in recent decades experienced some form of a banking crisis within 10 years of interest rate liberalisation.” Enable’s independent financial advisors will be watching events in China closely this New Year.
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