According to the Chinese Zodiac, we’re at the tail end of the year of the dragon, which is associated with power and good luck. Next February we’ll transition to the year of the snake, associated with intelligence and materialism.
What’s the economic translation? The three panelists at Chicago Booth’s Economic Outlook event last week sounded cautious notes on China, especially when it came to the banking sector.
To be sure, as Northern Trust Chief Economist Carl Tannenbaum pointed out, “it is hard to feel sorry for a country that is still growing at 7.5%, nevertheless down from eleven.”
China is making some successful attempts to strengthen its middle class. It’s also producing more value-added goods for export, pointed out Chicago Booth Professor Raghuram Rajan.
But the economists described a country that, while increasingly capitalistic and aspirational, is still building the institutions and sensibilities that would support a healthy consumer culture. Wages, while rising, remain low. That dampens consumption. Moreover, savings rates are high, and banks have yet to create widespread, sustainable credit offerings.
In fact as some people hunt for higher yields, Chinese banks are dreaming up and offering new products to wealthy clients. A Financial Times story printed a day before the conference described the growth of loosely regulated, non-bank lending and detailed the complexities and potential problems.
“This is exactly parallel to what happened to the shadow banking system in the US,” warned Chicago Booth Professor Randall Kroszner, who had just returned from a trip to China. He had appeared on Nov. 28 at the opening session at the 10th Caijing Annual Conference, a finance and economics gathering in Beijing. Kroszner called attention to “frightening parallels” between China’s banking system and the US financial system before the 2008 crisis.