To regain global balance, UBS urged China to stop playing the blowout trilogy

In the first 5 months of this year, RMB loans increased by 5.84 trillion yuan. In June, CICC expected a sharp rebound in new lending to at least 1.3 trillion yuan.　　7 trillion of new credit in the first half of the year may hit a beautiful G DP, but it also buried the hidden dangers. "One of the biggest risks China faces is the credit expansion we've seen over the last 6 months." UBS Securities believes China needs tighter controls on credit to avoid unreasonable further expansion of its capacity.　　This is one of the three things China needs to do to regain the balance of the global economy.　　Credit is still expanding. The new credit figures for June were not available, but given the "quarter-ending sprint" of bank lending, more than $6 trillion trillion in the first half was a foregone conclusion, with experts predicting up to 7 trillion yuan.　　This means that the first half of the credit will be more than the new China since its inception in any one year of total delivery (Figure 1).　　On one side is China's current-account surplus, the US's structural deficit, and the global imbalances may not yet come, but the global economic "core" imbalance remains to be resolved. UBS Securities believes the global rebalancing China needs to do three things: tighten control over credit, avoid unreasonable further expansion of capacity (Figure 2), and in the near future, promote the integration of heavy industry, let the enterprises with low profit level into the natural integration cycle, keep the RMB appreciation trend to "block" the export channel　　To actively promote the longer-term reform of the shareholding system of state-owned enterprises, implement the state dividend reform and make the privatization more high, so as to help to determine that corporate profits can actually flow to the remaining shareholders, rather than automatically being reinvested.　　One of the biggest risks facing China, UBS believes, is the expansion of credit that we have seen over the past 6 months, raising concerns about the potential for a further blowout in manufacturing excess capacity and trade surpluses.　　Wang Tao, China's chief economist at UBS, is looking forward to a significant reduction in liquidity over the next 12 months, a sharp contraction in credit expansion and the reversal of the surge in credit and balance sheets so far. UBS believes this will help China avoid the local and central government spending too much on new capacity.　　Indeed, the central government's announced fiscal stimulus is focused on infrastructure rather than on new capacity, a plan that could help rebalance China over the next few years (Figure 3). But the biggest risk in this scenario is that China mishandled the government and failed to tighten credit.　　With the excessive pursuit of fiscal stimulus, local governments are likely to expand their capacity again over the next few years and push the trade surplus to rise further from the current level. CICC also agrees with the contraction of credit, with China's G D p only about 1/3 of the US, but the total base currency has overtaken the US, and the explosion of credit has made China's monetary environment looser than America's.　　China should be concerned about the risk of bubbles in asset prices as a result of excess liquidity. Scholars have begun to say that China should withdraw from monetary easing early. The chief economist of CICC thinks that the US has started discussing shortThe exit strategy for stimulus measures, but China has yet to start discussions.　　Maguire, chief Asia economist at Société Générale, also pointed out that China could face the risk of too much stimulus, and that China should begin discussions on a policy of easing its exit strategy. June 25, the central bank announced the second quarter of the Monetary Policy Committee meeting minutes, again that will maintain monetary policy continuity and stability, the implementation of monetary easing policy.　　This is a good indication that the economic recovery is still much bigger than inflation expectations. CICC believes that China will remain loose monetary policy in the short term until the end of the central Economic Work Conference can initially release the signal of policy adjustment.　　It will be followed by tightening measures other than raising interest rates, but it is hard to tighten the loans, and raising rates would be possible by the first half of next year. Worries about overcapacity closing several steel mills "the problem in China is that we see a massive expansion of supply capacity in the heavy industry, where China needs to shift its growth model and reduce overinvestment."　　Wang Tao said. UBS believes that the sharp rise in net exports from China has been driven by a significant expansion in the domestic steel and materials industry, as well as the expansion of capacity in the mechanical and chemical industries (Fig. 4, 5). Most of the expanded capacity is eventually exported overseas. On the one hand, local producers use excess capacity to seize the domestic market, and, on the other hand, export excess capacity to overseas markets. This "market share" strategy has progressively increased the proportion of corporate profits and savings to the overall economy. As a result, China has built up a lot of heavy industry capacity and sold its products at home and abroad to compete for overseas rivals ' market share.　　The final result is that, as the overall capacity is high, Chinese companies ' gross margin levels have risen sharply. Over the past 6 years, China has experienced yet another round of overinvestment ——— this round of investment has focused on: steel, aluminium, cement and other basic materials and chemical industries, with the main thrust of promoting the domestic housing and auto market boom. These industries produce homogeneous export commodities. Of course, China has become a more open and experienced trading economy over the past 10 years.　　During this period, we saw a sharp rise in China's trade surplus, as Chinese companies competed for market share from overseas companies in the domestic market, then moved to export markets and exported excess output abroad. "To some extent, we are on an unsustainable path, and it is only when the financial markets impose change on the economy that the path is eventually corrected."　　"Perhaps the global economic crisis triggered by the financial crisis last year is a wake-up call. Deep integration of heavy industry is inevitable, and China needs to shift its economic growth model.　　Wang Tao, China's chief economist at UBS, has made clear that improving the social security system and improving the coverage of pensions, health care and education will help support long-term consumer prospects, but not a way to address the short-term problems facing China's surpluses. UBS believes that China needs to promote the consolidation of heavy industry in the near future, such as closing several steel mills is a better practice, so that companies with low profit levels into a natural wholeCombined cycle.　　At the same time need to actively promote the state-owned enterprises corporate shareholding longer-term reform. The solution needs to be co-ordinated by the global economy, while for China there is a need to gradually reduce excess capacity.　　A faster-moving exchange rate fluctuation is likely to occur, and exchange rate fluctuations should also take place in a gradual appreciation. The fragile banking system will go up in the next 5 years with non-performing loans, which are easier to recover.　　Chinese loan officers are not willing to mention the knowledge. If not forgetful, we will remember that China's banks with huge non-performing loans in the banking system into the current 10 years, non-performing loan rate may reach 35%-40%.　　Over the past four or five years, the government may have invested more than 500 billion dollars to reduce the level of non-performing loans. How did non-performing loans come about?　　UBS believes this was due to the unprecedented investment cycle of the 1990s, when Overinvestment itself collapsed, and because of the accumulation of too many things, then entered a period of long-term unprofitable or loss. In fact, over the past 1997-1998 years, the whole state-owned industrial enterprises have virtually no profit at all. The banks are once again paying for the excessive expansion of those years.　　In the current 10 years, China's industrial capacity has undergone a rapid expansion. However, there are two major differences in this capacity expansion: first, the scope of the round will be smaller if it is based on indicators such as credit or investment expansion, or it can be answered by just looking at the number of industries affected.　　Second, in contrast to the the 1990s, the expansion of domestic producers to expand net exports through competition for international market share, to avoid a sharp decline in profits. For the next 3-4 years, a relatively high or gradual decline in the trade surplus will be the country's success in avoiding a "pay price" environment.　　You may have some consolidation at home, but there will be no sudden large-scale bankruptcies in industries such as steel, aluminum, cement and auto parts.　　As a result, the balance sheet of China's domestic banking system will eventually be greatly enhanced by exporting capacity to overseas for years to come ——— as long as it avoids another round of huge new credit. How to view the development of the asset quality of the banking system? UBS Securities Wang said the rate of non-performing loans is expected to rise in the next 5 years, but will not return to near 35%-40% levels.　　To be exact, this is due to a significant change in the current round of adjustment mechanisms. This reporter Jongming Zhou Yanni intern