March 5 (Bloomberg) — Premier Wen Jiabao warned of “latent risk” in China’s banks and pledged to crack down on property speculation as the government faces the consequences of flooding the economy with money to drive growth. “The domestic economy still faces some prominent problems,” Wen, 67, said in a speech in Beijing to the National People’s Congress, similar to the U.S. State of the Union address. He also cited excess capacity in manufacturing and weak support for rural-income growth.
Wen’s comments reinforce concern that loans made in last year’s record 9.59 trillion yuan ($1.4 trillion) credit boom may go bad. Harvard University Professor Kenneth Rogoff has said growth could slide to 2 percent from Wen’s 8 percent target within a decade as a debt-fueled bubble collapses, and Victor Shih of Northwestern University sees risk of a crisis in 2012. “A year ago the overwhelming priority was to get growth going and worry about the potential consequences later,” said Brian Jackson, an emerging markets strategist at Royal Bank of Canada in Hong Kong who previously worked at the Federal Reserve and Bank of England. “We’re closer to a possible reckoning.”
Wen is trying now to rebalance the economy away from investment and infrastructure spending, toward consumption. The government pledged today to raise health and social security outlays by more than 8 percent in 2010 and expand pensions, efforts that may help buttress consumption in the world’s third- largest economy. Transportation spending will be cut 2.7 percent.
The government affirmed its target of reducing new loans by 22 percent to 7.5 trillion yuan this year after property prices climbed the most in 21 months in January. The Shanghai Composite Index rose 0.1 percent as of the 11:30 a.m. local time break in trading, after a decline of about 13 percent from last year’s August high on concern that monetary tightening will slow growth and cut profits. Wen indicated no roll-back in the fiscal stimulus that spurred a rebound, targeting a budget deficit of 1.05 trillion yuan, or 2.8 percent of gross domestic product. That’s similar to last year’s ratio, according to the Ministry of Finance, with the projected deficit including 200 billion yuan of local- government bonds.
The premier affirmed a target of 8 percent growth, which has been set and surpassed in each of the past five years, along with a 3 percent inflation target and a “basically stable” currency. Wen said a moderately loose monetary policy and a proactive fiscal stance will continue, adding that government “must not interpret the economic turnaround as a fundamental improvement in the economic situation.” Meeting the inflation goal will be “a major challenge,” requiring higher interest rates and a stronger currency after two increases so far this year in banks’ reserve requirements, Jackson said. Wen reiterated pledges to crack down on housing speculation, land hoarding and excessive property-price gains in some cities, using taxes and credit policies. The real-estate market will probably weaken because the government has signaled that it wants prices to fall, billionaire Zong Qinghou, the chairman of Hangzhou Wahaha Group Co., said March 3. “Latent risks in the banking and public-finance sectors are increasing,” the premier said.
China’s banking regulator has ordered lenders to review loans granted to local governments’ financing vehicles by the end of June and ensure they can be repaid, a person with knowledge of the matter said in January. Industrial & Commercial Bank of China Ltd. Chairman Jiang Jianqing, who was attending the meeting of lawmakers, told reporters that the lender sees risks in some local-government funding arms and will slow loan growth this year. Northwestern University’s Shih, a political economist in Evanston, Illinois, said this week that hidden local-government borrowing had added to financial risks and “in the worst case” could help to trigger a crisis around 2012. By contrast, Jing Ulrich, chairwoman of China equities and commodities at JPMorgan Chase & Co. in Hong Kong, said this week that she wanted to debunk “the myth of a China collapse.” She said in a research note that China’s property market lacks the excessive borrowing and mortgage securitization that contributed to the American housing crisis.
Public-sector debt risks “do not appear as severe as some have suggested,” Ulrich said. China’s growth accelerated to 10.7 percent, the fastest pace since 2007, in the fourth quarter of last year, partly because of record bank lending.
Wen’s report contained “very small steps toward a structural adjustment of the economy towards greater consumption,” said Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong. China may struggle to fix economic imbalances because key leaders are nearing the end of their tenures and vested interests can block measures such as a property tax that could help to wean local governments from dependence on land sales and taxes on industrial production. “China’s in severe election mode,” said Jim McGregor, a senior counselor in Beijing at APCO Worldwide, a public-affairs group advising clients including China Cosco Holdings Co., Asia’s biggest shipping company. “They have 2 1/2 years left in their term,” he said before the meeting. There is “a lot of jockeying for position.”