The Bank of Japan this week warned that the Chinese economy was entering “the danger zone” while the People’s Bank of China flooded financial markets with capital to address a cash shortage.
Taken together, these events warn of an extraordinarily difficult environment ahead for Canadian resource companies. The end of the Chinese economic miracle would cripple commodity demand, ending a prolonged period of outsized profits.
For now, economic growth rates in China remain much stronger than those in the developed world. A prominent Japanese economist notes, however, that all of the preconditions are in place for a major financial upheaval.
“If a demographic change, a property price bubble, and a steep increase in loans coincide, then a financial crisis seems more likely. And China is now entering the danger zone,” said Bank of Japan deputy governor Kiyohiko Nishimura in his speech at the RBA-BIS Conference in Sydney.
Mr. Nishimura believes that the Chinese economy shows all of the necessary preconditions for the malign form of financial crisis that struck Japan in the early 1990s and the United States in 2008: A peak in the working-age population, excessive loan growth above the rate of inflation and sharply rising property prices.
A 2008-style financial crisis in China would be a severe inconvenience for global commodity markets and Canadian energy and mining companies. Japan’s GDP growth fell from 5.6 per cent in 1990 to zero by 1993, and U.S. GDP collapsed by 5 per cent in 2008. A similar slowdown in China would have drastically negative effects on global demand for commodities.
The PBoC’s 200-billion yuan ($31.2-billion) liquidity injection is the largest single-day reverse repo (exchange of cash for collateral) in the central bank’s history, according to Bloomberg. A lack of foreign capital inflows and stress in the shadow banking credit sector are blamed for the shortage of cash in China’s financial system.