Tony Ward's Blog
Thursday, 03 May 2012
Tony Ward is chief executive of Homefunding
What a contrast. Let’s stop for a moment and look at how the UK is dealing with an economic downturn as opposed to China and we will see that we are literally worlds apart.
Just to recap. The UK has gone into a technical recession with GDP shrinking by 0.2% in the first quarter of 2012. Deleveraging is the order of the day. Banks are looking to shore up their capital in light of new regulation which is starting to kick in. Plus they have the Mortgage Market Review shadowing them and the impending restrictions on capital requirements resulting from Basel III requiring banks to increase levels of highest quality capital to 7% by 2019.
And Mervyn King is putting in his two pennies worth stating that banks haven’t gone nearly far enough and need to improve their ratios considerably from 20:1. So the resulting impact is that banks are choosing to lend less, both to businesses and consumers. Lloyds Banking Group announced recently that it is planning to cut its share of the UK mortgage market from 28% to 25% and no doubt other lenders will follow. Inevitably credit will dry up or only be available to the less risky elements of society and will be risk priced accordingly.
Sadly of course this will have a knock on impact to the economy with mortgage lending faltering and a subsequent knock on effect to house prices. Thus potentially dampening the economy still further. But let’s wait and see.
And what of China? Well China’s manufacturing activity seems to have turned a corner expanding for the fifth month in a row, easing concerns about a sharp slowdown. The worries about a global slowdown and its impact on China’s economy had seen the country take steps to ease monetary policy in order to boost growth. China’s central bank has cut the amount of money banks need to hold in reserves twice in the past few months to try and stimulate lending in the country. The move saw Chinese banks extend new loans in March, much more than forecast. Analysts said the increased availability of credit had started to have a positive impact on the economy. And subsequently, China’s economy is likely to grow at an annual rate of 8.5% in the second quarter, up from 8.1% in the first three months of the year. So good news for the Chinese.
Of course we have to put in some caveats. The UK economy is vastly different to that of China with different concerns and pressure points. The government, Bank of England and FSA are hugely worried that unless we take these measures we are vastly exposed to a potential second banking crisis. I take on board these points. Still, maybe, just maybe, there are some lessons to be learnt from the Chinese approach?