China struggles to adopt new growth model - FT.com It used to be the case that if you ran a bank, everyone in China bowed to you. But, these days, that is no longer true. Demand for money is drying up in China. For many years, Beijing controlled the supply of loans, doling out money to its favoured children â€“ the state-owned enterprises â€“ at subsidised rates while everyone else paid far more. Both companies and individuals had a voracious appetite for money, and the market capitalisations of Chinese banks soared. But today, nobody wants to borrow much. Fu Yuning, chairman of China Merchants Group â€“ an empire that includes China Merchants Bank â€“ says he began to see demand for loans dry up earlier this year. Every month, he expected that to change. It hasnâ€™t. As a lender that serves Southern China and Hong Kong, his bank has been especially hard hit by the declining fortunes of exporters along the coast. Thatâ€™s bad news because when there is less demand for money, there isnâ€™t much demand for anything else, whether at home or from abroad. New renminbi loans in July grew at the lowest rate for 10 months, to only Rmb540bn ($85bn) â€“ a drop only partly explained by an increase in corporate bond issuance. Officially, economic growth has slowed to 6.8 per cent in real terms in the first quarter and 6.9 in the second, from a rate of 9.2 per cent last year. Export growth has slowed dramatically: up merely 1 per cent from a year ago in July. Fixed-asset investment is growing at a fraction of the rate three years ago. Inflation is disappearing, causing worries over the economy to veer from overheating to deflation with breathtaking speed. On the ground, it feels worse than the official figures suggest. Output now exceeds sales in a host of industries, leading to a build-up of inventories of everything from cement and coal to iron and steel. Even gold â€“ which is supposed to be the last refuge for those who find the world a scary place â€“ has seen a drop in demand from China. But the response from the Chinese government has been oddly restrained. The conventional wisdom was that, to the extent that the slowdown in China was policy-induced in the first place, a simple reversal of that policy should kick in and growth would obediently turn up. The governmentâ€™s stimulus measures â€“ which have revolved around a gradual pick-up in infrastructure and transport investment, and an easing of restrictions on home purchases for first-time buyers â€“ have been far more moderate than expected. Partly, that reflects the consensus in Beijing that the last stimulus in 2009 was too aggressive, and left waste and lots of bad debts in its wake. And, of course, not everything is in the governmentâ€™s control. The eurozone crisis means there is much less demand from Chinaâ€™s biggest export markets. Moreover, China is going through a political transition that means it is not a time for bold moves and official heads above the parapets. To be sure, the economic indicator that Beijing monitors most closely is unemployment, given its obsession with stability. If that goes up, then the government is likely to react far more forcefully than it has done so far. However, the absence of the more forceful policy measures is mostly because Beijing is trying to engineer a transition to a new growth model. As Japan reminds the world every day, the export-led growth model is an unreliable one. And while the investment/infrastructure model that was the Chinese growth mantra in recent years is a sound one, it tends only to work at a certain stage of development. China is rapidly outgrowing that model now, even though local governments continue to embrace it. Of course, the desired move to an economy in which consumers play a larger role and the state a smaller role, and where it is more important to provide services than to make things, takes both time and courage. Such a transition is not easy â€“ and banks are caught in the middle: their share prices hurt not only because of that slowdown but because the structure of finance is changing, making banks less profitable. In yesterdayâ€™s China, the direction was clear, and the leadership certain, if not smug. Debates about a hard landing versus a soft landing, or about inflation versus deflation were mostly conducted outside China. Now, both the government and the people of China feel that their future path is less certain. Is it better to hold renminbi or dollars or gold? Yesterday, everyone had a view. Today, who knows? China is struggling to save itself. The rest of the world is on its own.