One of the ways that China manages the ups and downs in its economy is through the Reserve Ratio. In effect, this is the amount of capital Chinese banks are required to have as a prudential reserve. Last week, the ratio was lowered, meaning that their banks can lend more money per unit of deposits. This is a signal that the Chinese economy has been slowing and their government wishes to increase liquidity in the credit system, especially for businesses.
It is actually the opposite of what is happening in Europe and Australia, where Basel 3 has the effect of increasing the capital adequacy requirement of banks and thereby reducing credit availability per unit of deposit.
In Europe, there is a counter effect in that quantitative easing (printing money) is capitalising the banking system, and for those that are credit worthy in accordance with German credit standards, have access to long term finance at competitive interest rates. However the barriers to obtaining credit are historically higher than in the Anglo economies. Australia does not have quantitative easing and has higher real interest rates.
What all this means is that, for the foreseeable future, access to credit (and equity) is an international exercise for serious companies. For Australian investors and companies, domestic credit will be far more constrained, especially in the SME (German Mittelstand) sector, and more expensive. For Australian large companies with access to international capital markets, credit may be easier and cheaper to obtain.
For most Australians, the so called two tier economy is therefore likely to become more so and especially given fiscal contraction at Federal and State levels. i.e. less money will be spent by those governments with SME’s. This is likely to mirror the (North) European situation. However the big difference is that European companies are better linked into a much more substantial and broader large corporate base which can and does provide finance to SME’s. There is also more equity in the form of venture capital and true private equity.
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