Credit jumping sixfold, yes, you read that correctly, sixfold. And what’s more, the authorities are not about to curtail that anytime soon. Although the Chinese export machine has come to something of a grinding halt, domestically things are purring along, helped by loose credit and a oversized Government stimulus program. Domestically orientated consumer and infrastructure stocks are the place to be, we think. We just introduced you to one of them, Fuqi International, which seems unreasonably cheap to us..
Normally, we would be very cautious when we read about a sixfold expansion in credit, because that can have pretty dire consequences for inflation and exchange rates. Inflation is not really a worry right now, and China manages its exchange rate very carefully (and hasn’t liberalized capital flows).
Therefore, we’re quite bullish, although such a credit expansion is unsustainable, but we have a feeling the authorities are keenly aware of that, having witnessed what happened in the US the last couple of years. And read below what kind of measures they are imposing against bad debts. It’s pretty impressive.
By Kevin Hamlin and Dune Lawrence
April 13 (Bloomberg) — China’s central bank said it will ensure sufficient liquidity to sustain economic growth, damping speculation regulators may seek to restrain credit after new loans jumped sixfold to a record in March.
The People’s Bank of China “will implement moderately loose monetary policy and maintain the continuity and stability of policy,” the central bank said on its Web site yesterday. It pledged “ample liquidity” to “ensure money supply and loan growth meet economic development needs.”
The statement indicated that reviving growth remains China’s priority amid concern that the credit boom will lead to bad debts and asset bubbles. The world’s third-largest economy, while showing better-than-expected performance in the first quarter, still faces “great difficulties,” Premier Wen Jiabao told reporters in Thailand on April 11.
“It’s likely that the authorities will not change their stimulative policy at least for another month,” said Stephen Green, head of China research at Standard Chartered Plc in Shanghai. “This means fast loan growth will continue. The longer this goes on, though, the bigger the risk of asset bubbles developing becomes.”
New loans rose to 1.89 trillion yuan ($277 billion) in March, the central bank said April 11. M2, the broadest measure of money supply, grew 25.5 percent, the most since Bloomberg began compiling data in 1998 and more than the 21.5 percent median estimate in a survey of 12 economists.
China’s industrial production climbed 8.3 percent from a year earlier in March and consumer demand grew “relatively rapidly” in the first quarter, adding to signs the government’s 4 trillion yuan stimulus plan is taking effect, Wen was cited as saying by the official Xinhua News Agency.
The government has pushed banks to lend in support of the stimulus, implemented after the global recession led to a collapse in exports that dragged economic growth to the weakest pace in seven years. China’s lending boom contrasts with the struggle in the U.S. to rid banks of illiquid assets and efforts by central banks from Switzerland to Japan to unfreeze credit.
China’s banks, which are mostly state-owned, have already met the bulk of the government’s target of at least 5 trillion yuan of new loans this year. Lending may top that level by as much as 3 trillion yuan, according to JPMorgan Chase & Co.
“The biggest dangers to China’s economy and financial system come from within, not from outside,” Jiang Zhenghua, former vice chairman of China’s parliamentary standing committee, said at a conference in Beijing April 11. “The biggest of these hidden dangers is the degree of bad loans in China.”
Commercial banks’ bad-loan ratio was 2.45 percent at the end of 2008, according to the regulator. The ratio was more than 20 percent in 2003, before the government completed a cleanup of the banking system that cost more $500 billion.
The China Banking Regulatory Commission asked all banks to raise bad debt provisions to 150 percent of outstanding non- performing loans to be “prudent,” Chairman Liu Mingkang said in Beijing last month.
In yesterday’s statement, the central bank pledged to prevent loans from going to high energy-consuming or polluting enterprises or to industries where there is overcapacity. It also reiterated support for loans to the agricultural sector, as well as to small- and medium-sized companies.
“The lending numbers are extraordinarily strong and there must be concerns about the impact on overall loan quality, the potential for new asset-price bubbles, and whether these funds can all be allocated to investment projects in an efficient manner,” said Brian Jackson, senior strategist at Royal Bank of Canada in Hong Kong. “When you are throwing around so much money so quickly, some of it is bound to be wasted.”
The Shanghai Composite Index has climbed 34 percent this year, the second-best performer of 88 benchmark gauges tracked by Bloomberg, fueling concern that some of the increase in lending has been used for speculation.
“Some of the money has gone to the property market, some to the stock market,” said Kevin Lai, an economist with Daiwa Institute of Research in Hong Kong. “It is not what the central bank wants to see.”
Wen cited a month-on-month rebound in trade and gains in stocks and property transactions as evidence the stimulus is working, in an interview at the aborted Association of Southeast Asian Nations meeting, according to Xinhua. Signs of recovery also include a 26.5 percent jump in urban fixed-asset investment in the first two months.
Vigilance is still needed as the global financial crisis is continuing to deepen and spread, Xinhua cited Wen as saying.
China’s economic growth slowed to 6.8 percent in the fourth quarter. First-quarter data is due to be released April 16.