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Unprecedented credit boom in China

June 12th, 2009 · No Comments

Reading stuff like this put us up to writing about risks to the world economy. It certainly looks like the Chinese are getting a bit too enthusiastic. For the short term this is actually bullish, but this can’t last. We know of countries that have experienced exactly what happens next..

China’s New Lending Doubles, Helping Fuel Recovery

June 12 (Bloomberg) — China’s new lending doubled in May from a year earlier, adding to a credit boom that is supporting the government’s 4 trillion yuan ($585 billion) stimulus plan.

New lending was 664.5 billion yuan, the central bank said on its Web site today. M2, the broadest measure of money supply, rose 25.7 percent.

The government is battling to overcome an export collapse by flooding the economy with money to fuel domestic demand. Fitch Ratings said last month that it’s “increasingly wary” of China’s banking industry as it expects an increase in bad debts, and the nation’s banking regulator has urged lenders to ensure they don’t loosen management of loans.

“Stimulus always is good for the economy in the short run but this may come with a cost for long-run prospects,” said Ha Jiming, chief China economist at China International Capital Corp. in Hong Kong.

The yuan was trading at 6.8329 against the dollar as of 9.33 a.m. in Shanghai, compared with 6.8348 at yesterday’s close. The Shanghai Composite Index fell 0.2 percent.

Domestic banks extended a record 5.83 trillion yuan of new loans in the first five months of 2009, almost triple the value of advances in the same period a year earlier. New lending in May was the second-lowest level this year.

More Confident

The confidence of Chinese bankers increased for the first time in nine months in the second quarter, the People’s Bank of China said in a statement on its Web site today.

An index tracking the confidence of 2,900 heads of financial institutions rose to 40 percent, up from 25.6 percent three months earlier.

A record 1.89 trillion yuan of loans in March highlighted concerns that banks may be lowering their lending standards. Besides the risk of bad debts, the credit boom may inflate asset prices and increase the likelihood of inflation making a comeback. The Shanghai Composite Index has climbed 54 percent this year.

Other signs of recovery include urban fixed-asset investment gaining the most in five years, surging property sales, and manufacturing expanding for a third month in May as the stimulus package spurred demand, data this week showed.

Exports plunged a record 26.4 percent last month and dragged economic growth to the weakest pace in almost 10 years in the first quarter. Consumer prices fell 1.4 percent in May from a year earlier even as money flooded into the economy.

“The strength of lending growth is good for the economy and good for the stock market in the short term,” said Paul Cavey, an economist with Macquarie Securities Ltd. in Hong Kong. “In the medium term, it’s bad for the banks and it’s bad for the economy.”

New lending may reach 8 trillion yuan in 2009, said Wang Tao, an economist with UBS AG in Beijing.

Tags: China · Credit Crisis