Sunday, April 12, 2009

China’s New Lending and Money Supply Surged to Records in March

China’s new lending and money supply surged to records in March, adding to signs that government stimulus efforts are reviving the world’s third- largest economy.

Loans jumped more than sixfold from a year earlier to 1.89 trillion yuan ($277 billion) and M2, the broadest measure of money supply, grew 25.5 percent, the central bank said on its Web site yesterday.

Premier Wen Jiabao said China’s economy showed better-than- expected changes in the first quarter after the government adopted a 4 trillion yuan spending plan, the official Xinhua News Agency reported, citing an interview in Thailand yesterday. 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 is unusual in that it has this incredible capacity to mobilize all its institutions -- central government, local governments and the entire banking system -- to boost government-influenced investments,” said Vikram Nehru, the World Bank’s Washington-based chief Asia economist.

The growth in money supply was the fastest since Bloomberg began compiling data in 1998 and exceeded the 21.5 percent median estimate in a survey of 12 economists.

Economic growth cooled to 6.8 percent in the fourth quarter, the slowest pace in seven years. The first-quarter figure is due April 16.

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 explosion in credit since the central bank dropped lending restrictions in November prompted the nation’s banking regulator to warn this month that lenders face a “severe” challenge in managing their risks.

“The central bank had to ensure it did enough to reflate the economy,” said Kevin Lai, an economist with Daiwa Institute of Research in Hong Kong. “The question now is whether it has done more than is needed.”

A concentration of loans in infrastructure projects is a potential hazard for banks, China Banking Regulatory Commission Vice Chairman Jiang Dingzhi wrote in the April 1 edition of China Finance, a magazine affiliated with the central bank. Unusual growth in discounted bills, which are used for working capital and dilute banks’ lending profits, “deserves high attention,” Jiang said.

“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 financial conference in Beijing yesterday. “The biggest of these hidden dangers is the degree of bad loans in China.”

China Merchants Bank Co., the nation’s fifth-largest by market value, said on April 9 that providing money for infrastructure projects will improve the quality of its book by adding more medium- to long-term loans.

Besides the risk of bad loans, the credit boom may inflate asset prices and increase the likelihood of inflation making a comeback. The benchmark Shanghai Composite Index of stocks has climbed about 34 percent this year.

“Some of the money has gone to the property market, some to the stock market,” said Lai at Daiwa Research. “It is not what the central bank wants to see.”

Excessive loan growth may “lead to inflationary pressure in the medium term, exacerbate credit risk and could potentially contribute to higher volatility in the economy,” said Ma Jun, chief China economist at Deutsche Bank AG in Hong Kong.

Signs of nascent economic recovery include a 26.5 percent jump in urban fixed-asset investment in the first two months. Manufacturing expanded in March for the first time in six months, according to a government-backed index, while automobile sales rose to a record 1.08 million vehicles, Xinhua reported.

Consumer demand grew “steadily and relatively rapidly” while imports and exports rose month-on-month in the first quarter, Xinhua cited Premier Wen as saying in an interview with Hong Kong and Macau reporters during the aborted Association of Southeast Asian Nations summit in Pattaya.

“With loan growth rates exceeding official targets, bank regulators may urge more restraint, to guard against excessive liquidity,” Jing Ulrich, head of China equities at JPMorgan Chase & Co. in Hong Kong, wrote in a report yesterday.

China’s banking regulator is examining whether it needs to curb lending after new bank loans surged to a record in March, the Shanghai Securities News reported on April 8, citing unidentified people.

Still, exports fell a record 25.7 percent in February, Chinese steel prices have dropped this year, and industries face “great difficulty,” according to Ou Xinqian, a vice minister of Industry and Information Technology.

China’s trade surplus shrank 45 percent to $62.5 billion in the first quarter, from $114.3 billion in the previous quarter. The country’s foreign-exchange reserves grew by the least in eight years to $1.9537 trillion, the central bank said yesterday.

Macquarie Securities Ltd. on April 8 raised its forecast for China’s growth this year by 1 percentage point to as much as 8 percent. China International Capital Corp. raised its estimate to as much as 8 percent from a previous forecast of 7.3 percent.

from Bloomberg, April 11, 2009

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