Despite worries of credit tightening, the most recent Chinese bank lending data still suggest relatively loose conditions that are supportive of growth – and asset bubbles. Total local currency lending is still on track to exceed RMB 10 trillion (US$1.47 trillion) in 2009, well above the initial RMB 8 trillion target and about 30% of China’s 2008 GDP. The likely 34% increase in loans from last year helped fuel China’s quick return to growth in H1 2009, but the sheer volume of loans suggests that some could turn sour and become a risk to future economic growth. Although the number of loans extended has fallen in Q3, the lending data show evidence of “fine-tuning” rather than tightening, with the household sector now attracting the bulk of loans and the duration of loans being from lengthened. Despite the significant risk that China could overinvest in housing stock, a reduction in lending to households is unlikely, suggesting that property investment will support growth through H2 2009 and into 2010.
Rather than cut interest rates to zero as many other countries have, China preferred to use the credit channel to support growth in early 2009, urging banks to lend out a portion of their excess reserves built up in past years. In the past, China has tightened credit rather than raise interest rates when seeking to dampen investment. The record credit extension in H1 2009 did pose sustainability concerns and, as RGE has noted in the past, raised the risk of asset bubbles and non-performing loans. Yet, despite the shift to longer-term loans, these conditions remain in place.
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