RMB 1.5 Trillion in New Chinese Lending — Can We Turn this Thing Off?

I don’t have time to do a long entry today, but in my June 30 entry I marveled at the huge explosion in new lending, and claimed that credible rumors suggested that total new loans for June would be an astonishing RMB 1.2 trillion.  That would bring total new lending for 2009 to RMB 7.06 trillion, nearly three times last year’s first-half total of RMB 2.45 trillion.

Well, I was wrong.  Here is what an article that just came out on Bloomberg says:

China’s new lending more than doubled in June from a month earlier, increasing concerns bad loans and asset bubbles will emerge amid a credit boom.

New lending was 1.53 trillion yuan ($224 billion), the central bank said on its Web site today, bringing total lending this year to 7.4 trillion yuan. The calculation for new loans is preliminary, the central bank added.

The government is countering an export collapse by flooding the economy with money to fuel domestic demand. Rapid credit growth poses a risk to the nation’s lenders and a concentration of credit in some industries and businesses may damage the stability of the financial system, the banking regulator said yesterday.

“Excess liquidity is fueling speculation and that means asset bubbles and wasteful investment,” said Isaac Meng, a senior economist at BNP Paribas SA in Beijing. “Expect credit to slow dramatically in the second half.”

I was more than 20% too conservative in my prediction.  This is the third biggest month in history, and of course all three of them occurred this year.

Today bank stocks were down, on rumors that the very high and clearly unsustainable loan growth rates would soon come to an end.  If you need any evidence of how topsy-turvy things have become that fact should be enough.

Under “normal” circumstances the possibility that banks would continue to force new loan growth at anywhere near the current rates should raise terrible concerns about an explosion in future loan losses and cause bank stocks to collapse.  Instead, it is concern that this lending spree might come to an end that causes bank stocks to fall.

Of course this might not be totally irrational.  If you believe, as most of us do, that there is an implicit guarantee by the government on future loan losses, then this is clearly a heads-we-win, tails-the-government-loses proposition.  Let them pile on the loans at the guaranteed spread between lending and deposit rates.

I guess it is time to introduce something that I might call the Pettis Rule of Banking (although I am way, way down on the list of people who first thought of this):  “It is not even theoretically possible that in a banking system in which bankers are given unlimited liquidity, tremendous pressure to make loans, and an implicit guarantee against losses, that enormous amounts of bad loans will not be made.”

Originally published at China Financial Markets and reproduced here with the author’s permission.

6 Responses to "RMB 1.5 Trillion in New Chinese Lending — Can We Turn this Thing Off?"

  1. devils advocate   July 13, 2009 at 12:37 pm

    take a breath…China has decided to replace its tremendous loss of export businessby loaning and encouraging its capitalists…its real estate just started rising so the lending has not been going into real estate -40% is the usual down payment and their mortgages and real estate bank loans were not on the chop block)the vast majority of the bank lending has been to business peoplewho have the confidence to create and build businessthe huge pick-up in auto sales in China and the rise in R.E. show that the Chinese people have confidence…confidence is the basis for consumer consumption and business is anticipatingyes, it seems risky on the surface – don’t forget the Chinese banks still are better capitalized than US banks with tall their new loans…and will be able to absorb bad business loansthe Chinese Govt is betting on capitalism…I’d say it’s a good bet

    • paul94611   July 14, 2009 at 8:31 pm

      Was that grape or cherry flavored?

  2. MarkL   July 13, 2009 at 7:12 pm

    The Chinese government doesn’t believe in free capitalism they believe in control. The Chinese people always want everything cheaper and won’t pay if they can get around it – a la software, videos, nock off’s of anything with intellectual or design property. Not saying don’t deal with them just saying be very, very, very cautious and very, very, very hard on them they will be on you.

  3. Anonymous   July 14, 2009 at 11:07 am

    It is indeed true that there are huge NPL and inflation risks with the recent lending spree in China. However, the Chinese cabinet clearly made a decision that the risks for not doing so was much greater; it is likely that 6 months ago, we had much more complete data than most realize. Now it appears that the cash injection did its trick, and they appear to be prudent to realize that it is time to mitigate the risks in the other direction. To me it sounds like smart policy. However, the jury is still out on whether they can strike the middle ground exactly (well not necessarily precisely) and keep the chinese economy float for the next a few years where it is quite certain the rescue from the US and EU consumers will not be forthcoming. Past experience is encouraging where admin policies in china had been effective; many policies frankly most economists became aware of only posteri , e..g, lending curbs since 2005. These are policies of pragmatists, unlike what we have in the US of ideology driven policies. The good case is that there had been many planned projects in china since 2000 that were put on hold. The flood gate was opened and many can be shut again should they prove to be excessive. Of course, all are dependent on sound policies moving forward, hence my point of the jury is still out.Half+Half Actually Chinaman

    • devils advocate   July 14, 2009 at 5:16 pm

      there is nothing communist when it comes to the Chinese government-and-businessruthless and awe-inspiring qualities

  4. paul94611   July 14, 2009 at 8:33 pm

    The Chinese banking sector looks like its Anglo counterparts..Authority – responsibility = bubbles & chaos.