China Field Visit 3 – When Will the Music Stop?

I could sense optimism among Chinese. I was told last year was the worst but a big thank to strong stimulus injection by the government, pessimism turned optimism by a click of finger. China's loan growth reached a 55-month high in December 2008 and China's commitment to a loose monetary policy will likely generate as much as 8 trillion yuan (US$1.17 trillion) in new loans this year - well above the 5 trillion yuan target.

Though the expanded credit could help turn around declining economic growth, some analysts are seeing potential pitfalls on the horizon. The surge in loans together with expected strong growth in investment by the government and businesses will challenge the country's ability to combat asset bubbles and industrial overcapacity. It will also put greater pressure on the long-term credit quality of the commercial banks.

China will maintain a relaxed monetary policy and ensure sufficient liquidity in the banking system to sustain economic growth, the People's Bank of China said. The central bank won't tighten in the second quarter or even in the third. That means credit growth can hit 7 trillion to 8 trillion yuan this year.

Having said that there are signs that loans growth may ease – credit extended by China's banks in April have dropped to above 600 billion yuan (about 87.85 billion U.S. dollars) after staying at above 1 trillion yuan for three straight months. Short-term loan balances contracted for the first time since November 2008 and that could be due to write-offs or banks are not rolling over some of the shorter term working capital loans. This, I believe, that 1Q09’s strong growth was not sustainable.

Chinese regulators are investigating some of the nation's largest banks to see whether the recent boom in lending has included illegal loans for stock speculation. The Shanghai Composite is one of the best performing indexes in the world so far in 2009, with gains of nearly 40% under its belt. China Banking Commission Regulatory Commission Vice Chairman Jiang Dingzhi told the state-run Shanghai Securities Journal there were concerns about the surge in lending and that the regulator was ready to issue warnings.