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Will bank credit slow in China?

(China Daily)
Updated: 2009-08-17 16:43

Editor's Note: China's recent strong performance in economic growth and the equity markets has led to many cheers and also many doubts.

In a recent report, UBS Securities economist Wang Tao said she believes China's growth can be sustained. She projects that macro policy will be adjusted to avoid a major boom-bust cycle.

However, Wang pointed out that the slowdown of new bank lending in coming months might negatively affect investor sentiment in the asset market, which could trigger some corrections in prices.

"Under that assumption and the expectation of a modest recovery in the global economy, we see GDP growth at 8.2 percent and 8.5 percent in 2009 and 2010, respectively," Wang said.

"We expect year-on-year growth to get stronger each quarter in 2009 and bring along with it underlying demand for commodities and investment goods," she said. "We also expect GDP growth to slow in 2010 from the peak in the fourth quarter of 2009 or the first quarter of 2010."

Wang elaborated on her outlook for China's economy in a recent interview with China Business Weekly.

Q: Is it all just government stimulus programs, and how long can that last?

A: Growth so far has mainly come from government stimulus programs financed by fiscal spending and, more importantly, bank lending.

Going forward, the recovery of property construction is key to help sustain domestic demand, while the negative contribution from net exports is also expected to wane.

Both should help to offset the eventual tapering off of the stimulus.

Q: Is most of the lending going to sectors with excess production capacity?

A: Not by design. The stimulus is focusing on infrastructure instead of productive capacity in the manufacturing sector.

Investment in sectors with obvious excess capacity such as the steel sector, or export-oriented sectors that are facing a weak outlook such as textile and electronics, has been very weak.

Q: Has the majority of new bank lending gone to speculate on the asset market?

A: We don't think so. While money is fungible and the excess liquidity in the economy has almost certainly contributed to the rise in asset prices, most new loans seem to have gone to the real economy.

Total new bank lending reached 7.4 trillion yuan in the first half of the year, of which about 12 percent was mortgage lending or loans to property developers.

Total net inflow to the stock market was 450 billion yuan, while the combined import bill of basic metals and coal was little more than 200 billion yuan in the first half of 2009. Clearly these markets could not have absorbed a substantial share of bank lending.

Q: Will a moderation of new bank lending lead to a sharp drop in growth?

A: No. First, bank lending has always been front-loaded, and spending is smoother and has a time lag. We believe that investment in the coming months will continue to be well supported by lending that has already taken place.

Second, liquidity does not just disappear. There is a lagged spillover effect, and we have already seen non-SOE investment picking up recently.

Third, increased activity, a better outlook and an expected turnaround in corporate earnings will boost "autonomous" investments.

Q: Will China tighten its lending policy?

A: We do not expect an overall tightening in the form of strict lending quotas or interest rate hikes any time soon, given the need to support growth and little consumer price index (CPI) inflationary pressure.

However, the policy is turning from an extremely expansionary position to accommodative stance. Concerns about the asset market bubble and future non-performing loans (NPL) have increased.

We expect increased sterilization to slow liquidity creation in the banking system. We anticipate enforcement of prudent regulations to limit credit risks, and also measures to prevent an asset bubble from threatening the financial sector or social stability.

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