China's Loan Binge: Stimulus or Insanity?

05-06 12:06 Caijing, By staff reporters Wen Xiu, Fang Huilei and Wu Ying
http://english.caijing.com.cn/2009-05-06/110160775.html

 

Bankers, local officials and financial regulators are trying to explain -- and justify -- a stunning surge in new loans.

(Caijing Mazagine) China's banks approved a combined 4.58 trillion yuan in new loans during the first quarter – a remarkable cash surge equal to the total amount of bank lending for all 2008.

It shocked some to see the credit floodgates open smack in the middle of a global financial crisis. Even more surprising was that, a month into the second quarter, lenders were showing no sign of letup; neither the market nor government policies appeared to be putting on the brakes.

One of the only hints of a possible slowdown came April 15, when China Banking Regulatory Commission (CBRC) Chairman Liu Mingkang called for "moderating" the loan pace.

But the loan writing has continued, raising key questions for China's economy. Has this trend -- fanatical to some, sensible to others -- helped ease deflation and actually bolstered the economy? Or has it raised inflation risks and damaged financing mechanisms?

To what extent will bank lending grow or contract in the future? And what may be the consequences for China's financial markets and Main Street economy?

The country's key policymakers are offering few answers to these and other difficult questions. Neither are they willing to guess. "It's still too early to come to a conclusion," declared Yi Gang, deputy governor of The People's Bank of China, at a recent press conference.