China credit: still fuelling the machine

China isn’t holding back in its financial support for a flagging economy. The latest lending figures, published on Thursday, show banks made new local-currency loans totalling Rmb1.06tn ($171.2bn) last month – far more than forecast by analysts polled by Reuters and Bloomberg.

That puts Chinese lenders on target to lend Rmb9tn in new loans this year – well up on last year’s Rmb8.2bn.

The broad money supply – M2 – increased 15.7 per cent in March, according to the data from the central bank, well ahead of market expectations of 14.6 per cent. That puts the People’s Bank of China well on the way to meeting its 13 per cent target for the year.

Policymakers want to sustain economic growth as China struggles with a difficult global economic environment and the pressures created by its political transition to a new leadership.

GDP growth last year dropped to 7.8 per cent, its lowest in more than a decade, and the government has set a target for 2013 of 7.5 per cent.

While credit boosts economic growth it is also fuelling concerns about excessive debt. Fitch this week cut China’s sovereign credit rating – the first such move by a big credit agency since 1999 – because of worries that local governments and companies had together racked up too much debt.

As Simon Rabinovitch writes in the FT, the latest credit data coincide with figures showing the country’s foreign exchange reserves, already the world’s largest, jumped $130bn in the first quarter to $3.44tn.

This sharp reversal of the trend last year when money exited China suggests that capital inflows are helping to boost credit growth – and so will increase concerns about debt problems, says Rabinovitch.

So is rapid credit growth good or bad for China? It’s the key question that divides China bulls and China bears. It’s also near the top of the agenda for the country’s new rulers.

As the FT wrote in an editorial, recent world economic history suggests it should not ignore it:

Beijing faces a dilemma: regulating fast-expanding credit flows is bound to constrain growth. But the alternative is much uglier. As the western experience of the past decade shows, economic development is real only when it is financially sustainable. Getting a grip on credit expansion should be a priority for China’s leadership.

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