Maybe half of China’s enormous lending binge has not flowed as intended into the real economy. Instead, it has poured into the real estate and stock markets, or in the self-circulation of the financial system, and Chinese financial supervisors are seriously concerned over asset bubbles.
According to Wei Jianing, an expert for the Development Research Center of the State Council, cites his own survey saying about 20% of the credit funds have found their way into the stock market and about 30% into the note market, meaning about half the lending is circulating inside the financial system and pushing up asset prices.
Vice-Chairman Cheng Siwei of the Standing Committee of the National People's Congress has put forth a similar judgment. He said about 2.4 trillion yuan of the total of 4.58 trillion yuan lent in the first quarter had been transformed into real economy investment, while most of the remaining 2.18 trillion yuan, except for bill financing and fake lending, has flowed into stocks and real estate, and led to temporary rallies in these markets.
The lending growth this year is causing confusion. At the end of May, total lending by commercial banks reached 5.8 trillion yuan, higher than the 2008 total. While external economies are still in a recession, such rapid credit growth is very unusual. Is credit demand really so high among China’s firms? Why haven’t small and medium enterprises, always starving for funds, received support during the credit boom? And why, with production down and unemployment rising, are the stock and real estate markets reaching recent highs?
According to Wei Jianing, in the first five months of this year, about 1.16 trillion yuan of credit, out of the 5.8 trillion yuan, has flowed into the stock market. According to figures from the central bank, bill financing totaled 1.7 trillion yuan in the first five months, accounting for about 30% of the total lending.
"When funds are circulating and swelling inside the financial system, instead of servicing the real economy, we see this as a sign of bubble formation," said Wei Jianing. "Now the rapidly circulating funds can easily boost the stock market and produce new financial bubbles, and lift real estate prices as well."
As for the actually invested 50% of credit, Wei Jianing said although these funds have flowed into the real economy, most of it has gone to government-backed projects and little has flowed into small and medium enterprises.
Fast credit growth seems reasonable under current circumstances, though there are potential risks. Zhang Liqing, dean of the College of Finance, Central University of Finance and Economics, said these risks include boosting banks�NPL ratios and the bubbling of asset prices. He thinks as the economy has not yet stabilized, the government has not adjusted its monetary policy, but adjustment is going to be necessary in time.
Wei Jianing suggests that the government should inject credit funds more directly into the real economy. First, it should rectify the note market, and avoid funds circulating inside the financial system through bill financing. Regulators should reinforce supervision over the use of credit funds and lend more to small and medium enterprises.
Supervisory departments are catching on to the diversion of credit funds. Recently, the China Banking Regulatory Commission required commercial banks to strictly control the use of loans and guarantee that loans are entering the real economy, not the stock and property markets.