China's Lending Resurgent, but Riskier

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Bank lending in China has once again started to accelerate, reaching an average daily amount of more than 100 billion yuan in the first working week in January, 2010. Due to present demands for investment, regulatory authorities have held a relatively tolerant attitude to the current rapid credit growth, but anxiety over inflation expectations and asset bubbles is increasing along with doubts over the sustainability of credit growth.

 

The People's Bank of China, the central bank, has increased the amount banks must set aside as reserves in the clearest sign yet that the central bank is trying to tighten monetary conditions amid mounting concerns of overheating and inflation as a result of the credit boom. The central bank also raised interest rates modestly in the inter-bank market on Tuesday for the second time in less than a week.

 

But it is also widely expected among analysts that a moderate monetary policy is set to continue in 2010, and flexibility will remain during specific implementation. On the one hand, a considerable amount of additional credit will be maintained to support economic recovery and structural adjustment. On the other hand, efforts for open market operation have been increased to recycle excess liquidity and to strengthen inflation expectation management. It is similar to the fine credit dynamic tuning in the second half of 2009.

 

Lending by commercial banks in the first quarter may surpass expectations. Insiders believe that new loans throughout the year will reach 7 to 8 trillion yuan, amounting to 3 trillion yuan in the first quarter. The amount of new loans in January looks to be close to the level in January, 2009, and will certainly pass 1 trillion yuan.

 

Ba Shusong, deputy director of the Institute of Finance of the State Council Development Research Center, estimates that the credit allocation ratio in the four quarters of 2010 will achieve the traditional "4:3:2:1", and even may repeat the "5: 3:1:1" pattern of 2009.

 

Demand for credit has been rising as China's economy has recovered. Loans to many businesses in 2009 went lacking, lending little support to the recovery of industrial added value growth rate in the second half of 2009. Pent up business loan demand is being released in the first quarter of 2010.

 

As of November, 2009, investment in new projects amounted to 13.69 trillion yuan, up 76.6%. Loans to infrastructure projects usually peak in the second year of construction and their demand has slowed.

 

January's new loans, however, may lead to excessive concern from regulators. Concentrated and excessive lending may revive inflation expectations, while if the total credit limit is prematurely exhausted, it may lead to reversals later in the later year. The fundamental basis for the regulation is main macroeconomic indicators, especially price movements and asset prices.

 

So far, banking credit policy in 2010 lacks clear policy guidelines and objectives, but loan capital constraints will continue to play a limited role in the scale. Rapid credit growth is bound to consume a lot of capital, and only banks with sufficient supplementary capital channels can obtain good growth opportunities.

 

After the rapid credit growth in 2009, the deposit-loan ratio in many banks, especially small and medium banks, fell to a critical point and attracting deposits has once again become a focus. The high proportion of long-term loans in 2009 has turned regulatory attention to liquidity indicators.

 

Policy-makers are also paying close attention to where the money went in 2009, particularly investment and financing platforms established by local governments and real estate industries. Decision-makers will also strengthen supervision of non-performing assets, perhaps further limiting commercial banks' lending impulses.