China’s Stimulus Program Spurs Lending to New Record

By Don Miller
Associate Editor
Money Morning

Industrial output surged and lending hit new records in China in March, adding to signs its massive $585 billion (3.75 trillion yuan) stimulus program is beginning to bear fruit. The government added more fuel to the fire by saying it may bolster its stimulus plan to keep economic growth on track.

China's industrial production grew 8.3% in comparison to 2008, from a record low of 3.8% in the first two months of the year. Consumer demand grew "relatively rapidly" in the first quarter, Premier Wen Jiabao told state-controlled Xinhua News Agency.

The production gain came as new lending to rose to a record $277 billion (1.89 trillion yuan), and the money supply jumped by 25.5%, giving hope to the idea that the bottom of the worst global crisis since the Great Depression may not be far away - for China, at least.

The new data gave a boost to the yuan, as well as stocks and copper prices in Shanghai, leading Asian equities higher.

"It does seem that confidence is slowly growing among investors that the worst may be over for the global economy, and this will help boost commodities and other markets," Hideyuki Ishiguro, a supervisor at the investment information section of Okasan Securities in Japan, told Reuters.

After the global recession crushed demand for Chinese exports, the government pushed banks to lend in an effort to spur domestic spending. With the latest lending binge, China's state-owned banks have already hit the government's target of at least 5 trillion yuan of new loans this year. In fact, lending may surpass that level by as much as 3 trillion yuan, according to a JPMorgan Chase & Co. (JPM) report obtained by Bloomberg News.

And China's central bank said it will continue to prime the pump with enough funding to sustain economic growth. On its Web site, the People's Bank of China pledged "ample liquidity" to "ensure money supply and loan growth meet economic development needs."

That put a damper on speculation regulators may seek to restrain credit. The liquidity surge has some analysts worried that China could be building a portfolio of problem loans that will create a situation similar to what brought the U.S. banking system to its knees.

"The biggest dangers to China's economy and financial system come from within, not from outside," Jiang Zhenghua, former vice chairman of China's parliamentary standing committee, said at a conference in Beijing April 11, Bloomberg reported. "The biggest of these hidden dangers is the degree of bad loans in China."

To be "prudent," the China Banking Regulatory Commission asked all banks last month to raise bad debt provisions to 150% of outstanding non- performing loans, Chairman Liu Mingkang said in Beijing last month.

But the bad-loan ratio was only 2.45% at commercial banks at the end of 2008. By comparison, the ratio was more than 20% in 2003, when the government was forced to spend $500 billion to clean up the banking system.

The central bank vowed to restrict loans to high energy-consuming or polluting companies. It also stated support for loans to agriculture, as well as to small-and medium-sized enterprises.

Even though there are visible signs the stimulus is working, China is now planning a new economic stimulus package, The China Securities Journal reported yesterday (Monday). Citing a senior official of the State Information Center, the Journal said the new package would be targeted at further boosting domestic consumption.

On April 11, Wen told Xinhua that the world's third-largest economy still faces "great difficulties." The government is not convinced the financial crisis is over and will maintain "vigilance" to assure it doesn't deepen and spread, Wen said.

China's economic growth slowed to 6.8% in the fourth quarter. China needs economic growth of around 8.0% to keep its massive and growing workforce employed. First-quarter data is due to be released April 16.

News and Related Story Links: