Asset Bubble Coming? (泡沫理论重现江湖)

(SCMP) Excessive bank lending in China is flowing into the stock and property markets and could inflate asset bubbles, a mainland lawmaker and ex-central bank official said in comments published on Thursday.

Many independent economists have sounded similar warnings about China’s surging money growth, but Wu Xiaoling, former People’s Bank of China vice governor, is one of the first officials to sound the alarm about bubbles.

“Under conditions of overcapacity, excess money supply will not lead to rises in price indexes, but it could generate asset bubbles,” she said at a forum in comments reported by the Chinese-language National Business Daily.

“The money has really gone out and if it is a time when there is no investment in the real economy and no one will put the money in banks to earn interest, then the funds will flow into the property market and stock market,” she said.

China’s central bank may have to raise banks’ reserve requirements to mop up excess liquidity, she said, adding that this was simply a tool for managing the money supply and should not be misunderstood as monetary tightening.

“If the central bank one day needs to raise reserve requirements, nobody should panic too much,” she said.

In the first six months of the year, Chinese banks granted a record 7.37 trillion yuan (US$1.08 trillion) in new loans, almost 25 per cent of annual GDP and eclipsing a full-year minimum target of 5 trillion yuan.

The country’s benchmark stock index has soared some 80 per cent this year, making it the best performing major market in the world, and property prices have also started running up in recent months.

Mr Wu said that China faced a dilemma in easing the rate of loan growth. Inflationary pressures would arise if lending continued at the same pace, but without sustained lending, many big projects may wind up unfinished because they are contingent on longer-term financing.

She said that new lending in the year would probably reach 10 to 12 trillion yuan, making for an annual increase of 33 to 40 per cent in outstanding loans.