(Economist) THE surge in China’s bank lending this year partly explains why its economy has recovered much faster than other big economies. If, as many investors fear, the government has already turned off the credit tap, that could hurt economic growth. A closer look at the figures, however, suggests otherwise.
New bank lending did indeed slow sharply in July, to 356 billion yuan ($52 billion) from 1.53 trillion yuan in June. “China’s bank lending fell by 77%,” screamed the headlines. But bank lending always slows in the second half of the year; the 12-month pace of growth is therefore a better measure. On a year-on-year basis bank lending grew by an impressive 34% in July, roughly the same pace as in June. Moreover, the drop in new loans in July largely reflected a fall in short-term bills; medium and long-term loans to firms and households continued to grow briskly. And a large chunk of lending to firms earlier in the year has been parked in deposit accounts. Thus, despite falling profits, corporate deposits have soared by 35% over the past 12 months (see chart). This leaves firms with plenty of money to finance investment, and so sustain the recovery, even if the government tightens up.
What about the widespread concern that an unhealthy amount of new lending has been used to speculate in asset markets, leaving banks dangerously exposed? Chinese banks are officially not allowed to lend to investors to buy shares, but money is fungible. Firms may divert loans offered for investment to punt on the stockmarket. According to one widely quoted estimate, 20% of all new loans this year have gone into the stockmarket. Add in property and commodities, and up to half of all lending may have ended up in China’s asset markets, it is claimed.
Tao Wang, an economist at UBS, reckons that such estimates are nonsense. Based on published data, new inflows of money into the stockmarket and total imports of metals together amounted to 660 billion yuan in the first half of the year. This is equivalent to less than 10% of total new lending, and only a fraction of that could feasibly have been financed by borrowing. A larger share of lending, 12%, went into property, but much of this seems to have been driven by demand from first-time home buyers rather than by speculators.
Some loans certainly found their way into asset markets, says Ms Wang, but most went into the real economy, mainly for infrastructure investment. Even a small amount going into the stockmarket (plus the expectation of a lot going in) could have a big impact on prices. But claims about the scale of such risky lending appear exaggerated.