China's new loans rose by a record in January and money supply expanded at the fastest pace in more than a year as the government pressured banks to support a 4 trillion yuan ($US585 billion) stimulus package.
Banks extended 1.62 trillion yuan of new local-currency loans and M2, the broadest measure of money supply, climbed 18.8% from a year earlier, the People's Bank of China said today on its Web site.
The jump in new loans to twice the record set a year earlier shows China may succeed in reviving growth even as credit markets around the world remained locked and after developed economies slumped into what the International Monetary Fund calls a "depression." Loan default risk is rising and represents the biggest single threat to Chinese lenders this year, Fitch Ratings said last month.
"We believe China is the only economy in the world to see significant growth in credit to corporate and household sectors after September 2008, when the financial crisis worsened to a near collapse," said Lu Ting and T.J. Bond, Merrill Lynch economists in Hong Kong. Soaring credit growth "might be at the cost of the future health of the banking system."
The yuan was little changed at 6.8330 against the dollar in Beijing.
The new lending was the equivalent of 40% of the government's proposed stimulus spending.
Borrowing costs
The central bank can be less aggressive in interest-rate reductions because of the lending surge, Barclays Capital Research and Nomura Holdings said in reports today.
The People's Bank of China hasn't cut the key one-year lending rate this year from 5.31% after five reductions in the final four months of 2008.
The biggest proportion of new lending, 39%, was through discounted bills, which supply working capital. Medium and long-term corporate loans accounted for 32%.
"Injecting this blood into the system is helping the economy to revive," said Sun Mingchun, an economist with Nomura in Hong Kong. "Even the working-capital loans are needed because without them good firms will be forced into bankruptcy when it is not necessary."
China's economy may bottom out this quarter as the government's stimulus efforts counter a plunge in exports and a slump in the property market, according to economists at Citigroup Inc., Merrill Lynch and Deutsche Bank AG. Growth tumbled to 6.8% in the fourth quarter, the weakest pace in seven years.
ICBC's infrastructure loans
Stock transactions rose to a three-year high yesterday. The Shanghai Composite Index has climbed 22% this year after tumbling 65% in 2008.
Industrial & Commercial Bank of China, the world's biggest bank by market value, said it extended 252.1 billion yuan of new loans in January, 23.5% to road, power, railway and other infrastructure projects. ICBC lent 135 billion yuan in discounted bills.
"Infrastructure-related lending is likely to dominate bank's new loans in the coming months," said Jing Ulrich, head of China equities at JPMorgan Chase & Co. in Hong Kong. "Chinese banks have also been urged to finance sound companies that may be encountering temporary cash flow difficulties and to provide assistance to qualified first-time homebuyers."
The stimulus package announced in November spans spending through 2010 on public housing, railways, highways, airports, power grids and reconstruction work after last year's earthquake in Sichuan province.
Profits may fall
The four biggest state-owned banks, ICBC, China Construction Bank Corp., Agricultural Bank of China and Bank of China Ltd., have already met 20% of their full-year lending targets, the official China Securities Journal reported Feb. 4.
Chinese banks may report an average 12% drop in earnings in 2009 as the nation's policy of reviving growth through lower interest rates undermines profits and loan defaults increase, according to a Feb. 2 Citigroup report.
A bailout of Agricultural Bank last year completed a $US650 billion clean-up of China's banks after decades of government- directed lending that sent non-performing loans soaring.
Outstanding local-currency loans rose 21.3% at the end of January from a year earlier, the central bank said. Outstanding local-currency deposits rose 23%.
Chinese banks usually frontload lending, offering more loans at the beginning of each year.
Loan growth 'unsustainable'
"Explosive lending growth is unsustainable and will likely decelerate," said Ha Jiming, Hong Kong-based chief economist at China International Corp. "China may face increased risks going forward if the lending upsurge is coupled with declining loan quality and loosened lending terms."
The increase in money supply compared with the 18.4% median estimate in a Bloomberg News survey of 14 economists. M2, which includes cash and all deposits, gained 17.8% in December.
The central bank is targeting a 17% increase in money supply this year. Officials are on alert for the risk of deflation, after consumer prices rose by the least in two years in January and producer prices fell by the most since 2002.
The International Monetary Fund forecasts China's economy will expand 6.7% this year, the weakest pace since 1990. As many as 20 million migrant workers have lost their jobs as a property slump worsens the slowdown caused by plunging exports.