Recently, China has experienced much financial risk in the form of defaults and bad loans. But record new credit in January will hopefully help the economy maintain its momentum. According to Bloomberg, aggregate financing, the broadest measure of credit, was 2.58 trillion yuan ($425 billion USD) and new local-currency lending was 1.32 trillion yuan – the highest since 2010.
This data suggests that China may have succeeded in minimizing an economic slowdown, contrary to many expert’s speculation. But at the same time, these figures contrast with the central bank’s call in mid-January for lenders to control surging loans. “These numbers show that the firming up of the central bank’s monetary stance is going to be a gradual, balanced exercise, not an aggressive one,” said Louis Kuijs, chief China economist at Royal Bank of Scotland Plc in Hong Kong. “The authorities want to slow down the pace of credit growth and contain financial risks but they also want to ensure that sufficient credit growth continues to come online to support economic growth.”
The benchmark Shanghai Composite Index (SHCOMP) has risen 0.9 percent further extending gains after the biggest weekly increase since September 2013. Whether the increased lending will help China escape its economic slowing or exacerbate the problem remains to be seen.
On a somewhat related note, I read in the WSJ today that China has been manipulating the yuan in hopes of further improving its international trade efficiency. Perhaps these two factors combined will bring further growth to the Chinese economy.
A weaker yuan may be what an open market would deliver – Chinese are underdiversified in their asset mix and surely want to add non-domestic bonds and stocks to their portfolios. Non-residents have long been able to buy “B” shares and to engage in FDI. So we are more diversified in our holdings, plus China is an incremental addition. Chinese investors are starting from a position of no holdings, so desired purchases of dollars by Chinese will swamp those of the yuan by foreigners. Hence a strong dollar / weak yuan.
To whom is this credit being provided? Is it adding to real estate (over)investment?
The professor raises a very good point: if the credit is not being allocated efficiently and some sectors are being starved of lending, the outcome will be highly suboptimal. Remember also the dangers of unsustainable local deficits. (think: Detroit).