I don’t have time to do a long entry today, but in my June 30 entry I marveled at the huge explosion in new lending, and claimed that credible rumors suggested that total new loans for June would be an astonishing RMB 1.2 trillion. That would bring total new lending for 2009 to RMB 7.06 trillion, nearly three times last year’s total of RMB 2.45 trillion.
Well, I was wrong. Here is what an article that just came out on Bloomberg says:
China’s new lending more than doubled in June from a month earlier, increasing concerns bad loans and asset bubbles will emerge amid a credit boom.
New lending was 1.53 trillion yuan ($224 billion), the central bank said on its Web site today, bringing total lending this year to 7.4 trillion yuan. The calculation for new loans is preliminary, the central bank added.
The government is countering an export collapse by flooding the economy with money to fuel domestic demand. Rapid credit growth poses a risk to the nation’s lenders and a concentration of credit in some industries and businesses may damage the stability of the financial system, the banking regulator said yesterday.
“Excess liquidity is fueling speculation and that means asset bubbles and wasteful investment,” said Isaac Meng, a senior economist at BNP Paribas SA in Beijing. “Expect credit to slow dramatically in the second half.”
I was more than 20% too conservative in my prediction. This is the third biggest month in history, and of course all three of them occurred this year.
Today bank stocks were down, on rumors that the very high and clearly unsustainable loan growth rates would soon come to an end. If you need any evidence of how topsy-turvy things have become that fact should be enough.
Under “normal” circumstances the possibility that banks would continue to force new loan growth at anywhere near the current rates should raise terrible concerns about an explosion in future loan losses and cause bank stocks to collapse. Instead, it is concern that this lending spree might come to an end that causes bank stocks to fall.
Of course this might not be totally irrational. If you believe, as most of us do, that there is an implicit guarantee by the government on future loan losses, then this is clearly a heads-we-win, tails-the-government-loses proposition. Let them pile on the loans at the guaranteed spread between lending and deposit rates.
I guess it is time to introduce something that I might call the Pettis Rule of Banking (although I am way, way down on the list of people who first thought of this): “It is not even theoretically possible that in a banking system in which bankers are given unlimited liquidity, tremendous pressure to make loans, and an implicit guarantee against losses, that enormous amounts of bad loans will not be made.”