While the U.S. economy is in the aftermath of the credit crisis that nearly brought the financial system crashing to the ground and banks and families alike go about deleveraging and contracting their balance sheets, China appears to be on a completely different track as far as lending goes. According to an article by CNBC contributor Andrew Busch, The People’s Bank of China, the Chinese central bank, announced that June new lending was 1.56 trillion yuan ($224 billion). That is more than twice the amount lent out in May and year to date total lending has already surpassed 148% of the yearly targeted amount.
“Putting this in context, total lending this year so far has amounted to 25% of 2008 GDP. As I wrote earlier this week, Chinese regulators are getting concerned that this lending is going towards poor credit and bleeding into commodity market speculation.
As most know, bank lending is high powered monetary stimulus do to its high velocity. This is the key difference between fiscal stimulus vs monetary stimulus. Actually, monetary stimulus will only work well if the banks receiving the funds lend them out. In the US, this is clearly not happening due to banks loan losses and caution over new lending (expanding balance sheet.) In China, this is not the case and new loans are flowing.”– Busch: Chinese Bank Announces Bombshell
Of course, the U.S. Federal Reserve has greatly expanded its lending facilities in order to combat the downturn, but in comparison, the U.S. lending is actually subdue. Already this year, The People’s Bank of China has lent out a total of 25% of their GDP last year, meanwhile the Fed’s balance sheet has begun to contract after the extreme measures taken over the last year. Prior to the crisis, the Fed’s balance sheet was about $1.1 trillion under Fed Chairman Ben Bernanke and reached a height of $2.31 trillion in December. Today, the Fed’s balance sheet has dropped below $2 trillion, which is about 14% of last year’s GDP. At least in the short term, the Chinese lending stimulus is accelerating while the U.S. is beginning to pull back with one major emergency lending program about to expire and two more getting trimmed.
This casts some doubt on just how robust the Chinese economy’s rebound in the first half of 2009 has been. This type of lending is surely driving growth right now, but as everyone knows leverage can magnify both the good times as well as the bad. If a good portion of these loans are being given to low quality borrowers as some officials have feared, China’s banks could be in for painful write-downs. Where have I seen this before?
The last two years have been a truly global recession with no economy left unscathed, and now many are pinning their hopes of recovery on China. Its growth, as the theory goes, can begin to raise economic growth around the world. Thus far, the first half of the year has been impressive in terms of China’s demand for resources and, apparently, capital. However, if all of these Chinese “green shoots” are built on a foundation of poor quality credit, this could get very ugly, again. The implications on the global economy could be immense.
On the other hand, as Mr. Busch describes bank lending is one of the quickest ways to stimulate an economy, and if relatively few of these loans soar the Chinese growth story could be off and running. Either way, it is interesting to note that while, the U.S. central bank is at least starting to show signs of slowing down as the economy has gained a foothold. China is taking a completely different strategy and leverage is expanding extremely rapidly. This is a situation that will require continued attention, for it will certainly have an great effect on the world’s economy one way or the other.