China’s New Loans Rise by Record on Stimulus Efforts

By Kevin Hamlin and Luo Jun

Feb. 12 (Bloomberg) -- China’s new loans rose by a record in January and money supply expanded more quickly as the government implemented a 4 trillion yuan ($585 billion) stimulus package to revive the world’s third-largest economy.

Banks extended 1.62 trillion yuan ($237 billion) of new local-currency loans and M2, the broadest measure of money supply, climbed 18.8 percent from a year earlier, the fastest pace in more than a year, the People’s Bank of China said today on its Web site.

China’s government has put pressure on banks to boost lending as the government rolls out a stimulus package to reverse the nation’s economic slide. Loan default risk is the biggest single threat to Chinese lenders, which face “a choppy 2009” because the potential for credit losses is rising, 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 new lending is the equivalent of 40 percent of the government’s proposed stimulus spending.

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.

Bank Profits May Fall

The four biggest state-owned banks, China Construction Bank Corp., Industrial & Commercial Bank of China Ltd., Agricultural Bank of China and Bank of China Ltd., have already met 20 percent of their full-year lending targets, the official China Securities Journal reported Feb. 4.

Chinese banks may report an average 12 percent 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 $650 billion clean-up of China’s banks after decades of government- directed lending that sent non-performing loans soaring.

“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.”

Beats Economists’ Estimates

The increase in money supply compared with the 18.4 percent median estimate in a Bloomberg News survey of 14 economists. M2, which includes cash and all deposits, gained 17.8 percent in December.

The central bank is targeting a 17 percent 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. .

China’s central bank has cut interest rates five times from September and reduced the proportion of deposits banks must hold as reserves. It has also eliminated quotas that limited annual lending by banks.

The International Monetary Fund forecasts China’s economy will expand 6.7 percent 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.

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