China’s Lending Surge ‘Cause for Worry,’ UBS Says

By Chua Kong Ho

April 13 (Bloomberg) -- The surge in China’s March bank loans and money supply is “cause for worry” as it means the increase in liquidity behind this year’s stock rally will likely weaken, according to UBS AG.

New loans rose to 1.89 trillion yuan ($277 billion) in March, the central bank said April 11. M2, the broadest measure of money supply, grew 25.5 percent, the most since Bloomberg began compiling data in 1998 and more than the 21.5 percent median estimate in a survey of 12 economists.

“The liquidity surge is already weakening and is cause for worry,” Chen Li, a Shanghai-based strategist at UBS, said in a phone interview. “Bank lending in the first quarter has almost reached last year’s full-year target.”

Chen estimates new loans will average 400 billion yuan to 500 billion yuan a month for the rest of 2009 based on the “most optimistic” projection of 8 trillion yuan of bank lending for the year. The benchmark Shanghai Composite Index gained 1 percent last week, the smallest rise in four weeks.

The measure added 2.8 percent to 2,513.70 at the close, extending this year’s rally to 38 percent, the second-best performer among 88 benchmark stock gauges Bloomberg tracks.

The People’s Bank of China “will implement moderately loose monetary policy and maintain the continuity and stability of policy,” the central bank said on its Web site yesterday. It pledged “ample liquidity” to “ensure money supply and loan growth meet economic development needs.”

The surge in bank lending means the improvement in the economy in the first quarter from the previous three months was “a certainty,” said Chen, who joined UBS from Shenyin & Wanguo Securities Co. last year. He was voted “best analyst” from 2005 to 2007 in an annual poll by “New Fortune” magazine.

China’s industrial production climbed 8.3 percent from a year earlier in March and consumer demand grew “relatively rapidly” in the first quarter, a sign the government’s 4 trillion yuan stimulus plan is taking effect, Wen was cited as saying by the official Xinhua News Agency on April 12.

To contact the reporter on this story: Chua Kong Ho in Shanghai at kchua6@bloomberg.net