In an earlier article, I pointed out some of the problems with the Chinese stimulus package. The main issue with the package is that it was funded by either loans from state owned banks or by local governments. I also wrote about the problems with bad loans in China’s state owned banking system in another article about the Asset Management Companies.
It appears that the bad loans on the books of China’s banks are about to get far worse. According to the Financial Times, the banks lent out an astonishing $273 billion dollars. This amount when added to the amounts already lent in the first quarter means that the banks have lent out Rmb4,580bn almost the equal to the Rmb5,000bn that they planned to lend out for the entire year. This wall of money also went to the wrong place.
According to another article, smaller Chinese company, particularly in the export-oriented technology and electronics manufacturing sectors are hurting. They have not participated in this wall of money from state owned banks, which went mainly to the large state owned industries. As credit has dried up they have been forced to increase their get credit from their suppliers. The amount of the credit extended has gone up to over 90%. As might be expected with the rising problems, the cost of insuring customers defaulting has increased by 30 per cent.
The bottom line is that huge quantities of money are being thrown at inefficient state owned companies, while the smaller more agile exporters, who are responsible for much of China's growth are getting nothing. No government program, no loans anywhere in the world that pours out that amount of money so quickly will be successful. Instead it will result waste at best and at worst, much of it will be stolen. What will not happen is that it will be paid back, exacerbating an already feeble Chinese financial system. While dumping close to three quarters of a trillion dollars into an economy in a short period of time may temporarily increase the money supply and result in a temporary stock market rally, it will not sustain growth.
Disclosure: no positions
