China: Explosion in New Lending

I don’t have time to do a long entry, 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.

Wednesday 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.”

Comments

[Graham and ...:]

Looks like another country is getting out of hand, financially.

Jul 08 02:23 PM

[morph366:]

Unlike the debtor nations the Chinese might be able to rescue troubled banks without needing to tap taxpayers - but they might have to sell a lot of assets to do so.

Jul 09 07:26 AM

[CautiousInv...:]

This is a big story because China is bound and determined to keep their economy growing; all of this lending is designed to work in conjuction with the stimulus plan to offset contracting exports and achieve annual growth in GDP of 8%.

After banks unleashed a torrent of lending, authorities are now fearful of the consequences and are taking steps to reign in lending which has spilled into poor investments, commodity speculation, gambling in Macau and the stock market. Banks are being firmly encouraged to tighten lending standards.

Economists and others are genuinely concerned about the consequences of the unchecked lending, which is already apparent in growth of non-performing loans. I'm not sure how the state would deal with widespread loan losses but should they have to bail out one or more banks they would do it with injections of state/taxpayer money whether the funds were sitting in an account or had to be borrowed.

As we speak bank lending is propping up growth in China and, while China is an enormously attractive investment opportunity over the long-run, should this lending bubble pop suddenly, it could have long lasting consequences.

Jul 09 09:16 AM

[Stone Fox C...:]

The car sales were astonishing in June. Up like 48%. Do we really know that China consumers that have been huge savers can't afford these cars and other goods? Do they report any numbers on credit quality?

Jul 09 02:01 PM

[Pax Americana:]

Another state engineered Fiasco, due to the authorities lowering the "Capital Saving Ratio" of most Chinese Banks, agree with "cautiousinv"
this was Orchestrated in conjunction with the Stimulus spending to increase GDP numbers.

Jul 09 02:25 PM

[joes:]

To think that China would be immune to bubble is naive, there has never been a market based economy without bubbles, or without crashes.

Also today it was reported that incomes are increasing 20% YoY, and car sales are setting records supported by subsidies and low rate loans. Property is also looking like it is heading towards speculation levels of growth, and for China that is saying something.

Of course even with 20% wage growth the per capita GDP is still about $2000 USD capita/yr, with great and growing disparity.

What it appears to do is show that the structure of an economy and government is not a major factor in economic performance, factors like greed, fear, and corruption are the driving factors in both positive and negative outcomes.

As it turns out we are not very good at seeing the difference, with the current belief being that the balance between unregulated free-markets and government regulation is the key to wealth for all.

Maybe that is right, maybe it isn't, with no regs you get Madoff, Enron, AIG causing pain and sorror. But you also get great stock prices and 30x IPO's and M&A pays out like a broken slot machine.

Too much government and you spend money making sure that people are doing what they tell us citizens and shareholders, a sunk cost because it prevents something, maybe, that we never feel the pain of, like we do when our 401k's vaporize while bankers that we are told caused the problem still get bonuses that are literally unimaginable to a worker making the mean or less, about $43K a year.

The first step is to debunk the assignment of attributes to both institutions of business and government that are phony, they have emerged over time as the best configuration for human's. well out of Beta. They are made up of people, therefore not perfect, people can have these attributes of evil, and need to be policed and punished if guilty.

Jul 09 03:11 PM

[Mark Anthony:]

The number is actually significantly higher than the number you quoted. In June, 09, new loans in China amounted to 1.5304 trillion RMB Yuan. Read here:
news.xinhuanet.com/for...
Worth noting is that China's central bank released the June number ahead of time, which is an unusual move in itself.

Jul 09 11:40 PM

[kappa5:]

please do remember that going into the crisis, 2007 and 2008, China literally had it's foot on the neck of (corporate) borrowers, throttling down bank loans. You see, bank loans in China are an a quota system. China's banking system was restrained in the global easy credit days. RESPECT ! Just because the quota has been doubled for a brief time doesn't necessarily mean bad investment to follow. Bank loans in China are typicially one-year loans, which can be rolled over but will affect the next year's quota. Furthermore, who is to say the quota that was in place was an equilibrium? Maybe 2x the quota is a fine equilibrium? So, all the hubub over China's loosened lending is moot unless some can provide historical data showing a similar past situation and it's effect.

Jul 10 04:50 AM

[HeF:]

Morph, the last time they had a banking crisis in the late 1990s they bailed out the banks partly by injecting them with government funds and mostly by keeping deposit rates extremely low to force depositors (mostly households) to finance the bailout. Although this does not look like a tax, it effectively is. It is pretty certain that this is what they will be do again, and in fact the spread between lending and deposit rates (both set by the PBoC) is very high.

Stonefox, car sales were up big time, revenues were actually down, and profits way down. That is a little surprising.

Kappa, there were as you point out credit growth constraints in late 2007 and 2008 but the growth was still quite high (over 16%), it was off a very high base, and the credit constraints were undermined by an explosion in off-balance-sheet lending and what most believe to be a huge expansion in the informal banking sector, which may account for as much as 20-30% of all loans. But even ignoring all that, tripling the rate of loan growth in a six month period is still worrying, and when three of the last six months have the highest loan growth by far in Chinese history, that suggests rapid loan growth. There is no six-month period in Chinese history in which net new lending comes close to 1009 H1.

By the way loan maturities are on average more than one year and anyway these numbers are net new loans, not total loans.

Jul 10 07:22 AM

[Michael Clark:]

I read earlier last week that up to 50% of stimulus-induced low-interest loans have been siphoned into stock-market share-purchases and real estate pruchases. Is that infrastructure spending? A correction in the stock market, and another popped real estate bubble, are going to make those loans look pretty bad.

Jul 10 08:51 AM

[Arthur Hau:]

Before all the private banks in China went public, they were all national banks. These national banks used to have over 20% of non-performing loans. The communists poured in billions and billions of Yuan to clean up their balance sheets before launching their IPOs.

Guess what? Prior to 2007, with the boom of the Chinese economy, these banks all had less than 10% of non-performing loans. However, the financial crisis last year had wiped out thousands and thousands of exporting manufacturers in China. A reasonable bet is these banks' non-performing loans should have gone up to their pre-IPO levels.

There is one miracle in China though, namely, it is just too easy to manipulate the books. Isn't it surprising that with so many bankruptcy cases, Chinese banks do not need to raise their reserves for loan defaults by much?

Even worse, the Chinese government ordered banks to increase their lending in Jan and Feb in order to help troubled companies, regardless of the high risk involved. Until March, they finally realized that the billions and billions Yuans of news loans might have been either used by banks, government officials, their relatives, and friends for speculating in the stock and real estate markets or in loans that had ever high probabilities of default. So, all a sudden the Chinese government announced that no more easy loans could be loaned out.

That's not all. Starting from last year, many major banks in China had used up most of their valuable liquidity to buy up some (possibly troubled) banks in some poor provinces.

I wouldn't say that China will have a financial tsunami, cause it will really be a financial armageddon there!

Jul 10 09:24 AM