China’s Choices

In normal times, the Chinese government uses the banking sector to send masses of low-interest rate loans to companies and sectors targeted for growth. This maintains growth and employment levels, preserving social and economic stability in a country with a massive population.

In times of stress, this aggressive lending goes into overdrive. The year 2009 has witnessed an unprecedented lending-surge by Chinese banks, who, under government direction, hoped to stave off a recession in China’s domestic economy as exports to the U.S. and rest of the world plunged. This has been a dramatic success. For example, the data reported for the month of October was very strong:

1. Growth of industrial value-added, which accounts for about half of China’s GDP, accelerated to 16% year-over-year.
2. Electricity production, a good growth barometer, grew by 17% year-over-year.
3. Steel production set a record 44% year-over-year gain.
4. Retail sales increased 16.2% year-over-year.
5. Vehicle sales totaled 1.2 million (more than the 838,000 sold in the U.S. in October).

By the end of the year, the net new loans fueling this growth are likely to total more than $1.5 trillion, which would equal over a third of China’s GDP. In October, the money supply was up 29.4% year-over-year and bank loans were up by 34%. This is a massive lending spree, even by China’s standards.

Much of the lending that was targeted to growth industries has leaked into the stock and real estate markets, which have rallied dramatically and are beginning to form bubbles. With subsidized loans still growing and the global economy now in recovery mode, the threat of double-digit inflation (already prevalent in India, another BRIC country) is looming.

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