Another month, another lending bonanza in China. Banks issued RMB1.53trn ($224bn) in new loans in June, bringing the total for the first half to RMB7.3trn, up 32% year-on-year. Boosted by all that new money, the economy is accelerating. Consensus forecasts for GDP growth in the second quarter are 7.1% year-on-year, according to Bloomberg.
What the commentators said
“Few economists will take [China’s forthcoming GDP] report at face value,” said John Foley on Breakingviews. Hitting the government’s 8% growth target for the full year is too important politically for the headline GDP number to be reliable. “Still, simpler indicators also point to recovery.” Car sales were up 37% year-on-year in June, while electricity production was up 3.7%. Trade also provides “strong evidence of a recovery in domestic spending”, said Mark Williams of Capital Economics. Seasonally adjusted and allowing for higher commodity prices, imports were up 5% month-on-month in June.
Beijing is prepared to do whatever it takes to ensure strong growth, said Lex in the FT. “If that means hosing the economy with more credit than it knows what do to with, so be it.” However, as the “increasingly fretful banking regulator” is pointing out, rapid loan growth poses risks to the financial system. Inevitably, some of the cash will end up “on the blackjack tables of Macao – or that other casino, the Shanghai stock exchange”.
Even assuming most of it has gone where intended, there are still reasons to worry. It’s not clear China needs more investment, said Edward Chancellor on Breakingviews; critics such as Yasheng Huang of MIT and Michael Pettis of Peking University claim that China already has too much infrastructure for its stage of development and too much spare capacity in sectors such as steel and ship-building.
But crucially, that doesn’t seem to be where the money is going, said The Economist. “There has been little new spending in industries with overcapacity, such as steel.” Meanwhile, infrastructure spending is focused on less developed regions, “where the benefits promise to be greatest”; investment in the poorer western provinces this year grew at twice the rate for eastern ones. Some money will be wasted, but the rest will create jobs and support future growth.
What next? In any case, like it or not, China won’t clamp down on lending yet, said Stephen Green of Standard Chartered. Tighter policy is only likely next year, if inflation picks up. “There is little political upside now in constraining local governments’ investment boom.” And that means GDP growth should stay strong.