China’s export-led economy was badly hit when the financial Crisis began in Q4 2008. In response, the government moved quickly to stimulate domestic consumption, in order to keep people employed. It doubled bank lending overnight, and introduced a $580bn stimulus programme. Worth 13% of GDP, this alone was far larger than any seen elsewhere.
Doubling bank lending to $1.4trn, equal to 1/3rd of GDP, carried its own risks, of course. Inflation is now rising quite sharply, with a jump to 4.4% last month. Whilst premier Wen Jiabao warned in September that stabilising house prices was the “key responsibility of all levels of government”.
Now the government has moved to stop all further bank loans to the property sector until the end of the year. According to the Housing Ministry, “China’s four biggest State banks have used up their full-year credit quotas for property developers and will stop extending new loans to them“.
Originally, the government had set a lending target of Rmb7.5trn ($1.1trn), down 20% from 2009′s record level. But as the chart above shows, lending had already reached Rmb 6.9trn by the end of October. So the halt is clear evidence of its mounting concern. It is also apparently discussing a further 20% cut in 2011′s lending, to Rmb 6trn ($0.9trn).
Rapid expansion of credit usually seems to work well at first in stimulating demand, as we saw in the USA in 2003-7. But as Warren Buffett warned in 2008, “you only see who’s been swimming naked, when the tide goes out“.
China’s leadership has a difficult balancing act ahead, as it seeks to stabilise inflation and housing markets whilst maintaining economic growth.