China’s Risky New Lending Surge

Chinaloans.pngBy John Richardson

BANK lending is once again surging in China as politicians try to shore up their support ahead of the leadership transition.

“The central government has approved up to 7 trillion yuan ($1.2bn) for infrastructure investments since May to spur growth,” wrote the China Daily. This represents 15% of GDP.

Real-estate loans in Q3 rose by 29% over the second quarter.

But this is likely to do absolutely nothing to rebalance the economy away from investment and towards domestic consumption. In fact, it will probably make the problem worse.

A lot of the infrastructure money will surely have been allocated to local governments for more unneeded sports stadiums, railway stations and bridges, and for further real-estate investment.

The state-owned enterprises (SOEs) are also likely to have benefited from the rise in bank lending.

State-owned banks have for years supplied the SOEs with large volumes of cheap loans, especially during the 2008-2010 economic stimulus programme.

This benefits the politicians and SOE officials, who are said to have invested privately in “hot” sectors such as real estate.

Domestic savings rates have been kept below the rate of inflation in order to provide all this low-cost financing,

This penalises the vast majority of Chinese, who are forced to save rather than spend in order to compensate for low savings rates and inadequate state healthcare, education and pension coverage. They also need to pay for real estate, the cost of which has been driven-up by the state-backed speculators.

“On a recent weekday at the Henan Street flea market, crowds sifted through stacks of clothes that included $3 T-shirts with images of Minnie Mouse and $5 imitation Nike sports jerseys,” said the New York Times.

“Just a few yards away, an authentic Nike store selling the real thing for $35 had nary a shopper. Because consumers have so little spending power, many global-brand companies do not even bother to open stores in cities like Jilin.”

China’s consumer spending is just 35% of GDP, the lowest of any of the big economies, and has fallen from 45% a decade ago. In the US, consumer spending makes up 70% of the economy.

The rise in bank lending might lead to a rebound in petrochemical prices before the end of the year on the belief that the economy has bottomed-out.

But the “recovery” will make rebalancing harder for China’s new set of political leaders, assuming, that is, that they are reformers.

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