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China’s lending causes central bank headache

Consumer demand, Economic growth, Financial Events, Leverage
By Paul Hodges on 17-Feb-2010

China lendFeb10.pngNo wonder alarm bells were ringing in China’s central bank last week. The above chart (from China Daily) shows how total lending rebounded to $204bn in January, only 14% below the 2009 level.

Total lending doubled during 2009 to $1.4bn, an astonishing amount for a country with total GDP of $4.3trn. Of course, this enabled China to easily reach its target of 8% GDP growth. But it also led to higher inflation, and a surge in house prices, which rose 11%.

The government now aims to cut lending by 22% versus 2009, to help keep inflation under control. January’s lending figure was clearly too high for comfort, causing the central bank to order an unexpected rise in banks’ reserve ratios on Friday, just before the Lunar New Year holiday.

Further tightening is probably inevitable. Chemical companies therefore need to carefully reassess likely levels of Chinese demand for their products, given that key elements of last year’s major stimulus programmes may now start to be removed.