March 26th, 2011
in Op Ed
by Michael Pettis
Last week new lending numbers were released by the National Bureau of Statistics, and if it hadn’t been for rumors all the previous week that they would come it at RMB500-600 billion, I think we would have all been surprised by how low they were. Here is the relevant article in Xinhua:
The People’s Bank of China (PBOC), the country’s central bank, said Monday that new yuan-denominated loans stood at 535.6 billion yuan (81.52 billion U.S. dollars) in February.
The figure was 192.9 billion yuan less than February last year, said the PBOC in a statement on its website. By the end of February, the balance of outstanding yuan-denominated loans stood at 48.89 trillion yuan, up 17.7 percent from a year earlier. The rise was 9.5 percentage points lower than the rise a year earlier.
As I discussed last week, total new lending has represented a rapidly declining share of the total lending the PBoC now monitors, so we don’t really know how much new credit the banks extended in February. The table below was released two weeks ago by the PBoC (I have summarized it and the GEI editor has provided formating), and it shows what has been happening:
The total represents all of the financing that the PBoC is now tracking, and is listed as 100%. I have broken this total lending into a few especially important categories and listed the percentage they comprise of the total. By the way I have left out several categories that I didn’t think especially useful to the discussion.
Notice that at the beginning of the decade new RMB bank lending represented virtually all new financing – 92% as far as the PBoC calculates. What is striking is how quickly it came down – in 2010 new RMB loans represented only 56% of total new lending. It didn’t decline, of course, because of any restraint in new lending. On the contrary new lending has exploded, especially in 2008, 2009 and 2010.
It came down because other categories surged. We have discussed this on my blog for several years. I have argued many, many times that limiting loan growth through administrative measures (loan quotas, for example) while keeping interests low, credit risks socialized, and maintaining pressure for investment driven growth, could not help but result in an explosion of lending outside the normal channels which the PBoC and the CBRC simply would not be able to control.
When you have excessively loose monetary and credit policy, you will automatically get a rise in risky loans. Not even Japan in the 1980s was able to violate this rule of finance (for all they dismissed it as a “western” rule), and China has not been able to do so either. The PBoC tried to regulate loan growth by putting into place a RMB quota system, but the consequence was completely predictable, and in fact was predicted by several of us.
The system adjusted so as to allow more loan growth to take place outside the regulated areas. Banks, in other words, simply created alternative forms of financing to get around the rules. Now that the PBoC is monitoring this wider range of lending activities, if they start trying to control growth in all of these areas I think it is pretty safe to assume that even newer forms of lending will develop.
I think it is also pretty safe to assume that in a month or so we are going to see a renewed expansion in credit. With controls on new lending a lot of companies are struggling for financing and I suspect growth is going to slow down by more than Beijing can bear.
Michael Pettis is a Senior Associate at the Carnegie Endowment for International Peace and a finance professor at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets. He has taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is also Chief Strategist at Shenyin Wanguo Securities (HK). Pettis has an impressive work history on Wall Street, Latin America, Europe and Asia (see his blog China Financial Markets for a complete bio).