Changing Trends in China’s Lending Boom
Over the weekend, I had the chance to take a closer look at the latest bank lending figures released by China’s central bank, the People’s Bank of China (PBoC). As many readers already know, China has seen an extraordinary lending boom this year. This explosion of credit has been one of the main factors sustaining China’s economy in the face of the global recession. But it has also given rise to a great deal of concern among economists, who worry that runaway lending is fueling dual bubbles in stocks and real estate in the short-term and creating a bad debt time bomb for the future.
Earlier in the year, top Chinese officials estimated that, even allowing for the stimulus, bank lending would top off at RMB 5 trillion for the entire year. But when the complete first-half lending figures were published in mid-July, they showed that China’s banks had already blown way past that ceiling, lending nearly RMB 7.8 trillion — almost a 25% increase in the country’s total loan portfolio — in just six months, with no end in sight. Banking regulators, finally recognizing the risks they had long brushed aside, announced they would rein in lending in the second half of the year. The news that credit would be tightened, however, spooked China’s stock market, which saw several days of sharp sell-offs. The PBoC felt compelled to reassure investors that it would maintain a “moderately loose” policy, while imposing new safeguards to ensure that stimulus loans were not diverted to speculative purposes. Exactly how officials would reconcile these varied objectives remained unclear.
September is not yet over, but the PBoC has published lending figures for the first two months of the 3rd Quarter, and it’s possible to gain some sense whether China’s lending patterns have changed, and in what ways. In order to compare apples to apples, I’ve multiplied sum of the July and August figures by 1.5 in order to arrive at a projection for the 3rd Quarter as a whole, assuming trends remain consistent. All figures below are in billions of RMB.
|2008||1Q09||2Q09||3Q09 (projected)||1-3Q09 (cumulative)|
|Net Increase in Lending (Total)||4,230||4,558||3,199||1,479||9,237|
|Loans to Households||641||436||638||745||1,820|
|Loans to Corporations||3,589||4,122||2,561||734||7,417|
|Medium & Long Term||1,916||1,682||1,542||1,161||4,384|
Looking at each quarter separately, some very interesting patterns emerge, and it becomes clear that China’s lending boom has evolved significantly through the course of this year.
- The pace of Chinese lending has certainly slowed in the 3rd Quarter, to nearly half the rate witnessed in the 2nd Quarter. Nevertheless, it is worth noting that, in China, lending usually slows in the 2nd Half (as banks approach their annual lending quotas), and banks are still lending at nearly three times the rate in 3Q09 as they did in 3Q08. The RMB 1.5 trillion in new 3rd Quarter loans brings the 3/4 year total to RMB 9.2 trillion. It’s fair to expect the 2009 total to come in at roughly double the RMB 5 trillion figure originally “budgeted.” The country’s total loan portfolio will have expanded by about 1/3.
- In my Wall Street Journal op-ed in May, where I first called attention to the lending boom, I noted that over 32% of the new loans in the 1st Quarter — RMB 1.4 trillion, almost as much as was lent in the entire 3rd Quarter — went for bill financing, to provide working capital to help struggling companies meet outstanding payables. This represented a huge increase in a previously minor lending category, and I worried that the borrowers might be at high risk of default, if their business conditions didn’t turn around soon. It is very interesting to note that bill financing dropped off significantly in the 2nd Quarter, when it accounted for just 7% of new loans, and that banks actually pulled back in the 3rd Quarter, reducing their bill financing portfolios by RMB 710 billion. This represents a rather remarkable reversal in lending policy.
- Most “business loans” to Chinese companies take the form of short-term loans, which are rolled over from year to year. In the 1st Quarter, this category accounted for just over 20% of new lending, and together with bill financing comprised more than 52% of the initial credit boom. It’s fair to say that these two categories together approximate the funds made available to Chinese companies to sustain them in the immediate face of the downturn. It’s worth noting, then, that the expansion in short-term corporate lending fell off in the 2nd Quarter and nearly came to a halt in the 3rd. It appears that the availability of credit for business operations is seeing a real tightening.
- Since loans to Chinese companies are usually short-term roll-overs, the “medium and long-term loan” category is far more likely to capture lending to large projects such as infrastructure. Of all the lending categories, this one shows the greatest consistency throughout the year, expanding at roughly RMB 1.5 trillion per quarter. The pace is nearly four times that of the previous year, and it is far from certain that all such projects will show positive returns, but the steady figures do seem to indicate a more measured and determined policy.
- Expanding domestic consumption in order to reduce reliance on exports and correct global imbalances in payments is a key component of China’s response to the global recession. It was interesting to note, then, that consumption loans to households accounted for less than 5% of China’s lending boom in the 1st Quarter. This picked up in the 2nd and 3rd Quarters, just as the rate of other lending fell, so that consumption loans should account for roughly 40% of all 3rd Quarter lending. The vast majority (nearly 90%) of these loans are categorized as “medium and long term,” which I believe are likely to correspond to home mortgages, versus “short-term” which likely correspond to credit cards and other retail credit. The expansion of home mortgages — at a rate four times that of last year — is intriguing given China’s strong desire to shore up its real estate sector and promote it as a “pillar” of recovery. (I have always found China’s promotion of real estate and construction as a “driver” of economic growth to be putting the cart before the horse, since demand for usable space is generally a reflection of economic conditions, not a determiner of them. But this is a topic to elaborate on another time.)
Keep in mind that we are reading a lot into a little data, presented in somewhat vaguely defined categories. None of this is ironclad. Even so, relying on a little intuition, it’s possible to see some discernable patterns.
The main takeaway is that China’s credit boom has proceeded in a series of phases. In the 1st Quarter, there appeared to be a panicked effort to support struggling companies through bill financing and short-term business loans. The risks of this approach were recognized and there has been a considerable effort to bring things back under control. In the 2nd Quarter, the lending story was dominated by the consistent commitment to funding infrastructure projects as a means of stimulus. By the 3rd Quarter, lending to support domestic consumption — in particular, it seems, home mortgages to support real estate demand — has risen to the fore as other categories are increasingly reined in.
What the data does not show is one primary area of concern: to what degree loans designated for one purpose are being diverted towards stock or real estate speculation, and what’s being done about it. The most likely culprits, however, are bill financing and short-term corporate lending, since they would be the most flexible in terms of monitoring use of proceeds. And these are the categories that are being reined in most aggressively in the 3rd Quarter. If you compare the two potential asset “bubbles,” however, the cut-off in credit is likely to fall somewhat harder on stock market speculators, while China’s real estate market receives compensating support from the expansion in mortgage lending.