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Flood of bank loans

(China Daily)
Updated: 2009-07-11 07:14

While central banks in developed countries are still worrying about whether "quantitative easing" is effective in persuading domestic banks to lend, for Chinese banking authorities the urgent issue is to be prepared for a dangerous flood of excessive liquidity.

To the surprise of all, China's new lending rose again in June to 1.53 trillion yuan ($224 billion), bringing the total lending this year to 7.4 trillion yuan in spite of the central government's initial full-year target of 5 trillion yuan.

When China's new lending jumped by a jaw-dropping 4.58 trillion yuan ($670 billion) in the first quarter, many believed that, as a counter-crisis measure, such a credit boom was justified as the economy saw only a 6.1 percent growth in GDP, the slowest in about a decade.

The subsequent slowdown in credit growth to about 600 billion yuan a month in April and May has seemingly allowed Chinese policymakers to breathe a sigh of relief. But the latest surge in bank loans leaves no room for doubt about the imminent danger of a liquidity flood.

On one hand, if unchecked, the credit expansion will continue to fuel inflationary expectation and asset bubbles more rapidly than expected. On the other hand, the explosive growth of bank loans in the first six months would make it very difficult to rein in liquidity growth later this year without hurting economic growth. It is obvious that any sudden monetary tightening may prove disastrous for economic recovery.

Related readings:  China's bank loan total exceeds full-year target  Banking regulator warns of risks in loan spree  Loan surge irks regulator  Expert: Nation can avoid banking risks despite fast loan growth

The sound performance of Chinese banks in recent years has boosted their international status amid the global recession. However, their new-found confidence must be subject to strict scrutiny if they cannot uphold their standards of lending during the national campaign to fight the worst global financial and economic crisis in many decades. It is time for the banking authorities to take action now.

It was a good beginning for Chinese regulators to reiterate, as they did recently, that banks should carefully control credit risks while extending loans to support economic growth.

The central bank also needs to consider providing stricter guidance to banks to rein in growth of loans.

Unless the banking authorities act resolutely and quickly enough, it is not impossible that the current credit surge may end with some Chinese banks in floods of tears.