Credit Expansion Won't Last Forever

Given that Premier Wen Jiabao has said that new loans in 2009 had reached 900 billion yuan by January 20, it is hard to imagine how these financial institutions extended yet another 700 billion yuan in new loans in the last few days of January, especially since January 26 was Chinese lunar New Year, which kick-started a seven-day public holiday.

The new loans from December to January, added together, totaled 2.37 trillion yuan, or half of the amount of new loans in 2008.

Such rapid credit expansion will strongly support China's steady growth in the short term. In order to spur a slowing economy, China had in late last year launched a stimulus package worth four trillion yuan, of which, 1.18 trillion would be forked out by the central government, while the remainder would be raised by local governments or from private capital.

The sweeping package, if unable to gain strong credit support from banks, would be hard to implement on schedule. At least by now we don't have to worry about fund shortages.

Although we believe private capital will finally become a major source for the planned investment, financial institutions will continue to play an important role in the near future.

After analyzing credit data, some experts found a strong rebound in bond financing, which indicated a positive signal that firms' financing activities were starting to warm up. This may also reflect the acceleration of firms to consume their overstocks.

The news may vindicate those scholars who held that strong credit support could reverse China's slowing growth.

Domestic banks are working to keep up with the central government line of bolstering growth. Despite that numerous small-and-medium firms still need more credit support, the collective effort by banks is making credit the "best partner" of the expansionary fiscal policy.

Though administrative directives still exert powerful influence in the banking industry, we can't simply ascribe the rapid credit expansion to such pressure.

With the 4 trillion stimulus package being driven by the central government, banks can't afford to pass up any opportunity. And if the wave of collapsing Chinese firms grows, banks will not have a promising future.

Therefore, under these special conditions, bolstering economic growth and protecting firms are tantamount to protecting banks. 

This shouldn't, however, be an invitation to reckless indulgence. Bolstering growth and protecting firms should be as important as controlling bank risks.

It's very hard to detect risks during a crisis. We should keep an eye on whether these loans are being used in the real economy or the stock market. If the latter, then our diagnosis of China's economic condition will be distorted.

The credit expansion, in any case, can't last forever. Even if the central bank can provide enough liquidity and commercial banks are well-funded, even if there is a strong administrative pressure, we should realize that as a business, there's no free lunch for banks.

If they begin to realize risks but are still required to expand credit, the bank's normal credit service will probably be distorted. Even worse, if they loosen risk controls, it will probably lead to another financial crisis.