Will bank credit slow in China?

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(China Daily)
Updated: 2009-08-17 16:43

Q: How much new lending can we expect in 2009 and 2010?

A: We see total new bank lending reaching about 10 trillion yuan in 2009 and declining to 7 trillion yuan in 2010 (16 percent year-on-year growth).

Q: Are banks headed for an explosion of non-performing loans?

A: Yes, if new bank lending continues at more than 1 trillion yuan a month for much longer. However, we think lending will moderate in coming months.

Even so, we do expect NPLs to rise, probably significantly, as they usually do when credit expands rapidly during an economic downturn.

We expect the NPLs to hurt banks' profits and balance sheets, and the situation might require some government bailouts at the end.

However, we do not expect NPLs to come close to the high levels of the late 1990s, and we do not expect banks' ability to intermediate to be impaired. Nor do we expect a financial crisis.

Q: Shouldn't China be focusing on boosting consumption?

A: Over the medium term, China should try to reduce its reliance on investment and boost domestic consumption.

In the short run, however, it is very difficult to boost consumption, since it requires increasing employment and consumer confidence in an economic downturn.

Moreover, consumption has remained resilient while investment was falling significantly in the beginning of the downturn. Stimulating investment is the most effective way to boost GDP growth.

The government is aware of the imbalance in the economy and has started to implement measures to improve the social safety net (such as health care) and reform some of the domestic distortions. But it will take time and more effort for the growth model to change.

Q: What is the implication for investors?

A: We expect year-on-year growth and underlying demand for investment goods to get stronger in the next two to three quarters, and see corporate earnings improving by the end of 2009.

However, the slower flow of liquidity and new bank lending could negatively affect investor sentiment and asset prices, as could some policy measures aimed at preventing a speculative bubble, including efforts to increase the supply of tradable shares and large IPOs in the equity market.

This correction in prices is likely to happen in the third quarter.

In addition, we expect the additional effect of the stimulus to decline in 2010, leading to a slowdown in quarterly GDP growth in the second and third quarter of 2010 from the peak of the fourth quarter of 2009 or the first quarter of 2010, even as we expect a sustained recovery in housing and a turnaround in net exports.

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