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Surging new loans not necessarily lead to actual inflation
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14:59, July 10, 2009

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China's new bank loans exceed 1.5 tln yuan in June

Statistics released by the People's Bank of China on July 8 revealed new loans in June reached as high as 1.53 trillion yuan, significantly greater than market expectation. The aggregate new loans in the first six months stood at 7.37 trillion yuan, more than the amount of any annual loans extended since the founding of New China.

Following the rapid growth in loans, the public has had expectations of inflation. Experts believed, however, the surge in loans will not necessarily lead to actual inflation.

"The surge in new loans in June was related to recovery of China's economy and micro entities' increasing demand for financing," said Guo Tianyong, director of the Research Center of the Chinese Banking Industry at the Central University of Finance and Economics, adding, "Especially, both personal residential mortgage and real estate development loans soared amid the recovery of the housing market."

Industry insiders believed that aside from the increasing loan demand, the more important driving force for the surging new loans came from banks themselves.

For the banks, the operating indicators for the first six months are particularly important. From the perspective of operating results, loans that generate interest revenues in the current fiscal year were generally extended in the first three quarters. Therefore, the growth in lending in the first six months determines the banks' interest revenue for the entire year.

Amid the international financial crisis, the 7.37 trillion yuan of loans have helped boost investment demand, playing a positive role in expanding domestic demand and maintaining growth. Meanwhile, because finance is at the core of modern economy, loans represent "confidence" to some extent. The 7.37 trillion yuan of loans have helped remove the deflation expectation and elevate confidence in economic recovery.

"Following the high-speed growth in loans, the public currently has inflation expectations," Guo added, "However loans will not necessarily lead to inflation."

He said that in theory, a surge in loans will trigger inflation. However, China's domestic downstream enterprises' production capacity surplus will continue. This will restrain inflation. Before the full recovery of the world economy, the rise of commodity prices in international markets, due to the depreciation of the US dollar, is unlikely to sustain, and will not influence commodity prices in China's domestic market through imported inflation.

There are also some problems for the 7.37 trillion yuan loans. In terms of loan structure, these loans were mostly extended to government-financed projects such as railway, road and airport, and only a small part was granted to small and medium-sized enterprises.

In the aspect of credit quality, the majority of bank loans were granted to government-invested projects. In order to compete for government projects, some banks have even relaxed qualification reviews and lowered lending thresholds. But in the long run, some local government investment projects are unable to achieve higher returns and have a relatively longer payback period. Thus it is difficult to guarantee that these projects have sufficient cash flow in the future to repay capital and interest.

In addition, loans secured for government projects mostly rely on "government credibility." It is often difficult for banks to obtain prompt, comprehensive and correct information about future disposable financial resources and implicit liability of local governments. If a local government faces financial difficulty, it will undoubtedly affect the quality of banks' credit assets.

"In the second half of this year, credit distribution will be steadily reduced. New credit is likely to total 9 to 10 trillion yuan in 2009," said Guo, adding, "Distributed credit soared in November and December last year, therefore there is a possibility that credit will be reduced compared to the same period last year."

Recently at the second-quarter regular meeting held by the central bank's monetary policy committee, it was pointed out that in the next phase, China will carry out a moderately relaxed monetary policy to maintain policy consistency and stability and guide the reasonable growth of credit."

At present, China's economic growth has shown signs of positive change, but internal growth impetus should be further strengthened. Therefore, a moderately relaxed monetary policy will be maintained in the second half of this year. Meanwhile in respect of the issues arising from the surge in credit, efforts should be made to continuously optimize credit structure and prevent potential risks, said Jin Yanmin, general-manager of the Business Department of China Construction Bank.

Guo suggested that in the second half of this year, supervisory authorities need to enhance guidance to commercial banks, issue warning signs of an excessive growth in loans in certain sectors and tweak credit growth using open market operation.

By People's Daily Online


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