China Daily reports that China's bank loan total exceeds full-year target.
(emphasis mine) [my comment]
China's bank loan total exceeds full-year target
Updated: 2009-07-09 09:33
China's banks extended a surprisingly large amount of new loans in June, more than doubling that of May's, while driving up possibilities of bad loans and excessive production capacity amid a credit boom.
Preliminary calculations showed that new lending was 1.53 trillion yuan, the central bank said on its website yesterday, bringing total lending this year to 7.4 trillion yuan, far exceeding the country's initial full-year target of disbursing 5 trillion yuan in loans. Total lending so far this year amounted to almost one quarter of last year's GDP.
June's figure was the third-biggest monthly sum this year, after the 1.89 trillion yuan lent in March and the 1.62 trillion in January.
The surge in June loans is a result of the government's decision to pare the equity capital requirement of fixed-asset investments in May, Liu Yuhui, director of the Center for Chinese Economic Evaluation at the Chinese Academy of Social Sciences, told China Daily.
The equity requirement for railway, road and metro projects was lowered to 25 percent from 35 percent, while the ratio for airport, port and inland shipping construction was lowered to 30 percent from 35 percent.
"The lower requirements for infrastructure-related investment projects mean that it will be easier for the local governments to borrow from banks to fuel local infrastructure construction," Liu said.
Reuters reports that China June loans beat forecasts.
China June loans beat forecasts
07.08.09, 07:48 AM EDT
BEIJING, July 8 (Reuters) - Chinese banks extended an eye-popping 1.53 trillion yuan ($223.9 billion) in new loans in June in a fresh show of support for the government's drive to hit its target of 8 percent economic growth in 2009.
The burst of lending last month, up from 664.5 billion yuan in May, took total new credit for the first half of the year to 7.37 trillion yuan, or almost 25 percent of last year's gross domestic product.
The People's Bank of China, the central bank, announced the figure on its website, www.pbc.gov.cn, in a brief statement.
The record pace of lending is fanning concern in Beijing that bank credit is inflating new bubbles in China's stock and property markets and could sow the seeds of a new crop of bad loans in the predominantly state-owned banking system. [Inflation not bad loans is the real risk from the record pace of lending]
Wang Huaqing, the discipline commissioner at the China Banking Regulatory Commission, on Tuesday said banks should spread risk by syndicating big loans for projects like railways and airports.
More broadly, Premier Wen Jiabao and his advisers agreed recently on the need to keep inflation in check, given the massive stimulus coming from the surge in bank lending and the government's 4 trillion yuan stimulus package.
A Reuters poll released on Tuesday showed economists were unanimous in expecting no change in borrowing cost rates or banks' required reserves in 2009 or the first half of 2010.
But the PBOC has already started to nudge up money market rates, prompting a partial buyer's strike in the bond market on Wednesday. The Ministry of Finance failed to sell out a one-year auction as dealers held out for a higher yield.
The central bank also said on Wednesday that it would resume sales of 12-month bills, suspended since mid-November, to drain cash from the banking system.
The new-loan total for June was much higher than the estimate of 1.2 trillion yuan given in recent days by state media and suggested that banks had defied instructions from the China Banking Regulatory Commission (CBRC) to avoid sudden lending surges at the end of each month and quarter.
June's figure was the third-biggest monthly sum this year, falling short of the 1.89 trillion yuan lent in March and the 1.62 trillion disbursed in January.
The government initially said it wanted banks to lend at least 5 trillion yuan this year.
Bloomberg reports that China debt auction falls short as central bank tightens policy.
China Debt Auction Falls Short as Central Bank Tightens Policy
By Bloomberg News
July 8 (Bloomberg) -- China failed to complete a 28 billion yuan ($4.1 billion) government bond sale for the first time, as the central bank withdrew cash from the financial system to reduce inflation pressures.
The Ministry of Finance sold 27.5 billion yuan of one-year notes at a yield of 1.06 percent, compared with 0.89 percent at the last auction of similar-maturity debt in May, according to Chinabond, the nation's biggest debt-clearing house. Later, the People's Bank of China it said will resume the sale of one-year bills tomorrow after an eight-month suspension.
"The failure to sell all government bonds in an auction is quite rare," said Nie Shuguang, a fixed-income analyst at Industrial Bank Co. in Shanghai. "Investors are worried the central bank will fine-tune its monetary policy and drain capital from the financial market."
China is seeking to choke off supply of money to speculative stock-marke t and real-estate investments, without derailing its 4 trillion yuan economic stimulus plan by raising benchmark borrowing costs. The government needs to "fine-tune" monetary policy to prevent asset bubbles, loan defaults and rapid inflation, Zhang Jianhua, head of the central bank's research bureau, wrote in the China Finance magazine this month.
The yield on the 2.76 percent treasury note due February 2016 rose 1 basis point to 2.85 percent at 4:30 p.m. Shanghai time, and the price of the security fell to 99.46 per 100 yuan face amount, according to the Interbank Bond Market.
China's bond market swelled in size to about $2.2 trillion at the end of March, compared with $1.9 trillion a year earlier, paced by corporate bond sales, according to the Asian Development Bank. Demand has been waning in recent weeks. An auction of 28 billion yuan of five-year government securities on July 3 drew bids for 1.42 times the debt on offer, compared with a 1.65 bid-to-cover ratio in a sale of 28 billion yuan of 10- year notes on June 17.
The People's Bank has been draining funds from the financial system. The yield on the 28-day bill repurchase agreement climbed 10 basis points in open market operations in the past week to 1 percent, after being unchanged for six months. A basis point is 0.01 percentage point.
The central bank plans to auction a combined 100 billion yuan ($15 billion) of bills due in three months and one year tomorrow, the most since September 23. Chinese lenders extended 1.53 trillion yuan of new loans in June, more than doubling that in May, the central bank said today.
"The central bank is fine-tuning its monetary policy," said Yang Hui, a fixed-income analyst with Citic Securities Co. in Beijing. "Banks have made too many loans, which has helped drive up housing prices."
The resumption of initial public share sales has further strained supplies of cash. China's securities watchdog has since June 18 allowed three companies, including Guilin Sanjin Pharmaceutical Co., Zhejiang Wanma Cable Co., and Your-Mart Co., to proceed with plans to sell shares after a nine-month moratorium.
"The repo rate increases shook the market," Shi Lei, an analyst at Bank of China Ltd., China's third-largest lender, said in an interview from Beijing. "The government is worried inflation pressure will return in the future. A surge in money supply will turn into inflation in about six to 10 months." [It will be sooner]
China's consumer prices dropped 1.4 percent in May from a year earlier, after falling 1.5 percent in April, according to the statistics bureau. M2, the broadest measure of money supply, rose 25.7 percent, after a record 26 percent gain in April, the central bank said.
[Charts showing China's monthly CPI and money supply growth are below articles.]
The Shanghai Composite Index has jumped more than 80 percent from last year's Nov. 4 low, while the state-run China Daily newspaper reported last week that real-estate "bubbles" exist in major cities across the nation.
"The failure to sell the amount of bonds planned showed rising inflation concerns," said Tang Guohui, a fixed-income analyst and trader at Industrial Securities Co. in Shanghai. "The auction result will add to the bearish sentiment."
Bloomberg reports that China may keep interest rates low to cement recovery.
China May Keep Interest Rates Low to Cement Recovery
By Bloomberg News
July 8 (Bloomberg) -- China may keep interest rates unchanged for the rest of this year to cement a recovery in the world's third-biggest economy.
The key one-year lending rate will stay at 5.31 percent and the deposit rate at 2.25 percent, according to the median estimate of 15 economists surveyed by Bloomberg News. Reserve requirements for banks will also be unchanged.
An explosion in credit under a 4 trillion yuan ($585 billion) stimulus plan is reviving growth after trade collapsed because of the global recession. Falling exports and company profits, overcapacity in manufacturing and a rising jobless rate show the economy remains in a "critical" phase and the recovery isn't yet solid, the State Council said last month.
"It's a tough decision, when to tighten," said Wang Qian, an economist at JPMorgan Chase & Co. in Hong Kong. "China's recovery is fragile, medium and small businesses are mired in losses and unemployment is rising, so the government will be extremely careful."
The government is aiming for 8 percent growth to create jobs and maintain social stability after the collapse of global trade shuttered factories, costing millions of jobs.
President Hu Jintao has cut short his visit to Italy, where he was scheduled to attend the Group of Eight summit, after two days of ethnic violence in the westernmost province of Xinjiang left at least 156 people dead.
Chinese officials imposed an overnight curfew in Urumqi, capital of Xinjiang, for a second straight day, after ethnic Han and Uighur people fought in the streets with machetes, pipes and bricks. Yesterday's violence broke out as the police attempted to quell the deadliest clashes in decades. The strife has also left more than 800 people injured since July 5. [which is why Beijing is determined to keep the economy growing fast and will keep interest rates low]
Mydigitalfc.com reports that Inflation may hit first in China.
Inflation may hit first in China
Jul 01 2009 21:38 hrs IST
By Wei Gu
While China has been outspoken in expressing concern about the United States' printing too much money, those worries might be better focused at home. No country beats China when it comes to effective monetary easing.
Beijing has scrapped lending quotas, adopted a loose monetary policy and kept interest rates at a four-year low to bolster liquidity and promote growth.
The policy has worked. China has lent out more money in the first four months of this year than in the whole of 2008. Money growth in China is up more than 25 percent this year, versus about 10 percent in the United States.
Beijing's ''monetary emissions'' will have major consequences, and China might suffer from inflation before other countries in the world [This sounds familiar... Oh right, I wrote about this six months ago! (see *****Hyperinflation will begin in China and destroy the dollar*****)]. The flood of liquidity that has been injected will almost certainly overwhelm the country's seemingly indestructible overcapacity.
History has shown that China can have inflation even during times of severe overcapacity, as in 2008.
So far, China remains in a honeymoon period. Cheap money is sloshing around, but thus far it has generated only asset price inflation — the sort of inflation that investors like. Meanwhile, consumer prices are still falling—by 1.4 percent in May from a year earlier. Factory gate prices were down 7.2 percent.
These price declines must be seen in context [oil was hitting $140 at this time last year. Within that context, it is amazing prices in china are down only 1.4 percent. I will write a full entry on this later]. They reflect a high base of comparison last year, showing that China needs to worry more about inflation than deflation. Chinese policy makers might have misread the symptoms—the big drop in manufacturing activity late last year has been exaggerated by a sharp destocking process, which means end demand did not fall as much as the authorities thought.
Beijing has prescribed a strong remedy in flooding the market with liquidity.
And businesses, banks and local governments are only too happy to swallow it, for commercial as well as political reasons. Banks make money when they lend, businesses like cheap money and local government officials get promoted when local economies perform well.
As one might imagine, equity prices have been the first to respond to this liquidity injection. Chinese stocks have been a top performer this year, up about 63 percent, while the Dow is down 3 percent over the same period.
Next in line is the property market.
House prices in America are still falling, but in Chinese cities like Shenzhen and Shanghai, they have risen by as much as 20 percent since April. Long lines increasingly form when new apartments go on sale, and the government is talking about increasing the supply to help cool the market.
It will not be long before asset price inflation starts to infect the real economy.
People buy appliances to go with their new apartments, and a buoyant stock market prompts investors to order shark fins for lunch.
In China, the first signs of real-economy inflation will almost certainly be seen in pork prices. Over the past decade, pork prices have acted like a coal mine canary in predicting inflation. In 2004 and 2007, inflationary bursts were preceded by spikes in pork prices.
A jump in pork prices in 2007 and 2008 prompted the authorities to introduce new incentives to promote pig farming, which increased supply. As a result, pork prices have dropped by 39 percent from the high seen in early 2008. Pig farming has become unprofitable and farmers have cut hog numbers as a result.
This simply paves the way for another round of pork price increases.
[Here is a nice graph of pork prices in China.
It will be only a matter of time before inflation is transmitted to the country's factories. After destocking during the last quarter of 2008, Chinese companies have started restocking in fear of rising commodity prices, which in turn has helped drive global commodities higher.
The price of goods like clothing and toys has already risen, as the export slump has forced factories to close, causing supply to drop more than demand.
This is called supply destruction and I have written about it before (see comments below article):
Goods can't be sold for under their production costs, period. The credit crisis has boosted cost of financing manufacturing operations, and these higher costs must passed on.
So what if US demand is falling? If Chinese exports can't get enough to cover their costs, they will keep going out of business until the supply of goods shrinks enough for the surviving exporters to pass on their higher costs.
When inflation reaches consumers and factories, policy makers will start to raise rates [or appreciate the yuan]. Asset prices might then experience a last round of euphoria as a wider spread between domestic and international rates lures foreign inflows.
But higher rates will cut corporate earnings and home buyers' spending power, and asset prices might start to fall.
Inflation is always and everywhere a monetary phenomenon, as monetarists like to say. China is on a money-goround ride that can only end with higher prices. Watch out for the next export from China — inflation.
Chinese Money Supply Growth
The graph below shows the 6 month rolling average of China's year on year money supply growth. Notice the how the Chinese M2's rate of change is now heading straight up.
My reaction: Beijing has scrapped lending quotas, adopted a loose monetary policy, and kept interest rates at four-year lows to bolster liquidity and promote growth. The policy has obviously worked.
China's eye-popping loan growth
1) Chinese banks extended a massive1.53 trillion yuan ($223.9 billion) in new loans in June, more than doubling that of May's.
2) To put this lending in context, consider the following:
A) China has lent out more money in the first four months of this year than in the whole of 2008.
B) total lending so far this year is 7.4 trillion yuan, far exceeding the country's initial full-year target of 5 trillion yuan.
C) 7.37 trillion yuan is almost 25 percent of China's 2008 gross domestic product.
D) New bank lending in the first half of this year is up 200 percent from the same period last year.
3) The new-loan total for June was much higher than the estimate of 1.2 trillion yuan given in recent days by state media, suggesting a loss of control on the part of Chinese authorities.
4) The surge in June loans is a result of the government's decision to pare the equity capital requirement of fixed-asset investments in May
1) Chinese M2 (broadest measure of money supply) rose 25.7 percent in May, after a record 26 percent gain in April.
2) The Shanghai Composite Index has jumped more than 80 percent from last year's November 4 low.
3) Real-estate "bubbles" exist in major cities across the nation.
PBOC's Reaction to loans
1) China is seeking to choke off supply of money to speculative stock-market and real-estate investments, without derailing its 4 trillion yuan economic stimulus plan by raising borrowing costs.
2) The People's Bank of China has resumed sales of 12-month bills, suspended since mid-November, to drain cash from the banking system.
3) The PBOC auctioned off a combined 100 billion yuan ($15 billion) of bills this week, the most since September 23.
4) The PBOC's efforts to drain funds from the financial system has already started to nudge up money market rates and prompted a partial buyer's strike in the bond market on Wednesday.
Failed government bond sale
1) China failed to complete a 28 billion yuan ($4.1 billion) government bond sale for the first time.
2) The failure to sell all government bonds in an auction is quite rare and shows rising inflation concerns.
Why China will leave interest rates unchanged
1) economists were unanimous in expecting no change in borrowing cost rates or banks' required reserves in 2009 or the first half of 2010.
2) Chinese officials imposed an overnight curfew in Urumqi, capital of Xinjiang, for a second straight day, after ethnic Han and Uighur people fought in the streets with machetes, pipes and bricks.
3) The strife has also left more than 800 people injured since July 5, which explains why Beijing is so determined to keep the economy growing fast.
4) China will keep interest rates unchanged for the rest of this year to cement a recovery in the world's third-biggest economy.
China's CPI numbers
1) China's consumer prices dropped 1.4 percent in May from a year earlier, after falling 1.5 percent in April.
2) At this time last year, oil was hitting $140. Within that context, it is amazing prices in china are down only 1.4 percent.
3) China's CPI numbers, which reflect a high base of comparison last year, show that China needs to worry more about inflation than deflation.
1) In China, the first signs of real-economy inflation will almost certainly be seen in pork prices.
2) Pork prices have dropped by 39 percent from the high seen in early 2008.
3) Since pig farming has become unprofitable, farmers have cut hog numbers as a result, paving the way for another round of pork price increases.
Supply destruction in China's export sector
1) Higher commodity prices and more expensive financing have increased the cost of Chinese manufacturing operations.
2) In the face of falling global demand, Chinese exporters weren't able to pass on these higher costs, forcing many factories to close down.
3) The big drop in manufacturing activity late last year has been exaggerated by a sharp destocking process, aggravating this supply destruction.
4) The price of goods like clothing and toys has recently risen, showing that supply destruction has reached a point where Chinese exporters can pass their costs on.
China's next export - inflation
1) Beijing's massive stimulus efforts and monetary easing will have major consequences, with China suffering from inflation before other countries in the world.
2) Supply destruction among exporters and looming domestic inflation mean the next big export from China will be inflation.
Conclusion: Make sure you read *****Hyperinflation will begin in China and destroy the dollar***** If you haven't already. It explains pretty much everything that is happening in China now.