PBoC Will Keep Lending at High Levels - China in a Bubble?

Sunday, August 09, 2009

Fighting a harder Yuan while increasing domestic lending may pose new problems for China's central bank, PBoC. The Chinese central bank promised in a press conference last Friday to keep monetary policy loose.
From Chinadaily:
The government will not change its stimulus policies because it could derail its hard-won economic recovery, though record bank lending in the first half of the year has raised fears over credit risks and asset bubbles.
"The central bank is still committed to a 'moderately loose monetary policy'," said Su Ning, deputy governor of the People's Bank of China (PBOC), at a press conference in Beijing on Friday.
"When we say 'dynamic fine-tuning', we do not mean the monetary policy but the monetary policy operations. We will sharpen the focus and intensify the pace of the policies," Su said.
China's economy is expected to slow to a growth rate around 6% this year. The government has to walk a fine line in its monetary policy: Facing imploding exports that may require to keep the Yuan on the hard side are contrasting with a domestic stimulus that may carry higher inflation in its pouch.
China denies to consider asset prices a point of concern in its monetary policy decisions. So far it appears willing to let credit grow further.
The country's banks have lent nearly 7.4 trillion yuan ($1.08 trillion) in the first half of the year - far higher than the initial full-year target of 5 trillion yuan.
On the back of the unprecedented rise in credit, the Shanghai Composite Index has rallied about 80 percent this year and real estate prices have rebounded to record levels in some major cities.
Some economists say much of the country's massive $586-billion stimulus package and record lending in the first half may not have been spent on real economic activities and created asset bubbles.
"How far the bubble will go depends on the government's liquidity policy," said Xie Guozhong, board member of Rosetta Stone Advisors.
China may nurse a consumption bubble. Anecdotal evidence has it that "buy to let" condos in cities of China's dynamic Southeast lack renters. A property bubble plus bad credit reinvigorates pictures seen in the USA and Europe. Banking on a stable Yuan may prove to be as much of a Russian roulette as holding Federal Reserve Notes.


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