China bank lending: A bubble in the making?

Record lending in China is fueling both market speculation and bubble fears.
The Chinese economy may be roaring back to life, but concern is growing that record lending rates are feeding a speculation bubble.

While the U.S. and Western economies have faced a credit crisis, there is a credit feeding frenzy happening in China. China state banks have lent nearly $1.1 trillion in the first half of the year — more than the $800 billion U.S. stimulus or the $586 billion the Chinese government is spending to bolster its economy. The record lending spree — equal to one-quarter of the nation’s total economic output — is helping China’s economy grow close to 8 percent the last quarter. While boosting domestic consumption is seen as crucial to help reduce China’s reliance on exports, economists see signs of trouble ahead. “China has a $4 trillion economy and has (public and private) loans out of $1 trillion,” Jerry Lou, China strategist for Morgan Stanley, told CNN recently. “Its loan book is out of balance.” “Somewhere between a fifth and a third of total new lending may have ended up in such things as stock market speculation, real estate speculation and even a measurable amount may be showing up in the casinos in Macau,” said Michael Pettis of Peking University. Real estate prices are on the rise and Shanghai’s stock market is up about 70 percent this year. Chinese officials have warned of a significant rise in bad debts in coming years, and economists here say it could sow the seeds for huge bank bailouts down the road. “China of course has bailed out the banking system before, more than once,” said Wang Tao of UBS. “And cumulatively on a much larger scale than anything the U.S. have ever seen.”