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Rapid rise in lending double-edged

By Wang Donglin (China Daily)
Updated: 2009-04-20 07:57

In the midst of the current global financial crisis, the Chinese government has quickly loosened its monetary policy which has led to a dramatic increase in the country's credit since last November.

Lending in the first quarter of this year alone reached 4.58 trillion yuan ($673 billion), almost as much as the government's annual target of 5 trillion yuan ($735 billion).

The continuous growth in credit during the past five months has effectively paved the way to the country's economic recovery and increased consumer confidence.

Related readings:  China to keep relaxed monetary policy  Monetary policy should be 'fast and heavy-handed'  Monetary policy takes effect, adjustment possible: top banker  Further adjustment in monetary policy possible

Given the global economic slump, China has achieved great success in maintaining a fast-paced expansion of credit, reversed an economic downturn and brought the economy back onto the track of a gradual recovery.

However, we should not ignore what impact the dramatic growth in lending will have on economic growth in the months ahead. If inappropriately handled, it could endanger the national economy.

Bank lending on the current scale will not last long. Judging from past experience, inflation always follows every round of credit expansion. Whether or not record growth in lending will fuel record inflation remains a huge concern to the country's decision-makers.

Credit expansion on such a large scale is also likely to cause overproduction in certain sectors, another big concern for the steady and sustainable development of the national economy. Since last year, many Chinese industries have made great efforts to absorb their stockpiles of unsold products. But excessive production will not be easily absorbed within a short period of time. There have been rising concerns that the emerging investment spree may bring about a new round of over-production.

Lastly, excessive liquidity could create a bubble in the stock market. To seek short-term gains, part of the country's released funds has flowed into the stock market although relevant State regulations ban such a move. Proof can be found from the fact that at a time when the economy at home and abroad is yet to hit the bottom, China had a bustling stock market since the beginning of this year. The relaxation of credit controls has also caused a large quantity of funds to be pumped into the real estate market, creating new bubbles in an already speculative industry.

The author works with China Securities News