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Source: www.asiaecon.org |

CHINA'S ECONOMY IS BOUNCING BACK


After a record expansion in loans and government spending, The People's Bank of China, the country's central bank, has pledged to "guide" the pace of loan growth, since the rapid expansion of credit adds to the risk of bad debt and asset bubbles.


Contrary to worries, however, China appears to be doing exceptionally well: “China’s recovery is gathering further momentum,” Bank of America Merrill Lynch economist Lu Ting told Bloomberg News. “It has been recovering faster than the market had expected.”

The People’s Bank of China has said that it will focus on “strengthening monetary and credit management,” said Li Dongrong, an assistant governor in a statement. According to Dongrong, this will “guide the direction of money and loans” to establish stability in the financial sector.

In June 2009 alone, “new loans rose almost fivefold…as the credit boom revived growth… helping the Shanghai Composite Index to climb 80 percent” from its slump in 2008. On June 25, 2009, the PBOC called for more lending to rural areas and small-medium sized businesses. In November 2008, the PBOC dropped loan restrictions and encouraged lenders to “support” a 4 trillion yuan (equivalent to $585 billion) stimulus package that increased new loans to 1.53 trillion yuan in June 2009.

“The central bank may work on more policies to better guide loans to boosting the real economy,” said Xing Ziqiang, an economist at China International Capital Corp. in Beijing. “The bank might have found that despite rapid loan growth, exporters still face difficulty in getting funds.” Last week, the government revealed that exports had fallen for the eighth month in June 2009.  The fall in exports was offset by a spur of investment and lending by banks. The central bank has also “kept interest rates and stalled the yuan’s gains against the dollar for a year to help exporters. Fan Gang, an adviser with China’s central bank, expects the country’s recovery to be U-shaped, with export growth returning to “normal” by the end of this year or early 2010.

The PBOC is choosing to stick to a “moderately loose” monetary policy and a “proactive” fiscal policy, where they will attempt to “improve financial support for the economy.” It is essentially done by encouraging more spending from consumers and businesses by lowering interest rates and making money less expensive to borrow.

Although many expressed concern about China’s record lending rates, China’s economy is estimated to have expanded 7.8 percent in the second quarter, as “record lending and surging investment drove a rebound from the weakest growth in almost a decade.”

Tao Dong, chief Asia economist at Credit Suisse Group AG in Hong Kong predicts that “China will be the first among major economies to confirm an economic recovery.” His confidence stems from the plan to have policy makers use bill sales, specific instructions to banks and loan regulations to “fine-tune” monetary policy.

However, this may not be as easy as it may sound. Two government bill sales last week failed due to speculation that the credit boom would spark inflation. The government assures, however that the “risk is not immediate.”

The government is expected to announce gross domestic product on July 16, 2009.

Source: www.asiaecon.org |


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