China's strategy to keep its economy growing despite the global economic downturn has relied on a lot of spending. A rapid expansion of bank lending now raises worries that too much money in the system could cause some problems for China.
Chinese banks increased their new loans by 30 percent in July this year from last year. From January to July, Chinese banks have lent more than $1 trillion, nearly as much as the annual gross domestic product of Canada.
The loans, most going to build infrastructure, have been credited with helping the economy expand more than seven percent in the first six months of 2009.
"In the last five to six years, loan growth was pretty stable around 14, 15 percent. But since the fall of 2008, November, December until now, loan growth just surged basically culminating in the first half loan number of 7.4 trillion RMB [renminbi]; that's 54 percent of China's first half GDP," said Jing Ulrich, the chairwoman of China equities and commodities in Hong Kong for the bank JP Morgan.
Some economists and analysts warn that the situation has created a bubble or a surge in asset prices based on speculation, particularly in stocks and property. They warn that such jumps are wrongly seen as indications of an economic rebound. Shanghai's composite index rose some 80 percent from January to early August.
Plus, they say, too much lending can contribute to inflation, or, if it is done carelessly, could lead to banking problems later on.
Massive lending is part of China's $600 billion stimulus aimed at keeping the economy growing.
Officially, China's central bank says there will be no change in its loose monetary policy, denying that it will impose loan quotas as it did in the past when lending grew too rapidly. However, it called for "reasonable and sustainable" lending growth, signaling banks to maintain enough capital to cover their loans.
Over the past week, comments from the country's top lenders suggest a credit tightening in the coming months.
Jiang Jianqing, the chairman of the Industrial and Commercial Bank of China, the country's largest lender, spoke to a group of analysts and investors on August 20.
"I would say lending is just like eating food. The purpose of eating food is to keep fit and healthy," he said. "So it's the same with the economy, the purpose is to keep the economy healthy. You never ask every time to eat more compared to the last dinner you had. That would lead to a disastrous problem."
Officials at China Construction Bank, the second largest lender, also indicated that the bank will slow down lending in the next few months.
Ulrich says even if there is slower loan growth, there would still be enough liquidity (money) in the market to fuel growth.
In the 1990s, Chinese top state-owned banks were hobbled by bad debts from state-owned enterprises that had shut down as a result of economic liberalization. The government cleaned up the banks by transferring the bad loans into another company to be sold to outside investors. Since then, the central bank has been stringent about requiring banks to keep enough cash on hand.
But will tightening credit stall China's recovery? Market experts say lending alone does not guarantee economic recovery. Ulrich says exports and private sector investment have to pick up.
"Pure government driven investments driving GDP is not going to be sustainable in the long term," said Ulrich. "So that's why it is important [for] private sector investments to pick-up, and there are indications that private companies are putting in more investments."
The global economic downturn has severely hurt China's export sector, as demand for products in big markets like the United States and Europe dropped. Millions of factory workers have lost their jobs, causing fears of social unrest. The contraction in exports has slowed in recent months, and data from the manufacturing sector suggest that factories are beginning to hum again. But Premier Wen Jiabao recently warned that the economy still faces "uncertainties" ahead.