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Yesterday on their website, the People's Bank of China announced a shocker. New Chinese bank lending for June was 1.53 trillion yuan ($224 billion), double the lending in May. The total already for the year is an astounding 7.4 trillion yuan when the target for the entire year was 5 trillion.
Putting this in context, total lending this year so far has amounted to 25% of 2008 GDP. As I wrote earlier this week, Chinese regulators are getting concerned that this lending is going towards poor credit and bleeding into commodity market speculation.
As most know, bank lending is high powered monetary stimulus due to its high velocity. This is the key difference between fiscal stimulus vs monetary stimulus. Actually, monetary stimulus will only work well if the banks receiving the funds lend them out. In the US, this is clearly not happening due to banks loan losses and caution over new lending (expanding balance sheet.) In China, this is not the case and new loans are flowing.
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Eugene Hoshiko / AP People walk at a shopping street in Shanghai, China. |
This means the impact will be faster and more dramatic. One place I believe this is showing up already is in new car sales.
Today, the Chinese announced new car sales for June rose 48% and have risen 36% yoy. Also stimulating demand, the Chinese government cut some retail taxes and provided vehicle subsidies in rural areas to spur demand.
Automaker stocks rose today on the announcement.
More than the 4 trillion fiscal stimulus, these loan levels are stimulating the economy and are making analysts/economists/IMF revise their estimates for 2nd half Chinese growth. But at what cost? Like the G8, the Chinese will sort out the problems caused by this stimulus after their economy rebounds.
Is there any example in the history of our global economy where a government pulled back their fiscal stimulus spending in time to avert price problems? I can't think of one...
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