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China's stimuli package: The consequences of cheap credit

In 2008, the Chinese government announced it would in inject Rmb4 trillion ($586 billion) of capital into the economy to hamper the impact of the global economic slowdown in China. “China’s stimulus programme ended up being much bigger than the Rmb4 trillion originally planned,” explains Vincent Chan, head of China research at Credit Suisse.

The reason for this was that the National Development and Reform Commission (NDRC), the state planning agency, also approved a lot of industrial and infrastructure projects outside of the original stimulus plan. At the same time, under the business environment, banks were more than happy to lend to these projects approved by the NDRC. "Apart from the Rmb4 trillion fiscal stimulus programme, you had another big monetary boost, and one could argue, to a certain extent, the central bank lost control of the money supply because of that," adds Chan.

Easily available credit led to surges in private property development. High-end apartment building and housing projects have sprung up in China during the past couple of years. Pressure to earn money and pay back bank loans led to an escalation in property prices in China, as private companies sought to maximize profit margins. Since this exponential escalation in prices and the inability of China’s urban population to afford much of this high-end housing, concern about a property bubble in China has mounted among homeowners, investors and local media sources.

Mounting pressure on the government to stem the disparity between earnings and property prices partly forced a turnaround of economic policy. As a result, the government slashed the availability of bank credit to the private sector. In 2010, the People’s Bank of China raised banks’ reserve requirement ratio six times and raised interest rates three times in an attempt to curb excessive lending. Property development stalled as a result of limited credit. These tightening measures have continued into 2011 and are aimed at preventing bigger asset-quality problems in the wake of the credit boom of 2008 and 2009.

China’s policymakers tightened bank lending by lowering credit quotas and raising the required reserve ratio. Reported loan growth has been successfully lowered to 15% year on year in the first half of 2011 from 33% in 2009. Certain measures were aimed directly at controlling the property market. The government raised real-estate transaction taxes, increased minimum down payments for buyers and inflated mortgage interest rate margins.

However, credit loosening is only a question of time, say analysts. "Before 2007, there were draconian lending controls on property markets," says Kroeber. "After 2008, these were loosened, and in 2010 they tightened again," he continues.

"We will probably see a loosening of credit in the next six months," says Arthur Kroeber, non-resident fellow of foreign policy at the Brookings-Tsinghua Centre in Beijing. Indeed, evidence of loosening is visible. "In October, loan issuance was already up," he adds.

That month, Premier Wen Jiabao stated that monetary policy should be "fine-tuned and pre-tuned at the appropriate time and to the appropriate extent", hinting at a change in credit policy.

see also: 

Property throws a shadow over China
Corporate debt: Questionable investment

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