How Far Can Credit Go to Support China’s Economy?

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Aug. 11 (Bloomberg) –- Bloomberg’s David Ingles reports on Bloomberg’s new China Monetary Conditions Index, how it works and how China loosening its monetary policy effects the fundamentals of the economy. He speaks to Angie Lau on “First Up.” (Source: Bloomberg)

Tried and tested tool to spur growth, and of course we are talking about credit.

Bloomberg data showing this, but how effective has it been?

David english is here to walk us through the details.

Bloomberg has come up with this new index.

It is called the china monetary conditions index.

We all know how china has relied on credit in the past to spur investment, which would eventually find its way into spending.

They went back to that old tool in the second quarter.

This index shows you they've loosened monetary policy without formally slashing interest rates at the fastest pace in about two years.

Here is your index.

What does this number mean?

If you want to break this down, we are looking at three factors which affect where it goes.

You are looking at loan growth, real interest rates -- nominal interest rates and strip off inflation -- you also take the real effective exchange rate, which is the purchasing potter -- power of the yuan.

It is a snapshot from our economists at bloomberg that shows you, how does the loosening of monetary policy or tightening of monetary policy affect the fundamentals of the economy?

What it shows you, it is a small spot right here -- it big spike up.

The data goes all the way back to 2003. another point i want to mention -- back in 2009, that is when the world was trying to recover from the global financial crisis.

China said, let's put all the money in the bank and start lending out.

They were really the engine that drove the world's economy into recovery.

Exactly, but can they keep doing this?

We all know economists have been telling us, no, they can't. at some point, reform will have to shoulder the bigger burden.

What is the impact on gdp in terms of return on expansion?

It is the efficacy of monetary policy.

We have put together some data.

In the first half of 2014, for every one dollar, you can credit an extra $.20 of gdp reduced.

Just imagine, 500 billion worth of new credit, that's an additional 100 million.

What was it in 2009? it was eight cents more than that, $.28.

This text has been automatically generated. It may not be 100% accurate.

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