China Growth Push Risks a Debt Spiral

On the eve of the release of China’s second-quarter gross domestic product figure, which is expected to rise 7.4 percent, credit figures show a policy shift toward supporting growth in lieu of controlling a surge in debt and shadow banking.

China’s new loans in June reached 1.08 trillion yuan ($174 billion), compared to 860.5 billion a year ago, while analysts in a Bloomberg News survey had predicted just 955 billion yuan. Aggregate financing, also known as total social financing, reached 1.97 trillion yuan, well above the highest analyst estimate—1.55 trillion yuan—compared to 1.4 trillion yuan in May.

“The government has been concerned more about stabilizing growth recently,” and the credit numbers are a “confirmation of credit easing,” Shen Jianguang, chief Asia economist at Mizuho Securities Asia in Hong Kong, told Bloomberg News. “It’s offsetting the tightening from previous months.”

In order to encourage more lending without moving to a a full-scale easing policy, banking authorities have cut bank reserve requirements and loosened loans to small enterprises and to projects in agriculture and affordable housing. Meanwhile, China’s 30-some provinces have been pursuing stimulus programs, too.

Hebei, for example, has pledged to spend 1.2 trillion yuan ($193 billion), equivalent to 42 percent of the province’s GDP last year, in areas that include railways, power projects, and housing, said the Hebei Daily in a report posted online on June 26.

The northeastern province of Heilongjiang said it will “step up the construction of important infrastructure projects,” spending 300 billion yuan over the next two years on infrastructure and mining, according to a June 23 government statement. And the southern province of Guangxi will invest 630 billion yuan over three years on 166 infrastructure projects, according to a statement issued on July 4.

The renewed efforts to support growth are fanning renewed fears about the perils of too-rapid growth in debt. China’s local governments had accumulated 17.9 trillion yuan ($2.96 trillion) in debt as of June 2013, up 63 percent since the end of 2010 and much faster than the economy’s 40 percent expansion.

“Debt growth can indeed possibly increase risks—but if the economy collapsed, the problem would be even bigger,” said Chang Jian, chief China economist at Barclays in Hong Kong, in an interview with Bloomberg News.

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