China Shuts Down Lending

The mainland Chinese government moved  in the direction of providing liquidity to its economy last year when it launched it $585 billion stimulus package. Now that the program seems to have been a success, it is rushing in the opposite direction by reigning in bank lending. The concern voiced by economists in the People’s Republic is that lending has become so excessive that it is the cause of emerging bubbles in real estate, equities, and agricultural goods.

The central bank, the Bank of China Ltd., says that it is sharply reducing its own lending and wants the rest of the financial system to target lower loan losses. That is simply another way of saying that overall credit availability will fall.

Some economists believe that the Chinese government is dragging its liquidity strategy to and fro, but factory production did drop sharply last year as did exports. The potential of high real estate value may be a small price to pay for reviving the country’s industrial machine.

The US will face the same problem on a much more muted scale this year. The Fed plans to end its programs to buy government paper and mortgage back securities on the theory that it can time the move perfectly as the American economy recovers.

The financial policies of China and the US are based on well-educated guesses which is what makes them so dangerous.

Douglas A. McIntyre