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Monday, November 12, 2012 11:39 AM


New Loans and Money Supply in China "Lower Than Expected"; Hopes of China Soft Landing Too High


The Chinese service sector expanded last month causing many to believe the worst news regarding China was over. I think it has barely started.

Damping the Pollyanna view comes news China New Yuan Loans, Money Supply Lower Than Expected in October

The value of loans issued by banks in China in October was less than expected, whereas the amount of money in the banking system grew at a slower pace, which suggest the authorities may be reining in liquidity toward the end of the year.

Chinese financial institutions issued a lower-than-expected 505.2 billion yuan ($80.83 billion) worth of new yuan loans in October, data from the central bank showed Monday.

October's new-loan tally was down from CNY623.2 billion in September and also below the median CNY590 billion of new lending forecast by 11 economists polled earlier by the Dow Jones Newswires.

China's broadest measure of money supply, M2, was up 14.1% at the end of October compared with a year earlier, lower than the 14.8% rise at the end of September, and below the median 14.5% increase forecast by economists.

Societe Generale economist Yao Wei said October's total new-loan tally shows that the People's Bank of China appears to be zeroing in on the CNY8.5 trillion lending target that many analysts and economists believe the central bank has set for the year.

Given the recent signs of stabilizing economic growth, it is unlikely that Beijing will further loosen its monetary policy in the coming months, said HSBC economist Ma Xiaoping.
Lending in a Command Economy vs. Lending in US

I see no reason to change my long-held belief that surprises in China will generally be to the downside, and probably severely so.

I say that even though there is one huge difference in bank lending between China and the US in terms of the government coaxing banks to lend.

When the Chinese Central Bank suggests banks should lend, they do. In the US money piles up as excess reserves if banks are reluctant to lend (as they are now).

US banks lend, on two conditions, both of which need to be true.

  1. Banks are not capital impaired
  2. Banks believe they have credit-worthy borrowers.

For a discussion please see Economist Fired for Expressing Opinions on Max Keiser Show; Errors in Observation.

Hopes of China Soft Landing Too High

In spite of command-economy lending prospects, hopes of a "soft landing" in China are misguided. China is far too dependent on housing, infrastructure, and State-Owned-Enterprises (SOEs).

Infrastructure Malinvestment

China is home to the world's largest shopping mall and it sits empty. For a discussion and video, please see How Will China Handle The Yuan?

Also recall that China is home to numerous vacant cities. For a discussion, please see World's Biggest Property Bubble: China's Ghost Cities Revisited; 64 Million Vacant Properties

The Video of Ghost Cities is a must see eye-opener for those overly bullish on China.

Either now or later China will pay the price, and the sooner the better.

China needs to rebalance, and will rebalance. Propping up the economy with more infrastructure projects and easy money will only cause the imbalances to grow larger. A regime change in China is underway, and the new regime will have to address the issue.

Economist Michael Pettis describes the setup perfectly in The Dating Game: Michael Pettis Challenges The Economist to a Bet on China

Implications

For implications on the upcoming China slowdown, please see


Two of the world's foremost experts on China(Michael Pettis and Jim Chanos) will be speakers at my economic conference in Sonoma, California on April 5, 2013.

For details please see Wine Country Conference April 5, 2013 or click on the image below.



Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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