More Signs of Big Trouble in Big China as Loans Sharply Contract

Oops. More signs of big trouble in China as demand for credit substantially shrink.

From Bloomberg,

China’s biggest banks may fall short of loan targets for the first time in at least seven years as an economic slowdown crimps demand for credit, three bank officials with knowledge of the matter said.

A decline in lending in April and May means it’s likely the banks’ total new loans for 2012 will be about 7 trillion yuan ($1.1 trillion), less than the government goal of 8 trillion yuan to 8.5 trillion yuan, said one of the officials, declining to be identified because the person isn’t authorized to speak publicly. Banks are relying on small- and mid-sized companies for loan growth after demand from the biggest state-owned borrowers dropped, the people said.

The drying up of loan demand attests to the severity of China’s slowdown and may add pressure on Premier Wen Jiabao to cut interest rates and expand stimulus measures. The economy may grow in 2012 at its slowest pace in 13 years, a Bloomberg News survey showed last week, as Europe’s debt crisis curbs exports, manufacturing shrinks and demand for new homes wanes.

Press officials at the People’s Bank of China and the three largest lenders -- Industrial & Commercial Bank of China Ltd., China Construction Bank Corp. (939) and Bank of China Ltd. (3988) -- declined to comment. Press officials at Agricultural Bank of China Ltd. (601288) weren’t immediately available.

New bank loans last month dropped 33 percent from March to 681.8 billion yuan, missing the 780 billion yuan median forecast of economists surveyed by Bloomberg News. A third of April’s new credit was also so-called discounted bills, or short-term loans often used by banks to pad the total figure.

Worsening Situation

This month may be worse. The four biggest banks -- which account for about 40 percent of lending -- had advanced only 34 billion yuan as of May 20, Liu Yuhui, a director at the government-backed Chinese Academy of Social Sciences, said in an interview this week, without saying where he got the data. The lenders may rush to boost credit in the last few days, mainly through short-term notes, he said.

China hasn’t officially announced the quotas set for each bank or the total loan target for 2012.

In the past three episodes where China’s credit growth materially shrank during the last 3 years, the Shanghai index, on a time lag, experienced severe downside contractions.

While history may not repeat, however if the marked sluggishness in China’s credit markets are indeed manifestations of a deepening slowdown (or worst a bubble bust) then we can’t discount the same pattern from happening again—liquidations from bad loans, which may spillover to the equity markets, will mean higher demand for cash.

Again, reports like these, along with China’s considerable reduced demand for commodities and a sharp slump in the recent factory activities, have prompted many to anchor their hopes on a on a massive scale of stimulus from the Chinese government.

Again this will be an issue of available private sector real savings to draw from, the scale and timing of any forthcoming stimulus and of the markets response to these.

In reality, what ‘stimulus’ can do will be to temporarily mask the underlying imbalances and to defer on the day of reckoning. However short term benefits will always have long term costs: accrued imbalances worsen overtime. This should translate to a bigger intensity of a crisis when it inevitably arrives. [I am not saying this is happening today, as this has yet to be established, and vastly depends on the abovementioned conditions]

We must remember that inflation is a policy that will not last. Either the Chinese government accepts this fact or if not eventually suffer from a monetary crisis. Yet considering that China has been building up massive gold reserves and has taken steps to make her currency, the yuan, a foreign reserve currency, the latter seems less likely the option.

Also China’s slowing economy comes amidst the seething Euro crisis and the seemingly diffident (for now) US Federal Reserve, whose Operation Twist comes to an end in June which means a lot of uncertainty on the global financial markets which has been highly dependent on central banking steroids.

Like it or not, fact is, we are navigating in treacherous waters