Chinese banks are recommended to direct lending to stabilise growth24 July, 2012, 15:27. Posted by Zarathustra
Recommendations for financial institutions are being made by relevant authorities on measures to stabilise economic growth according to China Securities Journal.
The journal reports that unspecified authorities have made proposals on how banks and other financial institutions should increase their support for economic growth. Banks are recommended to direct to local government financing vehicles (LGFVs) and others to fund investment projects. Investments in railroads, highways, airports and new energy should be treated preferentially by banks according to the source. On top of that, the proposal also encourage private sector involvement in the financial industry.
The report points out that large amount of LGFVs loans will come to maturity this year, thus there will be high pressure for local government to repay or refinance these loans. Thus the proposal suggests that banks should ensure that local governments will not come under pressure such that they are able to continue with investment projects in order to stabilise economic growth.
|By Elyyo (Photo de l’auteur) [Public domain], via Wikimedia Commons|
This is exactly consistent with our conviction that when it comes to stimulate economic growth, state-directed lending (or as we put it, forced lending) will play an important role in the current and future effort to stimulate growth (learn more about that with our guide to China’s monetary policy tools). State-directed lending will ensure successful rolling-over of debts by LGFVs and/or state-owned enterprises, and hopefully to allow further investments and to offset the effect of debt deflation.
We can see how it works to stabilise and stimulate growth in the short-term, although we remain very sceptical if enough has been done in terms of stimulating investment, not to mention that we still see enormous risks on the down side that could jeopardise the second half recovery. Furthermore, we don’t see how further investments in railroads, highways and airports can in anyway rebalance the structure of the Chinese economy, and further investments will only make return on capital even lower in the future.