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Credit spurt spawning asset bubbles

CHINA needs to be cautious about creating asset price bubbles because a large part of the new wave of bank loans is being channeled into the stock and property markets, according to Wei Jianing, a senior researcher at the State Council's Development and Research Center.

"The current model of bank lending can easily create new asset price bubbles - and has shown some signs of doing so," Wei was quoted as saying yesterday by the Shanghai Securities News.

"The credit surge is circulating within the financial sector, raising stock prices and property prices."

While recent gains in shares and property prices are a welcome respite for investors, putting funds meant for stimulus projects into speculative investments could undermine the government's effort to boost growth and reduce the economy's heavy reliance on exports.

China's economic planners have urged banks to issue loans to support the government's 4 trillion yuan (US$586 billion) stimulus program, aimed at protecting the economy from the global slowdown by pumping money into spending on building airports and other public works projects.

Wei said nearly half of China's new liquidity may have gone into the financial sector instead of serving the "real economy" to support growth.

China's new yuan-backed loans amounted to 5.84 trillion yuan in the first five months of this year, more than the total lending for all of last year and exceeding the 2009 minimum target of 5 trillion yuan.

Market sources said new loans in June may surpass 1 trillion yuan, maintaining the momentum that began when China adopted a looser monetary policy last November to counter the global financial crisis.

The China Banking Regulatory Commission last week reinforced an earlier decision that bank loans should be directed into manufacturing expansion and other projects that help the traditional economy instead of being used for market investment.

The regulator also urged banks to avoid loan surges at the end of a month or quarter just to meet internal targets.

Cheng Siwei, a renowned Chinese economist and former vice chairman of the Standing Committee of the National People's Congress, also voiced concern over where the rising credit is ending up.

"Some of the new loans were undeniably channeled into the equity and property markets in the first quarter - that's one of the reasons for the warming up of the markets," Cheng said at a financial forum over the weekend.

Cheng also said the surge in loans could have negative effects on the economy, including the creation of bubbles, and he also worried that government-backed investment may be unable to stimulate consumer demand in a "sustained" way.


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