Chinese officials have ordered banks to make sure that their slew of new loans is directed to real businesses rather than stock and real estate speculation.
China’s new bank loans more than doubled in the first half of the year from the same period of 2008, reaching 7.37 trillion yuan. The lending spree came as the government implemented a $587 billion stimulus package to keep the economy out of recession.
But worry has emerged that banks are ignoring basic lending standards and fueling bubbles in the stock and real estate markets, the Financial Times reports.
Bank loans helped fuel economic growth of 7.9 percent in China during the second quarter.
Wu Xialoing, recently retired as deputy governor of the central bank, has said new bank loans will probably increase 40 percent this year, leading to bubbles.
“China's economic recovery is being constructed on the back of a savaged banking system,” Derek Scissors, a research fellow at the Heritage Foundation in Washington, told the Financial Times.
“Tens of billions — and perhaps hundreds of billions — of dollars of loans will not be repaid.”
“China's economic policies have shifted from being unsustainable over the very long term to being unsustainable for any more than one year,” he says.
The central bank has noticed and is acting to drain liquidity.
"It's definitely time to start tightening policy," Ben Simpfendorfer, an economist with Royal Bank of Scotland, told The Wall Street Journal.
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