Thumbnail: 

The plunge in China’s bank lending that drove down the country’s stock market in August is unlikely a sign that the country’s recovery from the financial crisis is faltering, reports The Wall Street Journal.

According to the Journal, the outpour of bank lending in the first half of this year has been a significant part of China’s strategy to stimulate economic activity, and key to boosting business and investor confidence.

The newspaper writes that Net new lending in July was 355.9 billion yuan (US$52.13 billion), the lowest figure so far this year and well below the first half's monthly average of 1.2 trillion yuan.  According to the Journal, the decline has caused some investors to question whether prospects for China's recovery are faltering. Citing figures from Merrill Lynch's monthly survey of global fund managers, the Journal reports that the percentage expecting stronger Chinese growth dropped to 49% in August from 56% in July.

Giving a possible explanation on the market decline, Michael Kurtz, head of China research for Macquarie, told the Journal that bank lending drove the run-up, so with less new credit, there's now less money going into stocks.
 

Another possible explanation, UBS China economist Wang Tao tells the Journal, is that investors simply convinced themselves that lots of bank lending went into the stock market.

However, both Kurtz and Wang tell the Journal that the slowdown in bank lending that has made investors anxious is unlikely a sign of a sharp economic slowdown.
 

Kurtz explains to the Journal that liquidity in the real economy is no longer dependent solely on bank lending, as it now is boosted by capital inflows from abroad and domestic consumption. For her part, Wang points out that while banks may have lent the money in big chunks at the beginning of the year, borrowers' spending of it likely will be spread out over a much longer period.

Quote Image: