China Risks Facing Renewed Slowdown as Lending Binge Subsides

With the stimulus program ending next year, China’s government has to find new ways to stop pumping money into the system without causing a sharp reduction in growth, said Bloomberg.

 

According to Bloomberg, the country’s rebound has been powered by 4 trillion yuan ($586 billion) of spending on railways, roads, power plants and public housing. With the stimulus expiring next year, Premier Wen Jiabao needs to find new ways to sustain the expansion with increased consumer spending and the financing of small businesses.

 

“This has been growth on steroids,” Michael Pettis, a Peking University finance professor and former head of emerging markets at Bear Stearns & Co., told Bloomberg. “The question now is how to stop pumping so much money into the system without a sharp reduction in growth.”

 

Quoting a report by the Asian Development Bank, Bloomberg said that extending the stimulus for too long risks the diversion of funds into stocks and real estate, an erosion of bank asset quality and inflationary pressures. “Such a scenario might trigger a round of severe monetary tightening in the medium term that would pull growth down again,” the lender said.
 

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