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China?s Soaring Bank Lending Stands Out in Global Downturn


BEIJING -- Optimistic official comments from China's annual legislative meeting are highlighting the country's differences with major Western economies caught in the worsening financial crisis.

China's economy hasn't turned the corner into recovery -- housing sales, construction and manufacturing continue to contract, and the worst is almost certainly still to come for exporters hammered by downturns in U.S. and European demand, with February trade figures next week expected to show a sharp decline.

But while financial systems sag in many countries, Chinese banks -- state-run, stodgy and opaque though they may be -- continue to pump money through the economy. Along with flush household savings and solid corporate balance sheets, that is sparing China from the liquidity crunch and credit collapse savaging other nations.

"The effect of this financial crisis on China is different than its effect on Western developed countries," Zhang Ping, the head of China's economic planning agency, said at a news conference on Friday. "For us the biggest impact has been on the real economy, while in the West there has been a major impact on the financial system."

"It's just one crisis, not two" for China, said Ben Simpfendorfer, an economist for Royal Bank of Scotland. Because they don't have to restructure their financial system, he said, Chinese authorities can focus on re-accelerating economic growth with measures like the 4 trillion yuan ($585 billion) investment plan the government announced in November.

The most important complement to the government's spending has been the jump in bank lending since November. In January alone, banks made 1.6 trillion yuan in new loans -- more than they did in the entire first quarter of 2008. February data to be disclosed in the next few days are expected to show another strong rise in loans.

"The size of total lending in January was beyond our expectations," central bank governor Zhou Xiaochuan said Friday at a news conference. Mr. Zhou said the increase is welcome if it keeps confidence from declining, and that any problems from the surge could be dealt with later.

While some experts question whether China's wave of lending is sustainable, it's the kind of problem other countries would like to have right now. "It's probably the only country in the world with a big expansion in private credit," Ronald McKinnon, professor of international economics at Stanford University, said in a recent talk in Beijing. With the European Central Bank and Bank of England slashing interest rates to record lows this week, the contrast is even more stark.

The availability of credit has helped ease China's slowdown, officials say. Indicators of manufacturing are falling less sharply than they were in November and December. "There are already some signs of stabilization and recovery. This shows that our policies are starting to take effect," said Mr. Zhou, the central bank governor.

Such optimism is, to some degree, intended for public consumption. The administration of Premier Wen Jiabao has made reassuring consumers and businesses a central part of its response to the crisis. This week Mr. Wen declared that China can achieve its traditional target of 8% economic growth for 2009. Though many private forecasters say that is unlikely, it was a public display of the confidence that Mr. Wen frequently says is "more important than gold or money."

However, domestic and global investors were disappointed that Mr. Wen didn't announce additional stimulus measures this week, and the reaction drove markets down.

Why didn't China ramp up its stimulus? In practical terms, it would be almost impossible for the government to announce new investment projects now, as it hasn't finished allocating the original funds announced in November. Revising the stimulus could also have undermined the government's careful optimism about current prospects -- and left officials with fewer resources to deal with what many expect to be a protracted global slump.

"We believe the government is unwilling to use up all its ammunition at the current stage of the downturn," said Lan Xue, China strategist for Citigroup.

Chinese officials say their response to the crisis so far has been effective, but they are leaving their options open. "Of course, we cannot lower our guard now, and we cannot say that we can completely avoid the impact of the financial crisis," said Mr. Zhang, the economic planner. Officials are monitoring changes in the economy and will shift policies as needed, he said.