China’s Surge in Lending Weakens Case for Rate Cuts

(Bloomberg, Feb 4) -- China’s central bank may become less aggressive in cutting interest rates as lending surges and the world’s third-biggest economy shows signs of bottoming out, Deutsche Bank AG said.

“Interest rates are no longer that important,” said Ma Jun, chief China economist with Deutsche in Hong Kong. “Rates were cut to stimulate lending, so now that lending growth is beyond everybody’s expectations the need for further cuts has weakened.”

Central bank Governor Zhou Xiaochuan says a 4 trillion yuan ($585 billion) stimulus package announced in November has had “initial positive results” and an official newspaper reported today that lending rose by a record in January. Policy makers are trying to reverse an economic slide that has already cost the jobs of 20 million migrant workers.

The central bank has yet to cut the key one-year lending rate this year after 2.16 percentage points of reductions in 2008 that followed the collapse of Lehman Brothers Holdings Inc. in September. The rate stands at 5.31 percent.

Ma expects 81 basis points of cuts this year, mainly to counter the risk of deflation.

Chinese banks may have offered a record 1.2 trillion yuan of new loans in January, the China Securities Journal reported today, citing people it didn’t identify.

Bank of China

The four biggest state-owned banks, China Construction Bank Corp., Industrial & Commercial Bank of China Ltd., Agricultural Bank of China and Bank of China Ltd., completed 20 percent of their full-year lending targets, the newspaper said. Most of the money went to railways, highways, electricity grids and infrastructure, it said.

December’s economic data showed “that the stimulus policy has achieved initial positive results, but we should pay close attention to future economic development to judge the overall trend,” the Financial News, a central bank newspaper, quoted Governor Zhou as saying yesterday.

Last quarter, gross domestic product grew 6.8 percent, the least in seven years, as the global recession cut exports and construction slumped. The International Monetary Fund last week reduced its forecast for China’s expansion this year to 6.7 percent from 8.5 percent amid the likelihood of global growth coming to a “virtual standstill.”

China’s manufacturing contracted for a fourth month in January, a Purchasing Managers’ Index released today showed.

‘Positive Signs’

Still, the measure rose for a second month after reaching a record low in November, “adding to positive signs for the short-term outlook for the economy,” Ma said.

China’s stocks rose to a four-month high on expectations that growth will bounce back. The Shanghai Composite Index climbed 2.2 percent as of 1:41 p.m. local time.

“We have quite a lot of evidence that the economy is bottoming,” said Tao Dong, chief Asia economist at Credit Suisse AG in Hong Kong. “This is the second consecutive month the PMI has rebounded and this month new orders surged.”

He also cited “unprecedented” loan growth and anecdotal evidence of mushrooming provincial infrastructure projects.

M2, the broadest measure of money supply, surged in December, rising 17.8 percent from a year earlier, the biggest gain in seven months. The central bank is targeting a 17 percent increase this year to boost domestic consumption as exports plunge because of recessions in the U.S., Europe and Japan.

Global ‘Heart Attack’

“The global economy is still in a heart attack so it’s very early to say we’ve hit a bottom,” said Isaac Meng, a senior economist at BNP Paribas SA in Beijing. An employment index released with the PMI fell to a record low, signaling that “this is still quite a severe situation,” he said.

China faces the risk of protests and social unrest as 20 million jobless workers return to the countryside from cities, a senior rural planning official, Chen Xiwen, said Feb. 2.

“Given the recent jump in M2 and loan growth, it appears that top leadership in China does not feel the urgency for more rate cuts in the near term,” Frank Gong, the head of China research for JPMorgan Chase & Co. in Hong Kong, said in a Jan. 30 report. He saw a risk of “complacency” among policy makers.