China Loan Growth Declines Sharply: This Can't Be Good

Economists are observing a sharp slowdown in China bank loans. Chinese bank lending fell 28% YoY in January, suggesting Beijing is reluctant to open the credit valves too quickly for fear of reigniting inflation. Chinese banks typically ramp up lending at the beginning of the year to avoid losing quotas issued by regulators and the effects of changes in monetary policy, but the December-January change was the lowest increase since 2007.

To us, this is more evidence that China's economy, now the world's second largest, is slowing as turmoil in Euro zone countries and weakness in the United States hurts demand for Chinese exports, while China is itself a key driver of the Asian and Japan economies.

The weak January numbers came despite reports by the FT that the government is telling the banks to rollover their loans to local governments to give them more time to repay massive debts from stimulus spending after the 2008 financial crisis. Last year, China's National Audit Office put the debt held by local governments at 10.7 trillion yuan ($1.7 trillion) at the end of 2010 -- or about 27% of China's 2010 gross domestic product (GDP). The huge amount of money involved this time is unsettling investors. The government belatedly gave permission to four of its most developed cities and provinces to directly issue bonds after a long ban, to give cash-strapped local governments an alternative funding channel to real estate development through property subsidiaries.