For all the panic about China's lending clampdown, the market has lost sight of the fact that the risks of excessive loan growth and hence economic overheating and inflation are still skewed to the upside.
Global markets tumbled on the clampdown, fearing tighter monetary policy would crimp demand from a country providing a crutch for an otherwise limping global economy.
But those fears have arisen in part from a basic mistake. Investors have confused the government's hard line on the pace of lending for its much more generous stance on lending volume.
Beijing entered 2010 with a hefty target of 7.5 trillion yuan ($1.1 trillion) in new credit, or an 18 percent increase in the stock of loans, and a demand that banks spread out their loans over the course of the year.
A loans surge at the start of January made a mockery of the latter.
Banks lent 1.1 trillion yuan, or 15 percent of the full-year target, in the first two weeks of the year, rushing to expand their balance sheets before policy tightening shuts the door on them.
The subsequent clampdown — ordering banks to slow and, in some cases, even halt loan approval — was a crack of the whip to get the unruly lenders to fall into line with the goal of a more balanced pace of lending.
The central bank also instigated a rise in bank reserve requirements across the board, restricting cash that otherwise could be used for lending. The worst offenders were singled out for even steeper increases.
Had banks continued to dish out loans unabated, the situation would have been more dire, fanning price rises and asset bubbles.
"It would be out of control. The real demand for loans -- for investment, consumption, for all this business — is not that great," said Ting Lu, an economist with Bank of America-Merrill Lynch in Hong Kong.
But there is little doubt so far about the government's commitment to relatively loose credit conditions over the course of the year.
"This year's new loan target is definitely smaller than last year's level (of 9.6 trillion yuan) but it still represents massive growth compared with other years," said a banking official, speaking on the condition of anonymity.
"It means that lending will not shrink abruptly, because the economic recovery still needs capital support."
Moreover, analysts estimate that a good chunk of last year's loans — as much as 1.5 trillion yuan or 16 percent — is still sitting unused in corporate bank accounts.
China's annual loan growth had been below nominal GDP growth for a few years until last year's blow-out, when credit rose by 33 percent, more than 20 percentage points faster than the overall economy's expansion.
This was a key part of the country's stimulus program, fueling the economy with loose money to power past the global financial crisis.
With global demand weak, the private sector flat and manufacturers suffering from over-capacity, the government judged — and many analysts agreed — that it could contain inflationary pressures caused by the lending surge, so long as it was confined to one year.
It was, in other words, meant to be an exceptional policy in exceptional circumstances.
But the gusher of loans at the start of this year was a warning that Beijing would have a battle on its hands to avoid a repeat of last year's surge.
A slowdown at the end of January may have capped monthly new loans at 1.6 trillion yuan, according to official media reports, but this is broadly the same amount as January 2009 when the economy was in the doldrums and not growing at an annualized rate of 11.3 percent.
"If this pace were allowed to continue, total lending would far exceed the 18 percent growth that had been deemed 'appropriately accommodative'," Tao Wang, an economist with UBS in Beijing, wrote in a note.
If the government fails to control lending — for example, if new lending tops 4 trillion yuan in the first quarter, as it did last year — Beijing may have to wade in more heavily to keep a lid on inflation and prevent over-investment.
Strict bank lending quotas, aggressive reserve requirement increases, slower investment project approvals and eventually higher policy rates could be on the cards.
Beijing was always going to have a tall order in getting banks to go easy on loans at the start of the year. In the country's typical lending pattern, banks issue about 40 percent of full-year loans in the first quarter.
If the government had any illusions about banks' incentive to front-load lending even more heavily when tightening is expected, those have been dispelled by January's lending surge.
The way that banks rushed to push out loans to gain market share before worried regulators pushed back could become something of a pattern, as it was in 2007/2008.
"We are likely to see the tug-of-war repeated each month and each quarter for the rest of the year. The end result may be net new lending of at least 7.5 trillion, but the process should be stop and go, causing a lot of uncertainty," Tao said.
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