China’s New Leaders, New Credit Binge; China’s economy has new leaders, not yet new ways. A surge in lending and capital inflows in the first quarter may be a precursor for tightening down the road.

April 11, 2013, 3:13 a.m. ET

China’s New Leaders, New Credit Binge

By TOM ORLIK

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China’s economy has new leaders, not yet new ways.

The first quarter brought a surge in credit creation. Total social finance, a measure that includes new loans as well as bond issuance and other forms of credit, increased 6.2 trillion yuan ($1 trillion)—a record high. China’s stash of foreign exchange came in at $3.44 trillion at the end of March—up $128.4 billion for the quarter after tepid increases in 2012.

It all looks like a throwback to China under its previous set of leaders. The People’s Bank of China is in the markets buying dollars, resulting in larger foreign-exchange reserves and more liquidity in the financial system. That should certainly allay fears about China’s growth. A 58% year-on-year increase in new finance will surely prop up an expansion in output above the government’s 7.5% target.

By extending the policies of previous Chinese leaders, though, Beijing exacerbates the risk of inflation and asset-price bubbles. Consumer price inflation for March came in at a moderate 2.1% year on year. But massive increases in credit can only add to the upward pressure on prices.

Equally worrying is the rapid rise in the ratio of credit to gross domestic product. That measure has moved from 120% in 2007 to about 180% at the end of 2012. On the current trajectory, it will end 2013 at 200%. Such a sharp shift raises concerns about the possible misallocation of credit on a grand scale, and a buildup of bad assets in the banking sector.

The central bank’s recent efforts to restrain credit growth have been limited to timid attempts to drain liquidity from the financial system. To head off problems down the road, much more aggressive moves will be required. A surge in lending and capital inflows in the first quarter may be a precursor for tightening down the road.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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