Is more money coming for the credit junkie?

Even though imports slowed drastically and inflation has busted the 3% target, some people at least can breath a little easier. Yes, I’m talking about the credit junkies, and they are making their cries for more stimulus heard. From Bloomberg:

“Policy makers may have more room to sustain growth if needed,” said Sun Chi, a Hong Kong-based economist at Nomura, who previously worked for the U.S. Treasury in Beijing. “The lending quota could be loosened to sustain ongoing investment projects.”

This is largely based on expectation that inflation is peaking and, dare I say it, the economy is weakening.

On the first factor, I think it’s still too early to call inflation peaking. Food has been a major driver behind inflation this year, with no sign of abating so far. And there has been a persistent rumor lately that China has purchased 600k metric tonnes of rice from Vietnam, mind you, the nation imported only 174k metric tonnes in H1/2010. So this could point to a severe shortage of rice in the market. Is this rumor true? I don’t know. But it’s at least credible enough for a Vietnamese minister to come out to assure his people of food security.

Besides persistent worries on inflation, the asset bubble is another cause of concern for China. Considering that the bank regulator has ordered the banks to consolidate off-balance sheet items on Monday and clamp down on their credit card activities today, plus the PBoC has drained an estimated RMB187bn from the banking system with its open market operations in three weeks, the fix is not coming, at least not yet.

Credit card bad debts soar in China

The focus of Chinese NPLs is on its overheating property market and the related bad debts incurred by developers and local governments. Consumers, unlike those in the US, are largely seen as prudent and safe. To a large extent this is still true. Consumption is still mostly paid with cash. Mortgages require 20%-30% down payment. However, there’s a sub-sector within the consumer market that is seeing increasing risk of NPLs, that of credit cards.

Credit cards as an industry is still new in a country that traditionally issued only debit cards. But credit card issuance has been exploding in recent years. Couple this with stone age risk management practices in Chinese banks and the new consumption habit of the post-reform generation, the result is catastrophic. According to a spokesman from Shenzhen Development Bank, 2009 credit card NPLs totaled RMB7.7bn (USD1.1bn) nationwide which may sound peanuts, but in fact was 226% (!) that of 2008.

No the Chinese banking system will not collapse, one of the tiny winy benefits of having real savings instead of just printing press. But a major banking crisis is looming and China’s formidable foreign reserve has already been earmarked for the eventual cleanup.

China’s March lending estimated at RMB500bn

The market’s focus on Chinese interest rate decision is quite off the target, as China has already started tightening, gently.

Being the command-market-whatever-economy that it is, Chinese credit expansion is not as sensitive to interest rate as other more advanced economies. One of the key policy tools the government uses is the so-called new bank loan quota. The PBOC pre-determines a quota for the entire year, barring unexpected event, and a draw down schedule for each quarter.

Under this draw down schedule, there’s only RMB150bn new bank loan quota left for March this year. Now, there is usually some “flexibility” given to the banks. As such, analysts estimate that actual new credit will expand by RMB300bn to 500bn, which may sound a lot but is actually down significantly from the RMB1,800bn of March 09.

Of course, many people thought the world was going to end in March 09. So perhaps the base for comparison isn’t quite right as China went on a credit binge last year to prop up its economy. But given the recent trade deficit, the world seems much closer to a double-dip. I for one think that the time is not ripe yet for a dramatic exit.