China's overall surge in credit in the first half of 2009 is normal and healthy; however problems still exist in the structure, quality and flow of credit. China should continue to optimize credit structure and guard against potential risks.

During the first five months, renminbi loans increased by 5.84 trillion yuan. It is already certain that the newly-increased credit in the first half of this year will surpass 6 trillion yuan, with some experts predicting this will even reach 6.5 trillion yuan. This means that credit volume in the first half of this year will exceed the total credit volume of any single year since the founding of People's Republic of China.

However, a surge in credit can create problems and concerning situations.

Firstly, the aspect of credit structure; loans mainly flow to government-invested projects such as railways, highways and airports; in the first quarter this year, lending to small- and medium-sized enterprises (SMEs) accounted for less than 5 percent of the total. As government-invested projects have a limited size and potential for development, the sustainability of growth in investment demand depends largely on whether private investment can be triggered. Privately-invested projects are the main source for employment. The key to maintaining growth in consumer demand lies in boosting employment, increasing income and improving people's expectations. As a result, to expand domestic demand and maintain economic growth, China must change the existing credit structure and resolve the difficulty facing SMEs in securing loans.

Secondly, the aspect of credit quality; the majority of bank loans are awarded to government-invested projects because they have low operational risks. In order to compete for government projects, some banks have even relaxed qualification reviews and lowered lending thresholds. Although there seems no risk of doing this in the short term, in the long term a number of local government investment projects have low earnings and a longer payback period. It is therefore difficult to guarantee that the project itself will have sufficient cash flow in the future to repay capital and interest.

In addition, loans secured for government projects mostly rely on "government credibility" – an invisible guarantee offered by local governments. According to data from the Jiangsu Banking Regulatory Bureau, of the loans issued by Jiangsu's large banks to finance government platforms at all levels, 57.27 percent rely on public finances to repay debts and 49.13 percent are backed by financial commitment letters issued by local governments.

It is often difficult for banks to obtain prompt, comprehensive and correct information about the future disposable financial resources and implicit liability of local governments. If a local government faces financial difficulty, it will undoubtedly affect the quality of banks' credit assets.

Thirdly, the aspect of credit flow; this year's credit surge has surprisingly converged with the recovery of the stock and real estate markets. It cannot be ruled out that some credit will enter the capital market via various means. If credit illegally enters the stock market, this will significantly increase banks' risks.

By People's Daily Online

http://paper.people.com.cn/rmrb/html/2009-06/29/content_284291.htm