It's said that the newly increased credit was 760 billion Yuan, or 112 billion USD in December, which is greatly beyond the imagination of market observers. In the first three quarters, China's credit increase was 1.33 trillion Yuan, 1.12 trillion Yuan and 1.03 trillion Yuan respectively, a monthly average of 386 billion. Considering the increase of Short-term Financing Bills and mid-term notes, the credit expansion in December was even bigger.
The great credit expansion reflects the determination of China Central Government to protect the economy from slowing down. As the export decreases and the foreign demand are weaker and weaker in the foreseeable months, China must rely on its internal demand to keep economic growth. Internal demand includes consumption and investments.
To stimulate consumption in China is not an easy thing. Although the young generation has great consumption desire, their purse is not that full now. China's social security system is far from complete, which greatly restrains people's consumption ability---they should save for their education, medical care, old-age pension. Now they face another difficulty, unemployment. As of November 2008, about 11 million Chinese workers lost their jobs; meanwhile, another 10 million students graduating from high schools are heading into labor market. These days, some posts spreads in leading Chinese websites, saying that to consumption is a patriotic action.
As the consumption would not be stimulated in the short term, investment becomes the prior option to support the economy. This is a method China has been using since 1998. Months ago, China Central Government released the ambitious 4 trillion economic stimulation plans, the effect of which would be seen in the second and third quarter in2009.
Most of the 4 trillion would be from bank credit. As a result, each bank has great burden to increase credit. Agricultural Bank of China's newly increased credit in the fourth quarter exceeds the total credit in the first three quarters in 2008. The Central Bank uses the “window guidance” to guide the Chinese banks. Although most of Chinese banks have been listed in foreign or domestic exchanges, the window guidance by Central Bank is still quite effective. The reason is that in China, the bank management are governmental officials rather than bankers, they care their political future more than the bank performance. As a result, it's not surprise that the Chinese banks have produced trillions of nonperforming loans before, it's estimated that the nonperforming loans would be greatly increased during this economic cycle.