China to expect uninterrupted but more balanced growth in 2010

Last year, loan growth in China was up by 33% in the third and fourth quarters, compared to an average growth rate of 18% over the past six years. Although lending growth came off slightly in January, it was well above the 24% growth rate during the previous loan cycle peak in 2003.

"This year, we expect that lending growth will slow to about 17% as Chinese policymakers look to curb liquidity," Jing Ulrich, J.P. Morgan's chairman of China equities and commodities, said at a recent media briefing.

The central government is also trying to revert to a more balanced pace of lending this year. New loans made by Chinese banks in each of the years between 2001 and 2008 were roughly spread over the four quarters in a pattern of 30%-30%-20%-20%. However, in 2009, around 50% of the new loans were given out in the first quarter as regulators encouraged banks to lend to offset the impact of the global recession on China.
 
Despite the slowdown in lending, Ulrich does not expect a credit crunch in the corporate sector as corporate savings growth currently stands at a record high of nearly 40%. Companies in China are sitting on strong balance sheets after borrowing money in 2009. "As they still haven't used the money, hopefully they will be using this money from the bank in 2010," said Ulrich.  
 
The credit situation in the household sector is somewhat different from that in the corporate sector, she continued. China's population has a strong savings culture and earlier used to maintain large current account balances. In recent years, this has changed and household deposits have declined due to the negligible interest rates. The Chinese are still saving rather than consuming, but they are channelling their savings towards the stock or property markets. Thus, the household sector also does not seem at risk of a credit crunch.
 
Besides regulating the amount and the pace of lending, the Chinese government is using a combination of "window guidance" and quantitative measures to slow liquidity in China, including raising the reserve requirement ratio (RRR) -- the amount of deposits that commercial banks have to hold with the central bank. So far this year, the ratio has been increased twice and now stands at 16.5%, compared to the previous peak at 17.5%.

"Therefore, there is not much scope left for the central government to lift the RRR," said Ulrich, who forecasts that the next step will be an interest rate hike. "Just like the two RRR hikes which came sooner than the market expected, we may have our first interest rate hike in two years in the second quarter this year," she said.
 
"In 2010, I believe the Chinese economy will achieve better balanced growth," said Ulrich. "We expect that investment and consumption will contribute evenly towards growth, and consumption will play a larger part towards growth relative to fixed asset investment."