Like a rolling loan

Chinese loans are building a bridge to nowhere

China's banks are lending as they might to an economy in rude health. Only that's not the kind of economy China has. While loan levels are going up, many other important economic measures are doing the opposite. The best explanation for the anomaly is that "lending" has morphed into "extending" and China's banks are building a bridge to nowhere.

The amount of new financing poured into China's economy during January was an ebullient 2.6 trillion yuan ($425 billion). That increased the total extended over the past year by 17.4 per cent, according to Bernstein Research. Just over half of January's increase was in the form of bank lending, and almost two-thirds of loans were classified as medium- or long-term, the kind that is most likely to go to productive uses.

Productive, though, isn't the same as profitable. Company purchasing managers are gloomy about the economy's prospects, according to the recent official survey. Steel sector managers were particularly glum, unsurprisingly since prices are down more than 10 percent from 2013's peak, according to the SteelHome China Steel Price Index. The coal industry tells a similar story. Yet production continues: steel output is still rising faster than the economy is growing. Real estate investment, too, is expanding at roughly double the rate of nominal GDP.

The question is whether banks can afford such generosity. The M1 measure of money, which includes cash and companies' demand deposits, grew by 1.2 per cent in January, the lowest on record according to Datastream. Deduct the cash portion, and it suggests corporate deposits fell 4 percent year on year. Such a decline hasn't been seen since 1989. A scarcity of deposit funding also doesn't bode well for lending.

Perhaps banks have little choice. China's financial planners have been trying to rein in the excesses of the so-called "shadow banking" sector, where rates are set by genuine supply and demand, and they may be succeeding too well. Bond issuance, one of the few kinds of lending that's driven by market forces, has collapsed. That has left some companies high and dry. Curbing financial excess is one thing; letting that spread distress through the economy is another. Unproductive lending looks like stimulus by another name.