BOSTON—China's banks have flooded the country with fresh loans to spur recovery, highlighting key differences with market economies like the United States, experts say.
U.S. banks have been slow to resume lending inside the United States at pre-crisis levels, despite a $700-billion assistance package for the financial system passed by Congress last October and a $787-billion stimulus plan passed in February.
In China, the response has been largely the opposite. After the government announced a 4-trillion yuan ($586-billion) stimulus plan last November, China's banks reacted quickly, unleashing a surge of new credits.
In the first quarter, the banks pumped out over 4.5 trillion yuan in financing, nearly as much as the 4.9 trillion in lending for all of last year, according to the People's Bank of China (PBOC). Nearly all the new lending took place even before the National People's Congress voted to approve the stimulus plan in mid-March.
Last week, the official China Daily reported that lending in the first half of the year may reach 6.5 trillion yuan, dwarfing both the stimulus package and the government's 5-trillion yuan loan target for all of 2009.
The wave of loans has been credited for sparking China's 6.1-percent GDP growth in the first quarter. Fixed asset investment rose 28.8 percent to 2.8 trillion yuan ($411 billion) during the period despite the worldwide slump, the National Bureau of Statistics (NBS) said.
But China's state-controlled banks have taken pains to deny they were following orders to underwrite projects even before they received government funding.
On March 17, Bank of China chairman Xiao Gang told China Daily that "no political leader has told his bank to lend as part of the government's stimulus package to cope with the economic crisis."
Xiao argued that "the pressure is only from the market in the form of competition from other banks," since government- approved projects are "potentially the most lucrative."
But the massive response of China's banks has raised questions about their independence and commercial decisions, as well as the nature of the investments and the recovery.
David Bachman, professor of China studies at the University of Washington in Seattle, says China's banks remain tied to the government's initiatives through political power structures including the Communist Party of China (CPC).
"Clearly, it seems to me, the message has come down from the party-state that this is what the banks should be doing," Bachman told Radio Free Asia. "Statements to the contrary that these banks are stand-alone--increasingly making decisions on a commercial basis and so on--I think that's simply window dressing."
China's stimulus has been questioned because much of the spending is directed at state-sponsored construction projects that were blamed for energy waste and pollution during the boom years since 2003.
In a recent analysis, Barry Naughton, professor of Chinese economy at University of California, San Diego, said the package focuses on traditional investment at a time when officials and analysts agree that new policies are needed to spur consumer spending for economic growth.
"The most fundamental criticism is that the stimulus package relies on pumping up investment when the long-run need in the economy is precisely the opposite: to expand household income and consumption, and shift the growth path of the economy to a more consumption-friendly trajectory," Naughton wrote in China Leadership Monitor, a quarterly published by Stanford University's Hoover Institution.
On June 24, China Daily reported that Chinese experts have offered similar criticisms. "The government is paying too much attention to infrastructure construction, but isn't focusing on powering up human capital," said Guan Xinping, director of the social work and social policy department at Nankai University.
Only 9 percent of new lending has gone to households, including farms, while over 90 percent has supported "non-financial" businesses, Naughton said. Aside from the rebuilding of Sichuan province following last year's earthquake, half of all stimulus spending is devoted to transport and power infrastructure projects, according to government data.
In the first five months of the year, investment in railway projects soared 120 percent, the official Xinhua news agency said. Spending and lending have favored state-sector projects rather than private enterprise, said Bachman.
"It's not moving the system in a more reformed direction," he said. "It seems like a very stereotyped Chinese government response, emphasizing the state, emphasizing infrastructure, emphasizing investment."
The massive lending has temporarily reversed government efforts to curb excessive credit during the economic "overheating" of the boom years. In the past, officials have worried about loose policies and bad loans that have often been linked to corruption.
In April, Liu Mingkang, chairman of the China Banking Regulatory Commission, warned that banks should be on "high alert for the accumulation of hidden risks" during the stimulus period, China Daily said.
But Naughton said the combination of looser credit policies and political push for the stimulus "send a very powerful signal to banks that they are expected to rapidly ramp up lending."
"It also suggests that bank loan officials will not be held accountable for loans they make, so long as they are in support of the investment plan," he said.
In March, Xinhua reported that the PBOC was also moving to legalize the private lending market in order to marshall its resources for the recovery, despite years of trying to rule it out. The report cited estimates that unregulated private lenders are the main source of credit to rural households.
But Bachman said he would not conclude from the turnaround in policies that the government has been insincere about earlier credit crackdowns.
"I think the priorities have simply switched," he said.