What inflation fight? Bank lending and money supply soar in China

01/13/2011 12:58 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Nothing in these numbers to suggest that inflation in China is headed anywhere but higher. Or that China’s government has a handle on the country’s run away money supply growth.

Chinese banks, as forecast, burst through the 2010 quota of 7.5 trillion yuan set by Beijing for new bank lending. For the year new bank loans hit 7.95 trillion thanks to a surge of new lending in December. With economists expecting a quota busting 300 billion yuan in new lending for the month, Chinese banks actually recorded 481 billion yuan in new loans for the month.

That was a huge 101 billion yuan more in new loans than in December 2009.

2010 was supposed to be the year when China restored discipline to bank lending after a huge loan blowout in 2009. That year China’s banks lent 9.6 trillion yuan, well above the 5 trillion annual rate for new loans in preceding years.

The quota-busting new loan level in 2010 kept China’s money supply not only growing at an excessively rapid rate but also actually accelerating. At the end of 2010, M2, the broadest measure of money supply, grew at a 19.7% rate. That was 0.2 percentage points higher than in November. The government’s target for 2010 had been an already inflationary 17%. (The rule of thumb is that any growth rate in the money supply above the growth rate for the economy adds to inflation. China’s 2010 growth rate is likely to finish at 10% to 11%.)

None of this is good news for those hoping that the government 1) really intends to fight inflation before it gets totally out of control, or 2) can engineer a soft landing that cuts the inflation rate without stomping out economic growth.

Inflation hit an annual rate of 5.1% in November. And while the details of the year to year comparisons make it likely that inflation will retreat in early 2011, the loan growth and money supply numbers almost guarantee that inflation will move higher from here later in 2011.

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