China faces a difficult choice in 2010 as rapid loan growth, necessary to sustain the economy, may begin to fuel hyperinflation. In normal times, the Chinese government uses the banking sector to send masses of low-interest rate loans to companies and sectors targeted for growth. This maintains growth and employment levels, preserving social and economic stability in a country with a massive population.
In times of stress, this aggressive lending goes into overdrive. The year 2009 has witnessed an unprecedented lending-surge by Chinese banks, who, under government direction, hoped to stave off a recession in China’s domestic economy as exports to the U.S. and rest of the world plunged. This has been a dramatic success. For example, the data reported for the month of October was very strong:
- Growth of industrial value-added, which accounts for about half of China’s GDP, accelerated to 16% year-over-year.
- Electricity production, a good growth barometer, grew by 17% year-over-year.
- Steel production set a record 44% year-over-year gain.
- Retail sales increased 16.2% year-over-year.
- Vehicle sales totaled 1.2 million (more than the 838,000 sold in the U.S. in October).
