SHANGHAI — When China announced three weeks ago that its economy had grown by 7.1 percent in the first half of this year, this country appeared to be a lone bright spot during the global recession.
But many economists now worry that too much of China’s growth was fueled by aggressive, state-directed lending that could eventually result in a soaring number of bad loans and mounting government debt.
While banks in the United States and Europe are still reluctant to make loans because of fears they will not get their money back, Chinese banks issued a record 7.4 trillion yuan, or $1.1 trillion, in loans during the first six months of this year, mostly to big state-owned companies and government infrastructure projects.
Here are just a few examples of the largess: In March, the city of Guangzhou was given a loan of 81.3 billion yuan to improve road transportation; in May, China’s Aviation Industry Corporation said it would receive 100 billion yuan to help the company export high-technology equipment; and a few weeks ago, the China National Nuclear Corporation received loan approval for nearly 100 billion yuan to advance the development of nuclear power.
“They opted for a very quick fix,” said Stephen Roach, an economist and chairman of Morgan Stanley Asia. “Surging investment, fueled by the most rapid bank lending in history, accounted for nearly 90 percent of China’s G.D.P. growth in the first half of this year. And that is worrisome.”
Mr. Roach said China’s growth remained too heavily weighted toward investment, rather than consumption, creating unhealthy, imbalanced growth.
Analysts say that in China, new loans have grown this year at nearly three times the pace of a year ago and that some of those loans may have been funneled into the resurgent Chinese stock and property markets, creating the risk of new asset bubbles. The Shanghai stock market is up about 84 percent this year.
A similar lending binge in the 1990s led to an explosion of bad debt that left the biggest state-owned Chinese banks nearly insolvent after the Asian financial crisis, until they were bailed out by the government in a series of moves that ended in 2004.
This unprecedented move to stimulate the economy through bank lending now appears far more ambitious than the $586 billion economic stimulus package that Beijing announced last December.
In the United States, political leaders debate the extent to which the government ought to intervene in the financial market. In China, there is little debate. The government simply orders banks to lend — and it happens almost instantly.
Some economists, including Mr. Roach, fear that these moves could prove unsustainable and hinder the long-term growth prospects for China.
But not everyone is so bearish. Some economists say that China’s growth this year — coming in at 7.9 percent in the second quarter — is a positive sign for the global economy and a stunning turnaround after the slowdown last year. They also say that Beijing is adept at changing course and finding new policy tools for dealing with threats to growth. While China’s growth rates have never been exact and debate about the precise pace of expansion has persisted, no other big economy has grown faster during the past three decades.
But if China’s growth falters later this year or early next year, some experts believe, the global recession could deepen and lengthen. After all, many economists had forecast that much of global growth over the next decade would come from China.
There is one thing economists agree on: The pace of lending in China must slow significantly in the second half of this year, if Beijing is to avert a crisis.
Nicholas Lardy, an economist and China specialist at the Peterson Institute for International Economics in Washington, contends that China’s investments in infrastructure have been more prudent than in the 1990s and that lending will slow significantly in the second half of this year. Still, he cautions: “If that does not happen, I will become much more pessimistic.”
Chinese regulators have already begun to acknowledge the risks of overly aggressive lending.
Last month, the Chinese central bank called for stricter supervision of bank loans because some stimulus spending appeared to be directed toward wasteful government projects. The China Banking Regulatory Commission also recently took steps to lower risk by ordering Chinese banks to raise their bad-loan reserve ratios by the end of the year.
“Rapid expansion of bank loans in the first half year boosted the country’s economic growth,” Liu Mingkang, the country’s top banking regulator said in a speech in late July. “But it also increased the possibilities of financial risks.”
Still, Beijing seems unlikely to tighten monetary policy sharply. The government needs to keep the economy on pace for 8 percent growth this year, quickly enough to create jobs and prevent social instability, particularly before celebrations this October on the 60th anniversary of the founding of the People’s Republic of China.
At a high-level Politburo meeting last month, President Hu Jintao called for the country to maintain a “relatively loose” monetary policy and signaled that the direction of macroeconomic policy “should be maintained.”
The question is whether economic planners can strike a balance in encouraging growth. Restricting lending could stall the recovery and make it difficult for Beijing to meet its growth target. Allowing the lending boom to continue could sow the seeds of financial disaster.
“They’ve got to ensure there’s enough loans for the real economy,” said Wang Tao, an economist at UBS Securities in Beijing. “But they also have to slow down the loan growth to prevent an asset bubble or future increase in nonperforming loans.”
In the first half of this year, China’s bank loans were up more than 200 percent from a year ago, to more than 7 trillion yuan, about equivalent to 25 percent of China’s gross domestic product in 2008.
Chinese banks were able to do this because they have strong balance sheets relative to Western banks. Bad loans were cleared off the books years ago and initial public stock offerings in recent years pumped billions into many of China’s big banks. The banks had also avoided many of the toxic assets American and European banks held.
Through June, China’s banking regulators said nonperforming loans at China’s commercial banks accounted for just 1.74 percent of outstanding loans — down slightly from the beginning of the year.
But many experts say that could change in the coming years, as these new loans come due. They suspect that government pressure on banks to make loans this year will eventually result in a spike in loan defaults.
“If you tell bankers, lend as much as you like — lend, lend, lend, and don’t worry about the risk, never in history has there not been a large increase in misallocated capital,” said Michael Pettis, a professor of finance at Peking University. “It’s never happened.”
Indeed, Fitch Ratings, the credit rating agency, warned in May that Chinese banks were facing new risks, particularly because this year loan growth skyrocketed at a time when corporate profits were weakening. “Ordinarily, falling corporate earnings are met with tightened lending,” the rating agency said in its report. “But in China precisely the reverse is evident, illustrating that despite years of reform Chinese banks still retain an important policy function in upholding local enterprises.”
Andy Xie, an economist based in Shanghai, said that one of the side effects of this huge lending spree was speculation in commodities, stocks and property — all of which could saddle the banks and local governments with huge debts, once prices fell.
“This could be a national debt issue,” Mr. Xie, a former Morgan Stanley economist, said. “All of this is government money.”
Recently, big state-owned property developers, flush with loans from state-owned banks, have made record bids at state land auctions. And the rise in the Shanghai stock market is a feverish turnaround following the sell-off last year.
No one has precise statistics or even clear proof that loans are flowing into the stock market, but most analysts seem to believe that to be the case. Besides, they say, there was tremendous evidence that in 2006 and 2007 many state-owned companies, even power producers, had set up independent units to invest in stocks.
Among economists, though, an even bigger worry is that China is not doing more to rebalance its economy, away from investment and exports and toward consumption. The country, they say, needs a new growth model.
With exports down more than 20 percent from a year ago, China appears to be stimulating growth with loans to state-owned companies and government works. But how long can that last? Mr. Roach, the Morgan Stanley economist, said not for long. China needs to stimulate its consumers.
“Here’s the wrinkle,” he said. “External demand is not coming back anytime soon because the American consumer is dead in the water.”