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China credit

Beijing may be prepared to do whatever is required to quell the riots in Xinjiang province but, on a national scale, also whatever it takes to manufacture an 8 per cent economic growth rate. If that means hosing the economy with more credit than it knows what to do with, so be it. Coincidence or not, the Tiananmen uprising took place in a year when economic growth more than halved.

However, China’s increasingly fretful banking regulator worries that rampant credit growth “poses risks” to the financial system. The warning comes after banks advanced Rmb5,840bn ($855bn) of new loans in the first five months, almost triple the amount a year earlier. As for June’s lending, at $220bn it was a blockbuster as banks pumped up their quarterly loan numbers, just as they did in March (to $280bn).

An unknowable amount of this cash has ended up on the blackjack tables of Macao – or that other casino, the Shanghai Stock Exchange, where daily volumes are currently three times the five-year average. But even assuming that most has gone where intended, there are still many reasons to worry.

Chinese banks seem ill equipped to handle asset growth like this. To win mandates on plum infrastructure projects such as public housing and transport, lenders have relaxed standards. Meanwhile, big corporates are awash in liquidity: some are simply putting loans back on deposit or lending on to lesser credits denied bank finance. In the first quarter, direct lending to small and medium-sized companies – the engine of any economy – accounted for less than 5 per cent of the total.

China failed to complete a $4.1bn auction of one-year government bonds on Wednesday, suggesting that investors are positioning for higher inflation caused by the credit surge. For Beijing, that is a secondary concern. As strong growth figures should confirm next week, in the 60th year of the people’s republic, and in a month with the worst ethnic violence suffered since the cultural revolution, the priority remains maintaining growth.

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