Will China's financial crisis crash the dry bulk shipping party? (Part 2 of 7)
Loans and the economy
As we saw in the previous article of this series, debt (or loans) helps an economy grow. In China, capital has primarily been supplied by bank loans. The limited number of alternatives for people to invest or save has helped funnel savings into large investment projects directed by the government. It’s important to note that the heads of all major banks—the Industrial and Commercial Bank of China, Bank of China, China Construction Bank, and Agricultural Bank of China—are all Communist Party members, which gives Beijing significant control over the economy.
Continued importance to economic projects
While capital channels are becoming more diversified, as wealth management products, bonds, and the stock market become mature and structured, infrastructure projects and bad loans remain an important part of stability in economic growth. Since new loans are a main method the government uses to control economic growth, they’re a widely watched monthly market report.
Moderate and mild loans growth
For the month of November, China issued new loans of 624.6 billion renminbi. This was higher than analysts’ median estimate of 580 billion yuan, compiled by Bloomberg News. Year-to-date growth in new loans has risen at 8.43%, higher than October’s 7.62%. While November’s data was definitely higher than analysts expected, notice how 2013′s year-to-date growth in new credit loans has been relatively mild compared to the years before 2012. This reflects the government’s new objective of putting the economy on a major stable economic path.
Analyzing new loans data is tricky, because banks rush to make new loans at the start of the year, whose annual limit is set by the government and regulated throughout the year. Naturally, lending is higher towards the first few months of the year, while loans also tend to rise towards the end of the quarter to make their financials better. This behavior makes it hard to compare monthly data on a year-over-year basis. So annual changes year-to-date (or monthly) are used.
But consider that year-to-date yearly growth doesn’t exactly help us predict turnarounds in economic cycles—likely because loans don’t always immediately translate to or ever reach physical investments. Some may even end up in real estate and the stock market. Just like there isn’t a crystal ball to the future, there isn’t one single indicator that gives the full picture. We’ll take a more segmented view on loans in the next article of this series.
Browse this series on Market Realist:
- Part 1 - Why the financial system affects dry bulk shipping companies
- Part 3 - Why loans affect the performance of dry bulk shipping stocks
- Part 4 - The key relationship between money supply and dry bulk shipping
- China Construction Bank
- Bank of China
- Agricultural Bank of China
- bank loans