More Credit Stimulus from China?

China's authorities are now more concerned about growth than inflation...

CHINA is considering trying to boost growth with more credit growth, writes Dan Denning in the Daily Reckoning Australia.

 "An increase in China's money supply and bank lending have underscored Beijing's move to ease monetary policy to bolster growth amid slower exports and a downturn in the property market," reports Robert Guy in today's Australian Financial Review.

"Growth has replaced inflation as Beijing's top policy concern," chimes in HSBC analyst Qu Hongbin in the Financial Times. Officially, China's money supply grew at 13.6% in December of 2011. Banks made over $100 billion in new loans.

Unofficially, there's no telling how much lending in the shadow banking system is going on. But because the shadow banking system is unofficial, China's officials can relax reserve requirements at banks for the first time in a year because official inflation figures are officially lower.

See? It's all official!

But the signs are disturbing. China's export engine is sputtering. You'd expect that when your biggest customers – America and Europe – are experiencing long-term household deleveraging. They're buying less stuff.

China's central planners are acting as if they can push on the accelerator (more bank lending) to promote more export growth. They are also trying to encourage more domestic consumption, while watching inflation carefully. It seems like a tricky balancing act.

Or, it seems like China also finds itself at the frontiers of growth. For 30 years, China could sell what it made to the cashed-up buyers of the West. Internal growth came from exports. But now, everyone in the world is trying to stay afloat by selling things to everyone else.

And it's all happening after a decade of over-consumption, in which consumer demand was "brought forward" through cheap credit and low interest rates. It produced a lot of growth. It just didn't produce a lot of lasting wealth. And in 2012, the reckoning will continue.

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