By chief economist Shen Minggao and staff reporter Huo Kan

(Caijing.com.cn) The high loan growth of early 2009, supported by China’s monetary policy easing, suggests an economy receiving fresh investment and poised for growth. But growth will depend on more than the availability of funding, and may not materialize if the money is not converted into effective investments that will stimulate economic activity.

China issued 1.07 trillion yuan new loans in February as Beijing continued to unleash liquidity following January’s astounding 1.62 trillion in new credit. Lending in the first two months of 2009 accounts for more than half of the full-year target of 5 trillion yuan announced by Premier Wen Jiabao.

Such easy lending cannot be sustained, particularly if enterprises are not ready to absorb it with a pipeline of viable projects. Indeed, money supply data suggest that much of the new liquidity is going to non-productive destinations.

M2, the broadest measure of money supply, including circulating currency and fixed deposits, grew at 20.5 percent, the highest since 2003. Meanwhile, M1 is growing at just over half that pace at 10.9 percent. This means more money is being deposited for fixed- and long-term savings. M0, the most liquid measure of money supply, is up by even less - 8.3 percent.

The money supply data paint a picture of a business environment that isn’t exactly taking up all the liquidity available to it, and may even be pointing to further economic contraction.

Meanwhile hopes for a consumer revival are not supported by the data. Consumer loans accounted for an insignificant share of total lending, with about 80 percent going to medium to long-term lending and bills financing.

In the short term, China is expected to loosen money supply further before the economy hits bottom. There is still room to cut interest rates in the first half of 2008, but cuts will be minimal unless new loans slump in the coming months.

If consumption remains weak and is not accompanied by a revival in business, money injected into the economy can only reflect on asset prices, weakening the chances of the government’s achieving its goal of 8 percent GDP growth.

Full article in Chinese: http://www.caijing.com.cn/2009-03-12/110119173.html