The mainland economy could run into serious trouble next year if banks fail to rein in runaway loan growth, a Washington-based economist warned yesterday.
Last year, state banks began increasing loans to a number of sectors including steel, cement, property and carmaking, which is likely to lead to a rise in non-performing loans, according to Nicholas Lardy, a senior fellow at the Institute for International Economics.
'If we continue to have the rapid credit growth we have seen in 2003 throughout 2004, then you could see a crash,' Mr Lardy said. 'Will non-performing loans rise? My own view is they will. The rise would have a significant adverse impact on fiscal stability.'
However, if banks tighten lending in the first half of next year, the country could avoid a financial fiasco, he said.
Mr Lardy blamed the lack of lending restraint on the short-term political considerations of some members of China's leadership, who want to create jobs 'even if problems occur down the road'.
Meanwhile, recent measures to reduce the bad loans were likely to be ineffective, he said. A new sale of bad loans through the asset management companies is expected to be 'too small' and 'too soon' because the banks have not improved their lending standards.
Mr Lardy acknowledged the mainland had implemented significant financial reforms since the Asian financial crisis but said the restraint appeared to have ended a year ago. He cited three key measures which point to out-of-control lending.
