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Tom Holland

Thanks to iron political will, Beijing attained its  growth target for 2009 - with room to spare.
Now over the coming months, we will learn the true cost of that achievement. It may turn out to be uncomfortably heavy.
Yesterday, the National Bureau of Statistics announced that the mainland's gross domestic product expanded 8.7 per cent last year, a figure  that surpassed even the government's ambitious 8 per cent target.
China's performance looks even more impressive when you consider that that growth figure was achieved in a year when the world's developed economies are reckoned to have contracted by a painful 3.5 per cent.
The turnaround over the course of the year was nothing short of stunning. From a situation at the end of 2008 in which many economists believe Chinese growth had ground to a complete halt, Beijing's policymakers engineered a rebound  in which year-on-year growth over the last three months of  last year hit a pumped-up 10.7 per cent rate (see the first chart below).
With net exports down steeply from 2008 levels, thanks to depressed global demand, that performance was almost entirely attributable to a surge in domestic investment.
And in turn, that surge was the result of an unprecedented government-directed explosion in credit, in which  the banking system  extended new loans last year worth 9.6 trillion yuan (HK$10.93 trillion), or 29 per cent of gross domestic product.
Officials claim that the credit expansion was controlled and that, with the economy now kick-started, the banks are winding back their lending.
Yet the evidence hints at a different story. Most of the apparent contraction in loan growth over recent months is explained by the maturing of low-risk short-term loans. As the second chart below shows, there has been little or no slowdown in the rate at which China's banks are extending higher-risk medium- and long-term loans, the sort used to fund investment projects.
And if reports that the banks made more than one trillion yuan of new loans in the first two weeks of  this month are correct, then lending has actually been accelerating again, not slowing down. Either way, the authorities are spooked. 
As we have seen, the boom in credit succeeded in keeping growth afloat, but it also created enormous stresses in China's domestic economy.
So much excess liquidity sloshing around is fuelling both asset and consumer price inflation. According to official figures, home prices rose 7.8 per cent last year, but other data indicates that the true increase in property prices may have topped 40 per cent.
Meanwhile, goods prices have shot sharply higher. As the last chart below shows, consumer prices rebounded from last summer's deflationary interlude to record year-on-year inflation of 1.9 per cent in December. According to economists at Goldman Sachs, the price increases last month  are equivalent to an annualised inflation rate of 22 per cent.
This leaves China's policymakers in a nasty spot. With the economy showing clear signs of overheating, they badly need to tighten monetary policy to prevent a runaway increase in inflation.
But raising interest rates would create big problems. Higher rates would threaten China's hard-won growth. On top of that, they could attract fresh inflows of hot money, exacerbating the mainland's developing asset bubbles. And they would also make it more expensive for state-backed companies to service all the loans they took out last year, potentially leading to a sharp increase in bad assets in the banking sector.
Trying to tighten by imposing loan quotas could also backfire, choking off the supply of credit to the private sector, where it is badly needed, but doing little to stop wasteful lending to well-connected state-owned companies.
And attempting to pop the property bubble using administrative measures brings its own risks. With local governments heavily reliant on property revenues to service their considerable debts, any downturn in the market could also push non-performing loan ratios sharply higher, undermining the banking sector.
Yet if the authorities don't raise interest rates, and inflation continues to rise, bank deposit rates will turn negative in real terms. That will trigger a flight of money out of the banking sector and into the property market as investors try to protect the value of their savings, inflating the asset bubble even further.
Which option policymakers will choose isn't yet clear: slower growth, a steep increase in non-performing loans, higher inflation or dangerous asset bubbles. But one way or another, the bill for achieving last year's growth target is about to land on Beijing's doormat, and it is sure to be expensive.




Where there's political will, there's a price to be paid