As of this year, 1 of GDP growth is consistent with more than 3.5 of credit growth. China s financial sector is now increasingly feeling the strain of this rapid credit growth, which has led to overcapacity in favored sectors and mounting debt problems for local governments, SOEs, and banks.

Clogged credit pipes With banks balance sheets contracting, too many small and medium size companies are unable to mobilize credit for investment and growth. Recognizing that it will take years until banks are properly stabilized, America needs to build new conduits for credit.

But, while the CN 4 trillion stimulus package propped up growth temporarily, return on investment was deteriorating, because potential growth was already lower than actual growth. As a result, credit demand was relatively weak in many cases, commercial banks had to persuade enterprises to accept loans, with a large proportion of the credit ultimately devoted to chasing assets in the capital market.

Before the crisis, credit expansion in China kept pace with GDP growth. Since the end of 2008, however, credit amounting to 35 of GDP has been issued annually, causing the credit to GDP ratio to soar from less than 150 before the crisis to 250 today.

Nonetheless, the rate of decline in private sector loans has accelerated over the last year from 0.6 to 2 and low demand is acknowledged to be the main driver of depressed credit growth. Simultaneous private deleveraging and fiscal consolidation are restricting eurozone growth far more than remaining restrictions on credit supply.

A sixth option especially where a country has carried out partially sterilized intervention to prevent excessive currency appreciation is to reduce the risk of credit and asset bubbles by imposing prudential supervision of the financial system. This should be aimed at restraining excessive credit growth, which the monetary growth that follows currency intervention would otherwise cause.

Credit Where Credit is Due

Second, the financial system both banks and non bank institutions is severely damaged. Lack of robust credit growth will hamper private consumption and investment spending.

Economic growth can indeed continue to be severely depressed by a debt overhang even when credit supply is unrestricted and cheap. Many Japanese companies were left overleveraged by the boom and bust in credit and real estate in the 1980s and early 1990s.

All countries and policymakers face difficult choices concerning the timing of austerity, perceived sovereign credit risk, growth oriented reforms, and equitable sharing of the costs of restoring growth. So far, the burden sharing challenge, along with naive and incomplete growth models, may have contributed to gridlock and inaction.

STANFORD, CALIFORNIA The current credit crisis has led to scaled back projections for growth around the world. Governments and central banks are responding to damaged balance sheets and credit lockups in an attempt to limit extreme harm to their economies outside the financial sector.

Measures that promote general economic growth in rural areas should benefit forest related enterprises, for example through access to credit, infrastructure development and improved access to markets.

Indeed, without access to affordable credit, economic growth, competitiveness and international trade could not be fostered, with enterprises being prevented from expanding to meet their full potential.

As always, the poor are the most defenseless. For developing countries, tighter credit conditions and much weaker growth mean that governments are less able to meet education and health goals, and to invest in the infrastructure needed to sustain growth.

In the UK, many business surveys from 2009 2012 told the same story. Poor customer demand was ranked well ahead of credit availability as a constraint on growth.

Credit

Credit

Instead, banks have hoarded the increase in the monetary base in the form of idle excess reserves. There is a credit crunch, as banks with insufficient capital do not want to lend to risky borrowers, while slow growth and high levels of household debt have also depressed credit demand.

Whether that fall reflected low demand for credit or constrained supply may seem like a technical issue. But the answer holds important implications for policymaking and prospects for economic growth.

Taxpayer funded bank rescues, higher bank capital requirements, and ultra easy monetary policy have all been vital to overcome credit supply constraints. But there is strong evidence that once the immediate crisis was over, lack of demand for credit played a far larger role than restricted supply in impeding economic growth.

But cheap credit promotes bad investment and excessive debt, which borrowers often are unable to repay. More fundamentally, investment is a bet that cannot pay off if growth is structurally depressed.

Unfreezing Credit

Rural Credit

Financial Credit

This way public credit registries and credit bureaux may be able to operate and provide adequate and up to date electronic credit information.

Indeed, just as microeconomic problems in the financial sector triggered a credit crunch and fueled a global recession, so microeconomic factors hold the key to recovery. Many economies need to fix the financial sector and restore credit, while many more need to raise productivity in order to boost growth and create jobs.

Every time you do something, you get credit you get a credit for trying.

In the last two years, credit grew almost twice as fast as GDP, and total social financing grew even faster. Yet GDP growth slowed considerably from an annual average of 10.2 in 2002 2011 suggesting that China may be moving closer to a medium to low speed growth path.

Its bid to join the European Union is currently stalled, while the eurozone recession dampens its growth. Its current account deficit remains large, and monetary policy has been confusing, as the objective of boosting competitiveness and growth clashes with the need to control inflation and avoid excessive credit expansion.

China s Credit Overdose

Banking and credit

E credit information

Not surprisingly, China skeptics are putting a different spin on the latest growth numbers. Fears of a shadow bank induced credit bubble now top the worry list, reinforcing longstanding concerns that China may succumb to the dreaded middle income trap a sustained growth slowdown that has ensnared most high growth emerging economies at the juncture that China has now reached.

Economists welcomed this ostensibly reasonable approach, which would slow the expansion of credit that had enabled a massive debt build up in 2008 2010. China s lower growth trajectory was dubbed the new normal.

Nonetheless, the PBOC s tactical decision is not without potential pitfalls not least because interest rate cuts encourage the extension of more credit at a time when China is trying to wean itself from debt intensive growth. A key challenge will be to avoid escalating credit risk, which could undermine the process of reform and rebalancing.

Bank Loans, Mortgages and Credit. Credit is available to both men and women in Pakistan.

Moreover, India s government adopted a pro active fiscal policy, rolling out two rounds of stimulus packages. The authorities pursued pro growth policies, including lower interest rates, expanded credit, and a reduction in excise duties.

Meanwhile, the main transmission channels of monetary stimulus to the real economy the bond, credit, currency, and stock markets remain weak, if not broken. Indeed, the bond market channel is unlikely to boost growth.

Had emerging economies resisted the temptation of excessive private sector credit growth, raising interest rates in order to stabilize currencies would not pose a severe threat to economic performance. But, unsurprisingly, they did not rather, they succumbed to the notion that unprecedentedly high rates of GDP growth were the new normal.

The credit repair mechanism is an important milestone in the construction of the tax credit system and even the credit system of the whole society, which indicates that the construction of our social credit system is becoming more and more mature.

Of course, rapid credit growth is a natural consequence of declining real interest rates. But, in Brazil, lending by state owned banks has outpaced that of private banks significantly since 2008, meaning that lending at deeply subsidized rates has largely driven the increase in bank credit, to 58 of GDP (roughly double the rate eight years ago).

Confidence is too low for commercial banks to create credit on the scale needed to return to full employment and the pre crisis growth trend, however many hundreds of billions of whatever cash central banks pour into them. We are learning all over again that the central bank cannot create whatever level of credit it wants!

The Great Credit Mistake

(a) Microenterprise Credit (MEC)

Limited access to credit