Don’t Quote Me (On Bad Loans)

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China’s fiscal stimulus plan is busy stimulating the economy in large part because the banks are (very) busy lending. This is great news. In the short term…Longer term there are fears of a return to the bad old days of non-performing loans (NPLs), and the risk of yet another round of bank bail-outs.

Our quote comes from Michel Pettis, a professor at Guanghua School of Management, via his blog, China Financial Markets.

Having noted that new lending for the first half of the year hit RMB7.4 trillion, he goes on to note:

    “…something that I might call the Pettis Rule of Banking (although I am way, way down on the list of people who first thought of this): “It is not even theoretically possible that in a banking system in which bankers are given unlimited liquidity, tremendous pressure to make loans, and an implicit guarantee against losses, that enormous amounts of bad loans will not be made.”

Storm clouds on the horizon?

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