China takes heart from surge in bank lending

By Alan Wheatley, China Economics Editor - Analysis

BEIJING (Reuters) - For the first time in a while, that light at the end of China's economic tunnel might not be an oncoming train after all.

Brushing aside awful trade figures for December, investors took heart on Wednesday from a surge in bank lending and money growth last month that economists read as an early sign that Beijing's efforts to pump up growth are working. The main Shanghai stock market index .SSEC rose 3.52 percent.

Some economists immediately questioned whether the burst of lending can be sustained -- at least without risking a damaging rise in sour loans as banks lower their credit standards.

They also said that trade flows were likely to get worse before they get better: both exports and imports fell in December from year-earlier levels for the second month in a row, reflecting depressed demand in the West and at home.

But optimists pointed to other indicators suggesting that parts of the economy might be finding a floor: property deals in some big cities have rebounded on the back of government incentives, while steel prices have staged a partial recovery.

Andy Rothman, CLSA's macro strategist in Shanghai, also cited the first month-on-month increase in electricity generation since July.

"We don't want to overhype this point, as in recent years there has usually been a seasonal increase in power consumption in December.

"But given the steep declines in consumption (or generation) growth over the last four months, it is good to see that the seasonal trend wasn't bucked by a collapse in industrial power demand," Rothman said in a note to clients.