Can new lending drive China economy freely?

China’s new lending doubled in May and industrial output and retail sales climbed more than economists estimated as government stimulus spending revived the world’s third-biggest economy.

New loans jumped to 664.5 billion yuan ($97 billion) from 318.5 billion yuan a year earlier. It add to accelerating fixed-asset investment and surging auto and property sales in signaling that the government is successfully countering a slump in exports. Record lending is stoking concern that China’s recovery may come at the expense of inflating asset bubbles and adding to banks’ bad loans. The pace of bank lending is dangerous and the risks include inflation, bad loans and economic volatility.

But the recovery is still fragile since this is an economy that is increasingly reliant on public demand. Aside from private residential property investment, private demand remains soft.

On the other hand, the rapid growth of credit should be regarded as a warning sign. In china, nearly always when we have financial difficulties at banking institutions, it’s preceded by rapid growth in lending.

The credit boom may help to end declines in consumer prices, however, inflation may bounce back faster than economic growth.