While the slump in China’s property sector has been steep, Chinese policymakers have responded to the falloff in property activity with policies designed to spur activity in the manufacturing sector. The apparent hope is that a pivot toward production-intensive growth can help lift the Chinese economy out of its current doldrums, which include weak household demand, high levels of debt, and demographic and political headwinds to growth. In a series of posts, we consider the implications of two alternative Chinese policy scenarios for the risks to the U.S. outlook for real activity and inflation over the next two years. Here, we consider the impact of a scenario in which a credit-fueled boom in manufacturing activity produces higher-than-expected economic growth in China. A key finding is that such a boom would put meaningful upward pressure on U.S. inflation.
A Surge in Bank Lending to Manufacturing
The shift in China’s policy focus is evident in recent credit trends. While aggregate bank lending growth has remained relatively stable, lending has been redirected from the property sector and toward the manufacturing sector. Indeed, as shown in the chart below, the growth rate for new industrial lending has roughly quintupled since 2020 and has doubled in just the last eighteen months. Growth in new “green loans”—which overlap with other sectors but are heavily concentrated in manufacturing—has picked up even more dramatically. Growth in new lending for property-related activity, meanwhile, has fallen to near zero.