China's Credit Slowdown Raises Concerns About Overall Economic Health

New economic data released by China's National Bureau of Statistics on Aug. 13 shows the supply of credit to the Chinese economy expanded by only $44.3 billion in July, the slowest pace in almost six years. To be precise, credit expanded at the slowest pace since October 2008, the month after Lehman Brothers filed for bankruptcy and the month before the Chinese government launched an economic stimulus program that sheltered China's economy from the worst effects of the global financial crisis. That program also locked China into a growth model grounded in the intimate bond between government-led credit expansion and housing and infrastructure construction -- one that the Chinese government is now struggling, against time and at the risk of crisis, to escape.

The dramatic and widely unexpected drop in Chinese credit supply in July has raised concerns that the economic "recovery" China seemed poised to make starting in June -- when aggregate financing in China hit a whopping $320 billion, which was more than seven times greater than July's figure -- has been nipped in the bud. There are also concerns that the coming months will bring even worse news from the world's second-largest economy. These concerns are aggravated by anecdotal reports repeated in mainstream news media saying July's decline is the result of the policy-driven credit tightening by the government and also reflects a drop in Chinese enterprises' demand for new loans. If the latter is the case, it raises important questions about the underlying health and trajectory of China's economy.

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