Bank lending in China rocketed up 100 percent in January compared to a year earlier — up to 1.62 trillion yuan (about US$237 billion) for the month — as top banks responded to the central government's economic stimulus policies. The leap in new loans also more than doubled the total lending in December 2008, which amounted to 771.8 billion yuan (US$112.8 billion). The current lending spree has outstripped previous lending booms, such as the one in 2003. Chinese banks normally do the bulk of their lending at the beginning of the year, but there are further reasons for the frantic increase in new loans in January. As the global recession wears on, China faces a slowdown that threatens not only its manufacturing base but also its social and political stability. Since November 2008, Beijing has lowered interest rates, scrapped restrictions on banks' credit and risk assessments, and encouraged banks to assist with the government's 4 trillion yuan (US$585 billion) fiscal stimulus program. This was all a dramatic reversal of Beijing's credit-tightening policies in 2007. Now, these various credit-boosting policies are translating to new loans meant to spur growth to fight off the downturn. The obvious risk associated with such freewheeling lending is that as new loans increase under looser regulations, the number of bad loans will increase too, and this will come back to haunt the Chinese financial system in the medium-to-long term. Nonperforming loans (NPLs) have caused Beijing serious headaches in the past — in 2003 the NPL ratio reached up to 20.4 percent, equivalent to 16.5 percent of gross domestic product. While banking reforms brought that ratio down to 2.81 percent in 2008, the problem was only superficially treated — when Beijing prepared its major policy banks to go public, the bad loans were wiped off their balance sheets and dumped into asset management corporations that were responsible for managing them from then on. However there was no effort made to alter bank policy or personnel, so there was no reason to expect the banks to grant fewer bad loans afterward. So far, the China Banking Regulatory Commission continues to claim that NPLs are falling, not rising. Outstanding NPLs are said to have decreased by 700 billion yuan (US$102 billion), down to 568 billion yuan (US$83 billion) by the end of 2008. This means that the average NPL ratio for all of China's banks fell from 6.16 percent to 2.45 percent by the end of 2008. These figures resulted in part from reform attempts in 2007-2008 that were scrapped in July 2008, but more importantly they came from China's unwillingness to publicize the full extent of its NPL problems since 2003. Judging by the colossal rebound in lending in 2009, the NPL problem — and the associated default risks — will return with a vengeance. There are also short-term problems with China's credit-fueled counter-recessionary moves, as it is not clear whether they are actually stimulating the economy. Of course, much of the new lending is serving the purpose the central government intended: it is being directed at households struggling with debt or seeking to buy homes, and at massive cross-country infrastructure projects and renovations. But much of the new credit is being directed at businesses that have not been profitable since the middle of 2008 and that are teetering under the pressure of plummeting sales and mounting stockpiles. Throughout the crisis, Beijing has wanted to prop up its industries to forestall waves of unemployment, especially among migrant workers. But while increasing bank loans to inefficient firms may enable the firms to cover operating costs, maintain production and make payroll, it will not contribute to overall economic stimulus efforts (and it will sink unprofitable firms into greater debt, further clogging the financial system with doomed loans). Furthermore, many of the new loans are being diverted from intended stimulus efforts and toward various kinds of speculation. Reports are streaming out of Chinese media showing that easily acquired, cheap loans are fueling a flurry of new risky gambles; one estimate suggests that up to 660 billion yuan (US$97 billion), or about 40 percent of the January lending surge, is being used in such a way. The most obvious example is the Shanghai Composite Index, the stock exchange, which, coinciding with the January lending rush, enjoyed a rally up to September 2008 levels while the rest of the world's stock markets continued stumbling. Companies have also used newly borrowed funds in a "carry trade" involving commercial paper (short-term business loans), as they take advantage of low rates in the commercial paper markets to deposit money in banks that are currently generating higher returns. Funds put in equities or wagered on commercial paper rates will not be spent on roads, bridges, airports, plants, power grids, green projects, technological research and development, or other infrastructure and development improvements promised by the stimulus package. The new speculative frenzy has already led the People's Bank of China, the central bank, to seek the names of those who received January's loans in order to scrutinize whether the loans are being spent in line with stimulus package plans. All of this suggests that Beijing will continue having trouble getting people to use new credit in a way that supports its stimulus plans and does not detract from the sustainability of future growth.