Bring On The Credit.(International Edition; CHINA)(lending business in China)

Byline: Barrett Sheridan; With Lauren Hilgers in Shanghai

Too much lending is bad, right? Maybe in the West--but China has the opposite problem.

If there is a single lesson to have emerged from the current financial crisis, it is that lending got out of control. The West needs less of it--not less compared with today's levels, of course, because right now virtually no one is lending, but less than was sloshing around over the past decade, when banks borrowed $26 for every $1 they owned, and the average American family owed $121,000 on their house.

The stereotype of the gentleman banker who makes plain-vanilla loans and retires to the golf course at 3 p.m. is no longer a source of scorn but, in some quarters at least, an ideal. Yet while this new conventional wisdom makes sense for the West, it ought to be flat-out ignored in China. As New York and London learn to embrace the new ethos of thrift, China's banks need to borrow a page from the Citigroup and JPMorgan of old (while avoiding their worst excesses, of course). What this means is they need to start handing out cash, and lots of it. More loans for more people will help China navigate the current economic crisis. It might even benefit the West.

The problem with China's banks isn't their size--the Industrial and Commercial Bank of China is the world's sixth largest corporation, with a market value greater than Microsoft. It's that, despite their wealth, they don't lend enough. And what loans they do make go mostly to large companies and state-owned businesses. According to research by Morgan Stanley, just 7 percent of the loans made last December went to households.

This isn't an accident, but the fruit of a deliberate government policy, a war on lending that Beijing has waged to help keep inflation in check. To keep prices stable during China's years of torrid growth, Beijing set quotas on how many loans could be issued. Now that the global economy is cooling (some might say freezing), inflation is no longer a worry, according to Brad Setser, an economist at the Council on Foreign Relations, Beijing's policymakers ought to "unshackle the banks."

Setser and other experts think this shift is essential because the Chinese government's war on lending has had a lot of unintended consequences. For one, banks offer pretty terrible interest rates to savers, since the government bars them from relending much of their deposits (a bank's chief way of making money). As a result, though Chinese businesses were "raking in fairly significant profits while the economy was doing well," says Eswar Prasad, an economist at Cornell University, they chose not to bank them, and instead spent them quickly, sometimes on frivolous investments. "Any rate of return [on a new investment] is better than something near zero," says Prasad.