While credit expansion can offset this to some degree, increased production based on credit expansion inevitably leads to large scale financial risk.

We know that extremely low real interest rates produce massive expansion of credit.

In fact, it was largely a result of massive fiscal stimulus and credit expansion.

Credit expansion must now be followed by a period of contraction, because some of the new credit instruments and practices are unsound and unsustainable.

So what explains the sharp decline in China s economic output, in an environment of rapid credit expansion? The answer is simple the way the credit is being used.

More generally, the rapid expansion of credit risks increasing inflationary pressure and fueling the formation of asset bubbles.

But, if more risk builds up through continued expansion of shadow credit, this risk buffer may become inadequate.

That created a system of asymmetric incentives also know as moral hazard which encouraged ever greater credit expansion.

A combination of financial sector recapitalization and rapid expansion of the Fed s balance sheet prevented a complete credit lockup.

Active policies to promote new start ups and local companies expansion through credit, training, and technical support are imperative.

But this time, credit expansion is not flowing into housing construction, but rather into commodity speculation and foreign currency.

Unfortunately, given high inflation, structural adjustment has been postponed, with efforts to control credit expansion becoming the government s first priority.

(c) To establish a permanent dialogue on investment, the expansion of the entrepreneurial base and access to credit and technical assistance

True, even as exports have collapsed, the government has managed to prop up growth with a huge spending and credit expansion. But, while necessary, this strategy threatens to upset the delicate balance between private and public sector expansion that has underpinned China s expansion so far.

Every time the credit expansion ran into trouble, the financial authorities intervened, injecting liquidity and finding other ways to stimulate the economy.

Savers were repressed in order to lower the costs of credit for debtors (including governments) and those seeking to borrow for business expansion.

They note that the enormous expansion of commercial banks reserves has not led to a comparable increase in the supply of money and credit.

China s remarkable growth has been financed recently by a rapid expansion of money and bank credit that is producing an increasingly unsustainable investment boom.

Indeed, the rapid expansion of bank credit needed to finance skyrocketing government led investment is increasing the amount of liquidity in China s financial system.

In 2011, for example, the BRSA adopted a loan to value regulation on mortgages in order to limit rapid credit expansion stemming from growth in consumer loans.

In January 2010, despite strict administrative control of financial credit lines (the PBC actually imposed credit ceilings on commercial banks), bank lending grew at an annual rate of 29 , on top of already strong expansion in the same period a year earlier.

European Expansion or Putin Expansion?

Moreover, roughly 40 of the increase in bank credit in 2009 accommodated the fiscal expansion, as projects were started prior to the budget allocations needed to finance them.

The Government attached great importance to private sector development of agricultural markets, rural microfinance institutions and domestic credit markets, improvement of land tenure security and expansion of transport links.

That trend has been accelerated by the rapid proliferation of computers, the considerable increase in the number of users of Internet services and the expansion of credit card based economies.

Surplus Chinese savings made possible America s credit expansion between 2003 2005, when the federal funds rate (the overnight rate at which US banks lend to one another) was held at 1 .

But inflation which rapid money supply expansion inevitably fuels has so far remained subdued, at roughly 2 , because banks are not using their swelling reserves to expand credit and increase liquidity.

Its current account deficit remains large, and monetary policy has been confusing, as the objective of boosting competitiveness and growth clashes with the need to control inflation and avoid excessive credit expansion.

Credit Where Credit is Due

So far during the financial crisis and ensuing recession, the US has been incapable of kick starting credit growth, the major transmission mechanism by which monetary expansion feeds through to domestic economic activity.

Credit expansion must now be followed by a period of contraction, because some of the new credit instruments and practices are unsound and unsustainable. Moreover, the ability of the financial authorities to stimulate the economy is constrained by the unwillingness of the rest of the world to accumulate additional dollar reserves.

In the US, the expansion of home ownership a key element of the American dream to low and middle income households was the defensible linchpin for the broader aims of expanding credit and consumption.

This is not, of course, the first time in history that credit expansion has been used to assuage the concerns of a group that is being left behind, nor will it be the last.

Today s financial crisis, triggered by the collapse of the housing bubble in the United States, also marks the end of an era of credit expansion based on the dollar as the international reserve currency.

Regulations should also have a strong counter cyclical focus, preventing excessive accumulation of leverage and increasing capital and provisions (reserves) during booms, as well as preventing asset price bubbles from feeding into credit expansion.

Presidential Instruction on Least developed Villages Development specially emphasized social, education and health services, expansion of business opportunities, including making household credit available to help most of the poor who lived in these villages.

Mission expansion

Mission expansion

Moreover, given continuing malaise in credit and housing markets, private consumption will remain subdued indeed, two percentage points of the 2.8 expansion in the last quarter of 2011 reflected rising inventories rather than final sales.

Increase expansion level

Decrease expansion level

Credit

Credit

Expansion of strategic partnerships

(Mission expansion and elections)