"Banks are likely to steer money to the public works that Premier Wen Jiabao is making a priority in the stimulus package "

Here's a Bloomberg post which seems to confirm Brad Setser's post:

"In broad terms, China’s fiscal stimulus will offset a fall in domestic investment more than it reduces China’s purchases of US debt. Chinese banks that previously were lending to China’s property developers will be lending to China’s government instead. And the rise in the US fiscal deficit will offset a fall in borrowing by American households and firms. As a result it won’t need to be financed as heavily by the rest of the world. China’s fiscal stimulus will do more to keep China’s current account surplus from rising than to bring China’s surplus down. "

From Bloomberg:

"Nov. 18 (Bloomberg) -- China's small manufacturers are likely to be starved of cash even after the government directed banks to increase lending as part of its 4 trillion yuan ($586 billion) plan to buoy the economy.

Banks are likely to steer money to the public works that Premier Wen Jiabao is making a priority in the stimulus package unveiled last week. Those projects are considered a safer bet than manufacturers: Half the nation's toy exporters have closed this year, and 67,000 smaller enterprises filed for bankruptcy in the first half, according to government figures.

``Small businesses will continue to be in despair,'' said Wang Tao, an economist at UBS AG in Beijing. ``Despite the government's drive, banks are likely to concentrate on risk-free infrastructure projects.''

The stimulus allocates money for railways, roads and power grids and calls for an increase in lending for small and medium- sized companies, whose output represents 60 percent of gross domestic product and 75 percent of urban jobs. The banks, focused on returns to shareholders, may favor the state-backed projects, weakening the impact of the package.

``Default risks are almost zero,'' said Lu Zhengwei, chief economist at Industrial Bank Co. in Shanghai. ``The reluctance of banks to lend to smaller businesses will undermine the effectiveness of the stimulus package.''

This seems to argue that infrastructure spending won't be as effective a stimulus for the Chinese economy as spending by other companies.

"The nation's four largest banks, which account for more than half of total loans, have already lowered their lending to smaller companies to reduce risk from slowing growth at home and cooling demand in the U.S., Europe and Japan, according to the banking regulator. The International Monetary Fund predicts all three economies will shrink next year.

Liu Yingshui, owner of mushroom exporter Yin Zhao Food Co. in central Hubei province, said it is getting harder to obtain financing.

``I have heard all this talk of easing credit for small and medium-sized companies, the dropping of loan curbs and most recently the stimulus package,'' Liu said in a Nov. 14 interview. ``None of that helps us.''

It also seems to be suggesting that banks are doing this on their own initiative, because government projects are safer, being backed the government I guess.

"Bad loans at Chinese banks may increase by 20 percent in 2009, BNP Paribas predicted in a Nov. 10 report.

Banks have ``shifted their strategy and mindset from bullish mode into a much more defensive mode,'' said Dorris Chen, a Shanghai-based analyst at BNP Paribas.

Jiang Dingzhi, vice chairman of the China Banking Regulatory Commission, told banks on Nov. 12 to better grade lending risks to different industries and to prevent bad loans from mounting.

``Governments in China and elsewhere are all trying to talk banks into lending money and it doesn't work,'' said Andy Xie, an independent Shanghai-based economist who was formerly Morgan Stanley's chief Asia economist. ``You cannot ask banks to lend to companies that are not viable.''

This may work as Setser says for us, but it doesn't seem to a big winner for the Chinese non-governmental sector.