Important math yesterday, November 22, by the Financial Times’s James Kynge, the paper’s long-time China correspondent and author of the book China Shakes the World.

Kynge notes that the official new bank loan total so far for 2010—a daunting 6.9 trillion renminbi in the first 10 months of the year—is only part of the real lending total for the year.

Which is a problem since the official new bank loan quota for the year is just 7.5 trillion renminbi, a total that on current trend banks are going to exceed handily this year. Beijing had vowed to rein in new bank lending after banks blew through quotas in 2009 with 9.6 trillion renminbi in new loans. Putting that much money into the economy is a huge problem if you want to control potential asset bubbles and inflation. Inflation ran at an annual 4.4% rate in October, way over the national target of 3%.

Add in various unofficial totals and the problem gets scarily larger.

• There’s off-balance sheet lending by state-owned banks of more than 2 trillion renminbi in new loans in 2010.
• There’s new lending of as much as 4 trillion renminbi in 2010 by underground lenders who take deposits from savers tired of earnings negative interest rates from official banks (after inflation)—offering interest rates, Kynge says of 12% to 120%–and then turn those deposits into loans.
• Throw in as much as 1 trillion renminbi in new loans from the unregulated private funds industry, which invests money for high net-worth individuals.

Even giving credit for double counting, the unofficial total for new loans in 2010 approaches the official total so far in 2010.

What can investors make of the fact that so much unofficial lending still takes place, even after various crackdowns? Either the crackdowns aren’t serious but instead just window dressing, or bank regulators and the central government don’t have much control over the country’s financial system.

I’d vote for both.

The most straightforward way for China to address the runaway loan problem is to raise deposit rates so that savers have some incentive to put money into banks. The benchmark one-year interest rate on deposits is 2.5% after an increase in October. (Not very attractive when inflation is running at 4.4%.) An increase in the deposit interest rate would put some of the underground lending industry out of business for lack of funds and it would cut official bank lending by making some current loans unprofitable.

Of course, a solution that requires cutting into official and unofficial profits is going to run into heavy opposition from official and unofficial banks that have their own extensive connections with China’s most politically powerful families. The power of those connections is why the problem exists. And why solving it is going to be so protracted and so messy—if a solution is possible at all short of a major crisis.