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China tightens reins on loans
Published on: 2010-01-27
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BEIJING—Several state-run Chinese banks have ordered some branches to suspend new lending for the rest of this month, suggesting a coordinated effort by Beijing to manage state banks' torrid lending in the year's first few weeks.

A person with direct knowledge of the matter said Tuesday that Industrial & Commercial Bank of China Ltd., the country's biggest lender by assets, last Friday ordered its branches in Beijing not to issue any new loans for the rest of January.

China Citic Bank Corp. also suspended new lending in Shanghai last week because its local operations have already used up their monthly quota for new loans in the city, a Shanghai-based official at the medium-sized bank said Tuesday. The Citic Bank official added that both the bank's own headquarters and the People's Bank of China, the country's central bank, "have told us to control the pace of lending this year."

The moves by the two state-owned banks follow similar steps taken last week by state-run Bank of China Ltd.

Concerns that China may be moving more aggressively to rein in bank credit rippled through Asian markets Tuesday. The Shanghai composite index fell 2.42% to its lowest level in almost three months, with declines in many property shares. Hong Kong's blue-chip Hang Seng Index fell 2.4% to 20,109.33, its lowest closing level since Sept. 3.

Taiwan shares ended at an eight-week low, with the Taiwan Stock Exchange's Weighted Price Index falling 274.18 points, or 3.5%, to 7598.81.

The curbs on lending come after China last week announced higher-than-expected economic growth for 2009—8.7%, comfortably above its 8% target. Now, the government appears to be winding down the bank-led stimulus program that helped it weather the global economic slowdown.

Beijing has also raised the amount of reserves banks have to hold at the central bank against their deposits, which shrinks the amount they can lend. It is gradually lifting the yield on central bank bills, making it appealing for banks to buy government debt rather than lend.

It remains unclear how severely China will continue to curb credit flows. Last week, China Banking Regulatory Commission Chairman Liu Mingkang said the regulator expects new yuan lending to be around 7.5 trillion yuan this year. That's down from a record 9.6 trillion yuan in new loans in 2009 but still more than double the 2008 level.

Chinese banks, which traditionally rush out loans at the start of the year, have already issued more than 1 trillion yuan ($146 billion) in new loans in the first two weeks of the year, more than double the monthly average of 400 billion yuan in the second half of last year, according to Chinese media reports, which could not be independently verified.

"In responding to such a credit surge, the People's Bank of China has launched more aggressive quantitative tightening than we previously have thought," said Credit Suisse economist Dong Tao.

Mr. Tao said six Chinese banks he contacted had confirmed they had suspended "new lending" across the country starting Jan. 19. He didn't name the banks.

Some economists said the government was attempting to smooth the flow of credit throughout the year.

"If banks are allowed to lend seven to eight trillion yuan in new loans for the full year, you can't come to a point [toward year end] where you ask banks to stop lending entirely," said Standard Chartered economist Stephen Green. "This is just policing of the quota."

Bank of America-Merrill Lynch economist Ting Lu said in a note that the credit suspension may mean that banks need to keep their loan levels stable, allowing them to extend new credit whenever an existing loan matures.

Given how much the banks have already lent this month, "there's no credit crunch. In hindsight there won't be any impact on the real economy," Mr. Lu said in a telephone interview.

Beijing is unlikely to drastically slow lending since many projects started as part of the government's stimulus measures still need at least another year of credit to bring them to completion.

On Tuesday, the People's Bank of China signaled its intention to keep monetary policy fairly accommodative by keeping the yield on its benchmark one-year bills unchanged after having raised it twice in the previous two weeks.

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