China Overshoots Loan Target, More Tightening Seen

Tuesday, 11 Jan 2011 01:26 PM

 

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China overshot its bank loan target in 2010 and finished the year with money growth still running too fast, underscoring the need for more decisive policy tightening to keep inflation in check.

At the same time, a record $199 billion surge in foreign exchange reserves in the fourth quarter pushed China's stockpile, already the world's biggest, to $2.85 trillion, highlighting that money streaming in from abroad was complicating policy efforts at home.

Chinese banks issued 7.95 trillion yuan ($1.2 trillion) in new loans last year, the central bank said on Tuesday, more than the 7.5 trillion yuan that the government wanted for the full year. The broad M2 measure of money supply grew 19.7 percent, also topping the official target of 17 percent.

"Lending is still excessive and China's process of monetary normalization has not finished yet," said Wu Tujin, economist with Guosen Securities in Shenzhen. "That means China will still face high pressure from inflation and asset bubbles."

More than just an economic issue, high-speed money and credit growth has become a political concern, helping propel Chinese consumer inflation to its fastest in more than two years.

Determined to rein in rising prices, a source of public discontent, the government declared late last year that it would shift to a tighter monetary policy stance. Some effects of that could be seen in the data for the final month of the year.

Chinese banks extended 481 billion yuan in new loans in December, down from 564 billion yuan in November and the lowest in one year.

MORE TIGHTENING TO COME?

But the December figures also showed that the impact of policy tightening thus far has been less severe than the market had expected.

The median forecast of economists was for issuance of 380 billion yuan in new loans.

And the 19.7 percent in annual M2 growth was quicker than the 19.5 percent pace in November and far faster than the 18.9 percent increase expected by analysts.

"Lending was still very strong despite constant regulatory efforts to contain the pace. That shows there is robust demand for loans from the real economy," said Ren Xianfang, economist with IHS Global Insight in Beijing.

"I expect January data will be even higher. That will prompt the Chinese authorities to take pre-emptive steps," he said.

The People's Bank of China raised interest rates twice last year and officially increased lenders' required reserves six times. Economists polled by Reuters expect two further increases of both interest rates and required reserves in the first half this year.

But the central bank on Tuesday allowed just a mild rise in auctioned bill yields and also mopped up liquidity through open-market operations, signaling that it will keep rates and reserve ratios stable until early February.

In another move to ease the build-up of cash in the economy, China will allow residents of the wealthy coastal city of Wenzhou to invest in select markets overseas, an experiment in liberalizing the tightly controlled capital account.

LENDING CONTROLS

With Chinese financial markets still under-developed, administrative controls over the volume of bank lending are a centerpiece of the government's economic policy.

There had been much speculation that Beijing would set a loan target for 2011 lower than last year's 7.5 trillion yuan, but recent reports in official media have suggested that the government will avoid publicly declaring a clear target.

Instead, China is planning to refine its techniques for keeping a handle on lenders, using regular, bank-specific adjustments of required reserves and perhaps capital adequacy ratios to penalize excessive issuance of credit.

"The monetary authority's policy intention is pretty clear. They want to tighten or normalize policy. But local leaders want to pursue high economic growth rates, so I don't think banks can go below 8 trillion yuan for new loans," said Chen Xingdong, economist with BNP Paribas in Beijing.

Though analysts believe monetary conditions are still too loose, China has gone a long way to winding down the ultra-loose policy implemented in 2009 to cushion the economy from the global financial crisis. That year, banks made a record 9.6 trillion yuan in new loans, pushing money growth to nearly 30 percent on the year.

© 2014 Thomson/Reuters. All rights reserved.

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