China moves to cut off domestic bank lending

After an emergency meeting last week, Chinese monetary authorities slammed the brakes on domestic bank lending, which analysts say ran amok during the first half of January.

In just two weeks, Chinese banks gave loans equal to as much as one-fifth of the central bank's $1.1 trillion annual lending target, said three analysts in Beijing. A Credit Suisse report said that six out of seven banks contacted in recent days confirmed that they had now suspended lending, while the other declined to comment.

The clampdown on lending may slow China's growth, which hit 8.7 percent last year and 10.7 percent in the fourth quarter. And it may make it hard for some Chinese companies, which import everything from machinery to commodities, to get the letters of credit needed to bring goods into the country, banking sources said. Credit Suisse said the move could delay imports and slow lending for mortgages and infrastructure projects.

Chinese banks generally receive lending quotas for the year, but frequently rush to push out loans early. Often they lend at low rates to reluctant borrowers for a few months and then roll over the loans at higher interest rates later in the year. Fears of a policy change by the People's Bank of China, the central bank, to slow down China's economy have made that pattern radically more pronounced this year.

"We believe controlling the pace of credit growth will be the key objective for monetary policy in the next few months," said Barclays Capital analysts Chang Jian and Peng Wensheng.

"The policy environment is changing considerably," said one Western consultant close to the central bank who spoke on the condition of anonymity. "The focus of regulators is to avoid the excesses of 2009."

In the first half of 2009, lending raced about 45 percent ahead of its 2008 pace, but slowed after monetary authorities ordered restraint in July, finishing 15 percent ahead of the previous year's pace in the second half.

China's target for bank lending in 2010 was 25 percent lower than last year's total, but still higher than levels set prior to 2009. The Barclays report noted that the central bank continues to rely on administrative restraints, and that interest rates remain relatively low in China. "We should not over-estimate the size of monetary tightening," it said. The government also is maintaining an aggressive stimulus spending program.

Both Credit Suisse and Barclays said lending could resume at a more moderate pace in February.

"Beijing is still keen to maintain an orderly accommodative monetary environment until growth has become better balanced and the job market confirms a meaningful strengthening," said the Credit Suisse report, adding, "we maintain our view that rate hikes will not be used at this stage to rein in the economy."