China tells banks to halt lending
By Jamil Anderlini in Beijing and Sundeep Tucker in Hong Kong and Jennifer Hughes in London
Published: January 20 2010 05:43 | Last updated: January 20 2010 20:07
Chinese regulators have told some banks temporarily to halt lending amid growing fears of asset bubbles and inflation.
The renewed efforts to rein in credit growth after a burst of frantic lending activity by Chinese banks that have raised concerns about overheating in the Chinese economy.
The crackdown prompted stock market falls around the world as investors worried that China’s tightening could cool its strong growth and dent expectations for the global recovery.
“This sort of baby step tightening doesn’t look like much but when you’ve had such rampant credit growth, it doesn’t take much for it all to end in tears,” said Albert Edwards, global strategist at Société Générale.
Traders said the China concerns added to fears over the outlook for Greece, which is struggling to convince investors it can fund the eurozone’s biggest deficit. Greek bond yields leapt dramatically on Wednesday, sharply raising the country’s borrowing costs. The jitters sent the euro to a five-month low against the dollar and sterling at $1.4115 and 86.7p respectively.
In the first two weeks of January alone, Chinese banks extended as much as Rmb1,100bn ($161bn) in new loans, analysts and bankers told the Financial Times. If banks were to sustain that pace of lending, they would pump nearly Rmb30,000bn into the economy this year. That would equate to four times the Rmb7,500bn annual target for new loans announced on Wednesday by Liu Mingkang, chairman of the China Banking Regulatory Commission.
In response to the lending spike, the regulator has issued verbal “guidance” to all banks, imposing lending quotas and warning the most aggressive lenders temporarily to halt loans, according to several banking executives.
Mr Liu said Chinese banks needed to prepare for “the wrong kind of borrowers and the wrong kind of weather”.
At least two banks – Bank of China and Agricultural Bank of China – have issued orders to lower level branches to stop issuing loans to corporate customers without explicit approval from their headquarters, employees at those banks told the FT.
Stocks in Shanghai fell almost 3 per cent and in Europe, the FTSE Eurofirst 300 dropped 1.6 per cent to 1,052.53.
A Chinese state-run newspaper cited un-named sources as saying that Bank of China, which has been the most active lender among the large state banks, had switched off its internal electronic loan approval system.
BoC issued what amounted to a self-criticism, admitting in a statement that it had issued an unusually large volume of new loans in the first 20 days of January. It promised to return to a more sustainable and even lending pace while optimising and adjusting its credit structure and obeying government rules.
The bank did not disclose how much it had lent or answer questions about whether it had suspended lending operations.
Analysts said Beijing had also raised the required amount of capital some banks must hold in reserve with the central bank, leaving them less money to hand out as loans.
That news came after China’s central bank last week raised the reserve requirements on all large lenders – the first increase in 18 months.
Chinese lenders extended Rmb9,600bn in new loans last year, more than double the amount in 2008, following government orders to support the economic stimulus programme and boost flagging growth in the face of the global crisis.
The flood of credit has led to soaring asset prices, particularly in the property market, and fears that inflation could take hold in the coming months.
“Banks are frontloading their loans in expectation of harsher tightening in the second half of the year but the regulators are also wary of higher inflation expectations that could be triggered by this spike of new lending,” according to Dorris Chen, an analyst at BNP Paribas.
“We’re not seeing interest rate hikes but more administrative interference, with regulators ordering banks to smooth out the seasonality pattern and avoid a spike of new credit at the beginning of the year.”
In a speech published late on Tuesday night, Wen Jiabao, the Chinese premier, appeared to lend high-level support to tougher measures aimed at reining in surging lending.
“China will maintain reasonable and ample growth in money supply and credit, focus on optimising the credit structure and carefully manage the pace of lending to reduce financial risks,” Mr Wen said.
Speaking in Hong Kong on Wednesday, Liu Mingkang, chairman of the China Banking Regulatory Commission, forecast that banks would issue Rmb7,500bn in new loans this year. That would mean a rise of 16-18 per cent in total outstanding loans on an annual basis and would mark a sharp deceleration from the 32 per cent rise in 2009.
Last year’s massive rise in lending has raised concerns that the credit expansion would fuel asset bubbles in real estate and stock market investments, which in turn could spark a damaging rise in banks’ non-performing loans ratios.
Mr Liu said Chinese banks had been told to “heighten vigilance” against a rise in credit risks. He added that the regulator was increasing scrutiny of second loans, in particular those relating to local government-sponsored projects, and was taking action against those banks that were concentrating lending risks.
He also said the commission had placed 190 banking institutions under better examination, although he did not name them, and said some banks had been asked to limit lending because they had failed to meet certain requirements, including capital.
Mr Liu stressed, however, that China had a large aggregate provisioning cushion: “We are confident that the risks envisaged can be absorbed.”
On regulation, he said the regulator would soon issue new leverage and liquidity ratios and prevent banks from guaranteeing corporate bonds.
China’s central bank last week unexpectedly raised the reserve requirements on its lenders – the first increase in 18 months. The ratio for big banks was raised this week by 50 basis points to 16 per cent.
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