China's Credit Growth Control: Case Study

Wen Signals Concern About Stimulus Risks (AWSJ)
Bank Of China Ltd. has ordered its credit officials to halt any new yuan loans due to overly fast lending growth so far in January. The headquarters of the state-controlled lender has issued a notice to all of its branches (a) to stop issuing new yuan loans, and also (b) to curb foreign-currency denominated new loans, (c) any new loans, if they were to be extended, would have to be approved by the bank's headquarters, the person said.

In a statement, Bank of China said its new loans in the first 20 days of January has been high and that it will take a closer look at its lending, though it didn't say whether it had suspended lending.

Banking shares in Shanghai and Hong Kong fell on renewed concerns over lending supply after a Chinese media report that the China Banking Regulatory Commission has asked several commercial banks to stop issuing new loans in the remaining days of January.

In early trading in Shanghai, China Construction Bank fell 1%, China Merchants Bank was down 1.3% and Bank of China lost 0.7%. In Hong Kong, China Construction Bank was 1.9% lower, ICBC was down 1.3% and Bank of China was off 2.0%. The Shanghai Composite Index was 1.0% lower and Hong Kong's Hang Seng Index fell 1.4%. Spillover effect was all over Asia bourses and US/Europe markets (Blg).

Mr. Liu said he expects China's new yuan bank loans to fall to around 7.5 trillion yuan this year from 9.59 trillion yuan in 2009, and outstanding yuan loans to rise 16%-18% this year, down significantly from a 31.7% increase in 2009.

Widespread concerns that fast growth in credit last year may lead to an asset bubble have led to calls for the authorities to rein in lending.

Beijing's stance on monetary policy has been gradually hardening over the last week as it prepares to gradually wean the country off the massive stimulus lending that has supported the economy over the last 12 months. So far it has taken fairly moderate actions:

• guiding up the interest rate on government bills,
• increasing the amount of reserves banks must hold at the central bank, which will decrease the amount banks can lend,
• taking aim at the quality of loans being made, saying Monday that banks will be required to base their lending on real demand and properly manage the pace and quality of lending. That follows signs of lending at a breakneck pace in the first few weeks of the year, when banks traditionally ramp up lending. A local media report earlier this moth said new loans in the first week of the year grew by 600 billion yuan, a massive figure. In all of December, new yuan loans were 379.8 billion yuan.
• The CBRC also said Monday it will closely watch changes in the property market and will strengthen its supervision and window guidance of related loans in 2010.

Look at past China's tighening: policy-announcement and then policy-execution and follow-up