China Curbs Bank Lending but Vows to Keep Liquidity High

Beijing continued a delicate balancing act yesterday (Wednesday), vowing to keep stoking its economy with funding from its $787 billion stimulus program even as it implements new controls on bank lending.

After spending three days visiting the restive eastern province of Zhejiang, Premier Wen Jiabao argued for maintaining the loose economic policies implemented under the stimulus program, saying it's too soon to be "blindly optimistic," according to a statement by the State Council.

His remarks are likely to fuel an ongoing debate between government officials over whether it's time to rein in bank lending.

After the government called on Chinese banks to provide increased liquidity to the economy, they lent about $1.08 trillion (7.37 trillion yuan) in the first half of the year - almost 50% over the government's target of $732 billion (5 trillion yuan), and nearly double the total loans extended throughout all of 2008.

Most analysts credit the stimulus program for China's economic rebound, as GDP expanded by 7.9% in the second quarter, up from 6.1% in the first quarter. But now some officials have voiced concerns that asset bubbles and non-performing loans could threaten a long-term economic recovery.

Last week, Chinese Legislator Yin Zhongqing called for limiting new loans to 10 trillion yuan for the full year, according to the Wall Street Journal.

The benchmark Shanghai Composite Index (SSE) is down 15% this month, amid fears that the government will move to tighten bank lending in the second half of the year to throw a wet blanket on the economy. The SSE, Chinas' benchmark index, zoomed 91% from Jan. 1 to Aug. 4, hitting a high of 3,478.01.

China's cabinet yesterday (Wednesday) said it's watching for signs of overcapacity in industries including steel and cement and will increase "guidance" in the coal, glass and power sectors. It will also place new restrictions on stocks and bonds sold by companies in those industries.

And continuing another trend, the People's Bank of China last week in an internal memorandum notified its branches to curtail lending for the remainder of the year. Other Chinese banks, including the Industrial & Commercial Bank of China (ICBC) and China Construction Bank (CBC), have also curbed lending in recent months, Reuters reported, citing anonymous sources.

The Chinese bi-monthly Caijing reported that with the new ceilings in place, ICBC has already lent 83% of its full-year new lending total, while CCB has lent 79%.

Other bankers reported that liquidity appears to be drying up and that loan approvals are taking longer than normal.

"It takes more time to process credit approval from Beijing headquarters now, and the pricing for onshore deals has been heading north in recent months, particularly for U.S. dollar deals,"a banker familiar with the process told Reuters.

And while the going rate for loans to top-tier multinational companies in the first half of the year were made at a margin of 150 basis points above the London Interbank Offered Rate (LIBOR), margins have now soared to over 200 basis points, according to the same banker.

Still, Beijing is unlikely to pull back from the massive stimulus program and the resulting liquidity that has bolstered the world's third-biggest economy. Even with the slowdown, analysts still expect total lending to exceed $1.5 trillion ($10 trillion yuan) this year.

And Premier Wen has called on policymakers to maintain "moderately loose" monetary policy and "active" fiscal policy.

That means the Chinese economy will remain flush with liquidity for the foreseeable future. And just to be on the safe side, the China's State Council has issued a directive to banks to provide more loans to smaller firms.

"We will give appropriate subsidies to financial institutions to support them in extending loans to small companies," the council said following a regular weekly meeting.

It also will extend measures to reduce the social security contributions paid by smaller firms that are facing difficulties and will increase tax support and direct government funding for them.

"This is tightening but it's not a total shutdown," Ken Peng, an economist with Citigroup Inc. (NYSE: C) in Beijing told Bloomberg News. "Policy hasn't reversed but they are contemplating moves that have a lesser impact on the broader economy."

News and Related Story Links: