Stocks worldwide plunged yesterday (Wednesday), commodities sank, and the dollar pushed higher after Chinese authorities demanded domestic banks slowdown lending amid concerns about asset bubbles growing in the economy.
Overall credit growth in China will be capped at $1.1 trillion (7.5 trillion yuan) for 2010, Liu Mingkang, chairman of the China Banking Regulatory Commission, told Bloomberg News in an interview in Hong Kong. Some banks were asked to limit credit because they failed to meet standards for capital reserves and other regulatory requirements, Liu said.
New loans in the first 10 days of this year were "relatively high," he told the Asian Financial Forum.
That may be understating the situation.
Unidentified sources at The People's Bank of China (BOC) told Reuters some banks lent more than half of their quota for all of 2010, and were excessively funding new projects.
Chinese banks lent $161.1 billion (1.1 trillion yuan) in the first two weeks of January. The top four state banks, including Bank of China, doled out almost half the total, about $73.1 billion (500 billion yuan), the sources said.
China's top government officials are now checking the lending data every day instead of at the end of each month, and were not happy with the accelerated pace.
The central bank has told other banks, including Industrial & Commercial Bank of China, CITIC Bank Corp Ltd. and China Everbright Bank to increase their reserve requirement ratio by half a percentage point, the sources told Reuters.
The restrictions will be effective for three months, and will be either extended or intensified if banks do not ease their lending pace.
The government is especially concerned that inflationary pressures may bleed into the consumer sector.
"Overly fast credit growth will add to such pressure," the BOC said in a statement. "Once CPI exceeds 2%, China's real deposit rate will be negative, and add pressure to take action on interest rate policy."
Zhu Baoliang, a government economist, told Reuters China's annual consumer inflation rate accelerated "significantly" in December, after growing 0.6% through November of last year.
The BOC told banks they must smooth out growth of credit in 2010 and try to extend loans in an even manner, averting abnormal swings between quarters and months, China's state radio reported on Wednesday, according to Reuters.
It also ordered banks to step up efforts to control their risks, especially when lending to projects backed by local governments.
Just last week, China raised its capital reserve requirement for banks for the first time since June 2008 in an effort to drain excess cash from the financial system. Earlier in the month, the central bank raised the interest rate on its three-month bills for the first time since August 13 and has been jacking up the rates on short-term bills to absorb liquidity.
The BOC had earlier telegraphed the moves by saying in a statement that its main goals for the New Year would be "to support steady economic growth and stabilize prices and effectively manage inflation expectations."
Meanwhile, tighter monetary policy in China weighed on higher-yielding commodity-backed currencies such as the Australian, New Zealand and Canadian currencies – all of which benefit from China's voracious appetite for commodities.
The news pushed the dollar higher, and oil and gold lower.
That in turn hit the euro, which was already under pressure from controversy surrounding deficits and public finances in Greece, and a report on Tuesday showing a bigger-than-expected decline in German investor sentiment.
Explosive Chinese growth has helped steer the global economy out of the biggest economic downturn since the Great Depression and a possible slowing of growth has spooked some investors, analysts said.
"Hints of policy tightening in China are prompting fears this will have a negative impact on the fate of the global economic recovery," Vassili Serebriakov, foreign-exchange strategist at Wells Fargo & Co. (NYSE: WFC) in New York told The Journal.
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