(ZT) China Tells Banks to Restrict Loans to Local Governments

MaJiang

China Tells Banks to Restrict Loans to Local Governments


By BETTINA WASSENER
Published: February 24, 2010

HONG KONG — China’s banking regulator has told commercial lenders to restrict new lending they provide to the financing arms of local governments, the latest move by the Chinese authorities to slow bank lending in a bid to head off inflation and limit the risks of potential loan defaults.

A flood of lending by the country’s state-owned banks, combined with a giant government spending program, helped China stave off the worst of the global economic crisis last year.

Although exports from China and other Asian nations collapsed as much of the developed world slid into recession, China’s economy managed to grow 8.7 percent last year as easy credit and low interest rates bolstered economic activity at home.

However, one side effect has been a dramatic rise in property prices. Land prices, for example, doubled in 2009 on a nationwide basis, according to economists at Standard Chartered in Shanghai. This has sparked worries of a bubble and has prompted the authorities in recent months to instruct state-owned banks to slow the flood of loans they are approving.

Last month, Liu Mingkang, chairman of the China Banking Regulatory Commission, said he expected the nation’s banks to extend credits totaling about 7.5 trillion renminbi, or $1.1 trillion — more than one-fifth less than the record 9.6 trillion renminbi doled out last year.

On Wednesday, the state-run Shanghai Securities News newspaper reported that the commission had ordered banks to inspect their existing loans to companies used by local governments to raise funds, and to stop lending to those projects that are backed only by expected fiscal revenues.

And in separate moves, the Chinese central bank has twice this year raised the amount that banks have to set aside as a reserve against failed loans. Analysts widely expect further rises in the so-called reserve requirement ratio, which effectively reduces the amount of loans that lenders can make, in coming months.

Combined, the moves are part of the government’s efforts to tamp down rapid price rises and prevent the overall economy from overheating.

Some economists believe China’s economy could grow by as much as 10 percent this year, particularly if exports continue to rally as they have done in recent months. Economists at Deutsche Bank, for example, this month raised their China growth forecast for this year to 9.8 percent from a previous projection of 9 percent.

“China’s stimulus measures were more akin to a blunderbuss than a sniper’s bullet; everything that could be done, was done,” wrote Stephen Green at Standard Chartered in Shanghai in a note Tuesday.

“A massive new wave of infrastructure projects were approved (only partially funded through the budget), a tsunami of bank credit was allowed to flood into the economy, the property sector was stimulated with a heavy cocktail of borrowing and tax cuts, and the MoF ramped up spending,” he said, referring to the Finance Ministry.

“Now we see policy moving towards moderation on all of these fronts.”