Tuesday, 16 February 2010

China Moves to Tighten Curbs on Lending

For the second time in less than five weeks, China’s central bank has moved to limit lending to consumers and businesses by ordering big commercial banks to park a larger share of their deposits at the central bank.

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Guanyu 道 said...

China Moves to Tighten Curbs on Lending

By KEITH BRADSHER
12 February 2010

HONG KONG — For the second time in less than five weeks, China’s central bank has moved to limit lending to consumers and businesses by ordering big commercial banks to park a larger share of their deposits at the central bank.

The step, announced late Friday, came earlier than most economists had expected and was aimed at forestalling a rekindling of inflation by controlling a rapid expansion in bank loans. Families, real estate developers and industrial companies have been borrowing heavily and have started paying more for everything from food to apartments.

While the central bank announced its action after the close of markets in China, it provoked an immediate reaction elsewhere. Stock index futures in the United States were down nearly 1 percent. Commodity prices also tumbled as investors interpreted the action as likely to trim China’s demand and possibly limit inflation, with oil and copper prices each down more than 1 percent.

The Chinese National Bureau of Statistics said Thursday that annual inflation in producer prices, typically measured at the factory gate, had more than doubled in January from December, to 4.3 percent. Average housing prices in large and midsize cities were up 9.5 percent last month from a year earlier, the fastest rate of increase in 19 months.

Rising producer prices and asset prices have not yet fed into high inflation in consumer prices, which were up 1.5 percent last month from a year earlier despite a sharper uptick in food prices.

The central bank action Friday was aimed at keeping a tight rein on consumer prices, as inflation has led to unrest in the past when it has eroded workers’ spending power.

The People’s Bank of China, the central bank, ordered an increase in banks’ reserve requirement ratio, which is the share of deposits that commercial lenders must park at the central bank, earning very little interest. A higher reserve requirement ratio means that commercial banks have less money left to lend to customers.

The central bank pushed up the ratio by half a percentage point, to 16.5 percent, for large banks, effective Feb. 25. But it left the ratio unchanged at 14 percent for smaller financial institutions, like rural credit cooperatives, which have been less active in a frenzy of lending to big state-owned enterprises in particular this winter.

The previous increase in the ratio was announced on Jan. 12 and took effect on Jan. 18. The latest increase is to take effect after the weeklong Lunar New Year holiday next week.

“The timing is a surprise,” said Qing Wang, an economist in the Hong Kong office of Morgan Stanley. But he noted that China’s policy makers always injected extra cash into the country’s financial system before Lunar New Year to accommodate holiday spending. Raising the ratio could prevent that cash from translating into more lending and speculative real estate activity after the holiday.

Jing Ulrich, the managing director and chairwoman of China equities and commodities at J.P. Morgan, said, “The message coming out of China has been quite clear — policy makers are becoming more concerned about containing inflationary expectations and managing the risk of asset price bubbles as a result of last year’s aggressive expansion of credit.”

Stephen Green, the head of greater China research in the Shanghai office of Standard Chartered, said that he had been expecting one increase a month in the ratio for the foreseeable future.

The increase in the reserve ratio will not actually require banks to curtail lending immediately, because the commercial banks have typically been keeping about 18 percent of their assets at the central bank — more than the reserve requirement. But raising the minimum makes it less likely that big banks will take this money back and start lending it elsewhere.

China’s central bankers face an acute dilemma in trying to rein in lending after banks lent more money in January than in the previous three months combined.

Guanyu 道 said...

The conventional remedy in most industrialized countries would be to push up the interest rates that borrowers must pay for loans, typically through actions in money markets. But that would draw even more investment into China, at a time when the Chinese authorities are already struggling to control inflows of foreign cash seeking high returns mainly in the country’s real estate market.

China has been trying to limit investment inflows for years because that makes the flows make it even harder for China to hold down the value of the renminbi against the dollar. If the renminbi appreciates, that would make Chinese exports more expensive in foreign markets, potentially leading to job losses at export factories.

The People’s Bank of China has tried to respond to this conundrum by periodically adjusting reserve requirement ratios and imposing administrative limits on bank loans instead.