Wednesday, 24 February 2010

China Tells Banks to Restrict Loans to Local Governments

China’s banking regulator has told commercial lenders to restrict new lending they provide to the financing arms of local governments, a measure designed to pre-empt a potential overheating in China’s booming economy.

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Guanyu 道 said...

China Tells Banks to Restrict Loans to Local Governments

By BETTINA WASSENER
24 February 2010

China’s banking regulator has told commercial lenders to restrict new lending they provide to the financing arms of local governments, a measure designed to pre-empt a potential overheating in China’s booming economy.

Hong Kong, meanwhile, announced plans to raise taxes on luxury-home purchases, an effort to cool red-hot property markets.

A flood of lending by China’s state-owned banks, combined with a giant government spending program, helped mainland China stave off the worst of the global economic crisis and grow by 8.7 percent last year.

However, the credit binge had the side effect of setting off a surge in property prices as much of the readily available cash flowed into the stock markets and property. Land prices in mainland China, for example, doubled in 2009 on a nationwide basis, according to economists at Standard Chartered in Shanghai.

This has sparked worries of a property bubble and concerns that some of the loans may ultimately go sour.

Economists are also increasingly worried that the overall economy may be overheating: Some believe China could grow by as much as 10 percent this year, particularly if exports continue to rally as they have done in recent months.

The reaction by the authorities has been to rein in the pace of loan growth in recent months.

In January, Liu Mingkang, chairman of the China Banking Regulatory Commission, said he expected the nation’s banks to extend credits totalling 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 lenders have been told to limit credit to local governments and reject projects that lack adequate capital, according to The Associated Press.

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.

Other Chinese measures aimed specifically at cooling the property market include raised down-payment ratios for second mortgages and land purchases.

Likewise, the Hong Kong government on Wednesday raised stamp duties on purchases of luxury flats and announced plans to boost the supply of housing in a bid to cool the property market.

The city’s overall economy is expanding less dramatically than that in mainland China — the government projected growth of between 4 and 5 percent for 2010 — but local property prices have soared here, too, since late last year.

Jing Ulrich, the managing director and chairwoman of China equities and commodities at J.P. Morgan in Hong Kong, said she expected the recent measures announced for mainland China to prevent property prices there from rising much more this year. Overall transaction volumes, however, would probably fall by 20 percent, as last year’s buying frenzy meant that much of the demand had now been met, and buyers remained on the sidelines.

But, she said, corporate savings are at a record high thanks to last year’s lending binge, meaning that the government-inducted slowdown in lending will not trigger an outright credit crunch in China.

And the high level of household savings meant that higher down-payment requirements, for example, would “not kill the market,” as they might do in countries like the United States, where household savings are much lower, Ms. Ulrich said.

“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. Now, China is moving to moderate the various stimulus measures it introduced, he added.