Sunday 7 March 2010

Beijing to tighten the credit tap

Beijing will sharply slow bank lending this year and reduce new construction, even though it intends to maintain a proactive fiscal policy and moderately loose monetary policy.

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Beijing to tighten the credit tap

Curbs on growth in bank loans and construction signal return to normal, analysts say

Jane Cai and Cary Huang in Beijing
06 March 2010

Beijing will sharply slow bank lending this year and reduce new construction, even though it intends to maintain a proactive fiscal policy and moderately loose monetary policy.

Lower targets for new loan issuance and construction, and for growth in money supply and the budget deficit, are contained in the central government’s annual work report, delivered yesterday by Premier Wen Jiabao. He also confirmed growth in government spending would halve from last year, to 11.4 per cent.

A year after the government launched expansionary policies to stimulate the economy - the world’s third-largest - the work report heralds a return to normal, analysts say.

Whle banks last year lent a record 9.6 trillion yuan (HK$10.9 trillion), this year’s target is 7.5 trillion yuan. And while the broad M2 measure of money supply grew 28 per cent last year, the target this year is a 17 per cent increase. The government is aiming for economic growth of 8 per cent, down from 8.7 per cent last year.

“Latent risks in the banking and public finance sectors are increasing,” Wen told the National People’s Congress.

On the sidelines of the meeting, China Banking Regulatory Commission chairman Liu Mingkang said it would require banks to hold a greater proportion of their capital on reserve if the economy showed signs of overheating this year.

Beijing has already begun to restrain credit growth as the economy rebounds and asset prices rise sharply. The central bank has twice ordered banks to keep a bigger portion of deposits on reserve this year to curb loan growth.

Wen said the yuan exchange rate would remain basically stable, at an appropriate and balanced level, despite international calls to allow the currency to strengthen.

The fiscal deficit for all levels of governments is set to rise to 1.05 trillion yuan. Though it’s a new high, following last year’s 950 billion yuan total, the year-on-year increase of 100 billion yuan is far smaller than last year’s 570 billion yuan increase.

New construction projects, a major contributor to the economic recovery last year, would be under strict control this year, Wen said.

“Government investments at all levels should be concentrated in the most important areas and be mainly spent to carry on and complete existing projects,” he said.

The National Development and Reform Commission said it was aiming to expand fixed-asset investment this year by 20 per cent, much less than the 30.1 per cent growth last year.

Qu Hongbin, an economist with HSBC, said Wen was more conservative on public investment this year. “For instance, the central government’s total spending on infrastructure is planned to grow by 7 to 9 per cent year on year, much lower than the 128 per cent in 2009.”

The government expects consumer prices to rise 3 per cent this year. Last year they fell by 0.7 per cent.

Wang Qian and Grace Ng, economists with JP Morgan Chase Bank, said the work report was “fairly balanced on most fronts”. “We expect the gradual normalisation of monetary conditions ... and a more flexible approach this year,” they said.