Tuesday, 2 February 2010

Squeezing easy money to avoid hard landing

China’s move to freeze loans panicked some investors, but it helped correct surge

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Guanyu said...

Squeezing easy money to avoid hard landing

China’s move to freeze loans panicked some investors, but it helped correct surge

By Grace Ng, China Correspondent
29 January 2010

BEIJING: At 3pm on a frosty Monday last week, China’s central bank summoned the big local lenders’ top guns to its Beijing office and ordered them to freeze new lending for that week.

Disobey and you’ll be slapped with punitive measures to crimp your lending ability, it reportedly told the crestfallen bank heads.

Word leaked out that China was tightening credit, and investor panic sent stock markets across the region tumbling to hit a three-month low on Tuesday.

Some feared the worst: Beijing might be slamming the brakes on loose credit - which helped fuel China’s spectacular recovery last year - too hard and too fast.

Some local businessmen like logistics and shipping company boss Li Hanwei, 46, had a week of sleepless nights.

‘I jumped every time my phone rang, thinking the bank was calling to recall my 12 million yuan (S$2.5 million) loan to acquire assets from another company,’ he told The Straits Times yesterday.

He had little cause for worry, actually. Beijing’s moves are aimed at smoothing loans growth across this year to support the highly anticipated growth target of 9 per cent - or more.

And such soothing assurances, voiced by local analysts who argued that the recent plunge was simply a correction and not due to fundamental weakness, were already well known to markets since the end of last year. Then, Beijing had flagged that it was shifting away from a policy of loose money marked by record loans of 9.6 trillion yuan last year.

This year, it is gunning for a more accommodative policy that would include slashing the loans growth target of banks to 18 per cent, from 30 per cent last year.

Reining in loans, especially to the overheated property market, would also help to avert a hard landing in that vital pillar of the Chinese economy, said Beijing-based economist Zhu Baoliang.

What is more, Beijing’s moves were calculated to calm fears that inflation would rear its ugly head, amid rising food and asset prices this year.

So why were markets still so convulsed when news broke this week that some state-run Chinese banks had ordered their branches to stop lending for the rest of this month?

It was the aggressive way Beijing swooped in to tighten credit that caught investors off-guard. First, China’s central bank had unexpectedly raised the requirements on the amount of reserves that lenders need to hold, giving them less elbow room in disbursing new loans.

Then, its meeting on Monday last week with banking heads had them scurrying, in some cases, to shut the bank books. Bank of China reportedly switched off its internal electronic loan approval system for this month. Others even called back some of their loans, reported China’s Securities Times.

But the banks had themselves to blame for the surprise discipline from the central bank. As UBS bank economist Wang Tao pointed out: ‘The 1.1 trillion yuan (of) reported new lending in the first two weeks (of this year) must have made the authorities uneasy and decide to hold banks on a tighter leash.’

The ones worst hit by the recent credit tightening may be local governments or state-owned enterprises applying for second loans for their projects.

With the government’s agenda this year focused on encouraging people to spend more, supporting lower-income groups in buying their first homes, and helping small businesses grow, borrowers in these groups should ‘not be affected too much by the limits on banks’ lending,’ said a Beijing bank executive.