China bank loans surge, policy tightening expected

Chinese banks continued their lending frenzy in the beginning of the year, doling out 500 billion yuan (USD 75.6 billion) in new loans in the first week of January alone, putting fresh pressure on the central bank to tighten policy to put a lid on inflation.

The loan figure includes about 210 billion yuan extended by the "Big Four" state lenders, sources with direct knowledge of the figures told Reuters on Wednesday.

The overall lending figure would roughly equal the new loans extended during all of December. New lending in December reached 480.7 billion yuan, meaning China overshot the government's target of keeping bank loans to 7.5 trillion yuan in 2010.

The surge in lending in the first week of 2011 continues a pattern seen in recent years of Chinese banks rushing out lending at the start of the year, after they built up a backlog of potential loans at the end of the previous year due to credit curbs and as they sought to extend credit ahead of any further official restrictions.

New loans extended in the first quarter have accounted for an average of 33 percent of the full-year total over the past decade, according to official data.

Banks lent 7.95 trillion yuan (USD 1.2 trillion) in 2010, overshooting Beijing's target and highlighting the need for more decisive policy tightening.

In the past, China used loan quotas to keep a handle on lending. This year, the central bank has pledged to refine that system with regular calibrations of reserve requirements and capital ratios targeted at individual lenders.

Li Daokui, an academic adviser to the People's Bank of China, said the government wants to rein in bank lending, but added that setting a full-year credit quota by itself was insufficient.

"China's economic structure is complicated today, so it is not sufficient to only set a lending target this year to control the economic performance," Li said.

More rate rises expected

The People's Bank of China, which raised interest rates twice and increased banks' reserve requirements six times last year, has promised to put the task of fighting inflation at the top of its 2011 agenda.

Li said a rate increase in the first quarter would be reasonable because inflation tends to be elevated for seasonal reasons during the opening months of the year.

"Generally speaking, prices tend to trend up in the first quarter, and focusing on such a trend, to make some adjustments in interest rates is reasonable," he told reporters at a forum.

But deputy central bank chief Yi Gang said in published comments that China should focus on tackling the root cause of inflation by cutting the trade surplus rather than relying too much on monetary policy to fight inflation.

Yi said the origin of China's inflation pressure lies in the country's huge trade surplus, which exerts pressure on the yuan to appreciate.

Chinese officials have warned that monetary policy will be less effective because of excessive liquidity in global financial markets stemming from monetary easing in the United States.

Raising interest rates would curb inflation but it would also attract hot money inflows into China, where required bank reserve ratios have already been lifted to historic highs, Yi told the official Shanghai Securities News.

Pressure

The pressure on the central bank to contain liquidity is evident after data showed a record USD 199 billion surge in foreign exchange reserves in the fourth quarter to USD 2.85 trillion.

The central bank has to buy most of the incoming foreign currency to keep the yuan stable, pumping out huge amounts of local currency into the banking system as a result.

It has been sterilising such funds by issuing bills and raising banks' reserve requirements, and Xia Bin, another central bank adviser, said the PBOC has done a good job in the area.

Although growth in money supply was fast last year, the extent should not be exaggerated because the central bank was controlling it through sterilisation, Xia said.