China bank lending curbs ripple through economy

An employee counts yuan notes at a bank in Nanjing, capital of east China's Jiangsu province June 17, 2006. Beijing's traditional year-end drive to curtail credit growth is biting hard in places as the central government steps up efforts to prevent the economy from boiling over.

BEIJING (Reuters) - Beijing's traditional year-end drive to curtail credit growth is biting hard in places as the central government steps up efforts to prevent the economy from boiling over.

Some bankers report that they are recalling loans, while others are turning down new requests from borrowers following firm instructions from the People's Bank of China and the China Banking Regulatory Commission.

Bankers say Beijing has not ordered a blanket freeze on net new loans in the final weeks of the year, but they say they have been told not to exceed their quota for the whole year set at the start of 2007 -- or risk punishment.

"We've already exceeded the quota and are having to cut back our loans," said the president of a city commercial bank in eastern Zhejiang province. "They warned us in September."

Banks in China typically lend at a cracking pace in the first quarter, partly so they have more assets that will yield income throughout the year and partly because they never know when the next administrative clampdown on credit might come.

Those fears then become almost self-fulfilling as the authorities, forever worried about credit-fuelled investment, apply the brakes in the second half. But bankers say the "window guidance", or arm-twisting, has been more intense this year and has been extended to foreign banks for the first time.

"The administrative tightening this year is the most severe it has been," said a banker who works at the consumer loan department of a state lender.

He said regulators routinely tell banks to control lending growth and beware accumulating bad loans.

"But this year, they are ordering us not to lend," he said, adding that he thought the hold-down would stretch into 2008.

Indeed, markets are abuzz with speculation that the central bank, which has raised interest rates five times this year, will adopt a tighter monetary policy stance.

QUEUE UP, PLEASE

The squeeze could have been worse. Banks lent less in October than in any month this year. But the total, 136.1 billion yuan ($18.4 billion), was the highest for any October on record.

Still, an executive at the corporate loan department of a second state bank, which doles out monthly lending quotas, said she had clients who had been waiting for months to borrow.

"It's very difficult for any new client to get loans from us. They'll have to wait for a long time," she said.

A vice-president at a city bank in Inner Mongolia said regulators had commended his bank for keeping within its quota.

Even so, he said the bank was having to wait for existing loans to mature before it could extend fresh credit.

Qiu Pingping, a real estate executive in Hangzhou, said none of her clients had been turned down when applying for a mortgage, but the approval process was taking much longer than before.

As well as discouraging property lending, regulators are taking particular aim at industries that guzzle energy and belch pollution.

Banks have "actively supported the country's policies to curb the development of industries that consume a lot of energy and to facilitate changes in the national economy", Su Ning, a deputy governor of the central bank, told a weekend forum.

COULD BE WORSE

Zhang Xi, a banking analyst with China Galaxy Securities in Beijing, said the squeeze was unlikely to do too much harm to banks' profits because lenders had been working to widen their interest spreads to offset the cap on loan growth.

The banker at the first state lender said his institution was doing less low-margin bill discounting so it can make more consumer loans.

The economic impact of the credit squeeze depends on how long it lasts. Investment slowed sharply, especially in construction and related industries, after the authorities suddenly closed the credit taps in May 2004.

Anecdotal evidence suggests the latest tightening campaign is not as severe. Annual lending growth actually accelerated to 17.7 percent in October from 17.1 percent in September.

Yang Qingli, a senior financial analyst with CITIC Securities in Beijing, said the curbs were keeping the economy from overheating, but were not enough.

Fan Gang, the academic member of the central bank's monetary policy committee, agreed but said they had at least prevented an inflationary explosion in money growth. The M2 measure of money supply was up 18.5 percent in October from a year earlier.

"Without these measures, our money supply could grow 30 percent or 40 percent," Fan told a forum on Monday. "There would be a flood of excess liquidity and the extent of inflation and the property bubble would be unimaginable."

($1 = 7.3840 yuan)

(Reporting by Langi Chiang; Editing by Alan Wheatley)