UPDATE 1-China credit pick-up warrants new tightening-papers

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BEIJING, March 15 (Reuters) - China's rapid loan growth warrants a new round of tightening steps to prevent the economy from overheating, the official Financial News said in a front-page editorial on Thursday.

The semi-official China Business News separately said the central bank warned bankers at a meeting this week that it might raise their reserve requirements and issue bills at punitively low rates to banks that are expanding their loan books too fast.

Banks extended 981.4 billion yuan of loans in the first two months, about 30 percent of all yuan credit offered last year.

Moreover, medium- and long-term loans grew by 22.3 percent in February over a year earlier, the fastest pace since 2004, the central bank-run Financial News said.

It said many economic indicators for February were feverishly high, indicating that past belt-tightening had not fundamentally solved the problem of excess banking liquidity.

"In order to avoid a rebound in fixed-asset investment and to reduce potential risks in the financial system, the central bank might need to introduce further tightening measures to mop up liquidity and contain credit expansion," the paper said.

It said the policies open to the central bank included further increases in banks' reserve requirements; instructions, or "window guidance", to banks to lend less; interest rate increases; and more central bank bill issuance to steadily push up market rates.

The China Business News, citing participants at the meeting, said the central bank did not specifically mention the possibility of a fresh interest rate increase but acknowledged that inflationary pressure was quite strong due to climbing international prices for grain and resources.

"The central bank official said that, although banks' required reserve ratio has been adjusted many times, it does not mean it would not be raised again," a banking source told the paper.

The People's Bank of China has raised reserve requirements five times since June and increased benchmark interest rates twice since last April.

The central bank official was reported as saying the PBOC would also sell penalty-rate bills to small and medium banks if they keep lending aggressively. Currently only big banks are subject to such "punishment", the source said.

All eyes are on Friday's fixed-asset investment data for signs that fast loan growth is fuelling a new capital spending boom.

But the Financial News cited a banking source as saying that urban fixed-asset investment in the first two months might have grown by less than 24 percent from a year earlier.

That's because of the time lag between loan disbursement and actual investment as well as the possibility that some consumer loans are being channelled into the stock market, the paper said.

Economists are expecting annual fixed-asset investment growth for January and February of 25 percent after full-year growth in 2006 of 24.5 percent.

The main source of China's ample liquidity is its bulging trade surplus, which surged to $23.76 billion last month, falling just shy of the record $23.83 billion set last October.