China tells banks to curb lending: sources

BEIJING (Reuters) - China has ordered banks to limit their lending until the end of the year as part of efforts to keep investment under control and prevent the world's fourth-largest economy from overheating, sources said on Monday.

The authorities routinely clamp down on lending in the final quarter, but banking sources say Beijing has intensified its efforts this year.

Banking and official sources told Reuters that the central bank and banking regulator have been pressing lenders to keep growth in the volume of new loans for all of 2007 within an official 15 percent guideline, forcing some of them to curb lending sharply in the final months of the year.

However, the sources said the instructions, known as "window guidance", did not amount to a freeze on net new lending.

The Wall Street Journal on Monday cited banking and regulatory sources as saying that banks were being required to ensure that their outstanding loans at the end of the year did not exceed the level as of October 31.

An official at the China Banking Regulatory Commission (CBRC) denied that the agency had laid out such a specific target.

"No, no. We only require the banks to control lending reasonably," Lai Xiaomin, a spokesman for the CBRC, said of the newspaper's report. "We have not set fixed quotas for them."

A source at one major bank said the demand to rein in lending would not have much of an impact on its operations as it had not exceeded the guidelines set out at the start of the year.

"Such restrictions are mostly targeting smaller banks," a separate source said.

Frank Gong, chief China economist with JPMorgan in Hong Kong, said that the People's Bank of China (PBOC) did not have the power to set a numerical limit on banks' lending, especially as most of them were no longer completely state-owned.

"Yes, indeed, the PBOC would set guidance in terms of the total quota of lending for banks each year. But the guidance is not binding at all," Gong said in an e-mailed note.

Hong Liang, Goldman Sachs's chief China economist, struck a different note. She said falling property sales and a softening in some industrial commodity prices suggested that the tightening measures had already become more binding at the margin.

With inflation likely to accelerate again in November, the credit controls are likely to be fully enforced this month as well and the "collateral damage" will become more visible, she said in a note to clients.

"In our view, the construction sector tends to be hit the hardest by policy-engineered credit controls, and commodity and property demand will likely be the areas first to see strains from the credit tightening," Hong wrote.

Banks issued 136.1 billion yuan ($18.3 billion) in new domestic-currency loans in October, a sharp drop from 283.5 billion yuan in September and 302.9 billion yuan in August.

But it was still the biggest figure for the month of October since at least 1999, the last year for which figures are available.

In the first 10 months, banks extended 3.5 trillion yuan in new loans, compared with 3.18 trillion yuan in all of last year.

($1=7.4257 yuan)

(Reporting by Shen Yan, Zhu Li and Zhou Xin; Writing by Jason Subler; Editing by Ken Wills and Alan Raybould)