China bank lending curbs ripple through economy

By Langi Chiang - Analysis

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.

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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.