December 14, 2010 5:46 pm

China looks at keeping bank lending high

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Chinese policymakers are examining bank lending targets for next year that will equal or even exceed their 2010 quota, despite fears about overheating amid the highest inflation in the country in more than two years.

Most analysts had expected a significant reduction from Beijing’s 2010 target of Rmb7,500bn ($1,130bn) in total new loans, especially after inflation hit 5.1 per cent in November and the government promised to tighten monetary policy.

But on Tuesday, a leading Chinese official newspaper reported that the government’s lending quota was likely to be Rmb7,500bn again in 2011.

Officials close to the process stressed that the final quota decision has not been made and the Rmb7,500bn figure is just “one opinion”.

The various regulatory agencies responsible for economic policy are meeting “every day” to discuss how much credit the state-controlled banking sector will be allocated for 2010, officials said.

The range under discussion is between Rmb7,000bn and Rmb8,000bn, with the final quota likely to be at the high end, marking an extension of the credit surge launched in late 2008 to combat the financial crisis. Chinese banks extended twice the volume of loans in 2009 as in 2008.

Despite attempts to rein in loan growth this year, Chinese banks have lent roughly the same amount as they did in 2009, once off-balance sheet lending is taken into consideration.

“The market was expecting a credit quota of between Rmb5,000bn and Rmb7,000bn with Rmb7,000bn as the ceiling as the government tries to reduce liquidity and deal with inflation,” said Dorris Chen, of BNP Paribas. “It now appears that Rmb7,000bn is the floor for next year rather than the ceiling.”

The higher-than-expected quota suggests Chinese leaders are still relatively sanguine about the country’s inflation prospects.

With food, especially vegetables, driving most of the recent price rises, some analysts believe the problem will be short-lived and that inflation may have already peaked.

But analysts say inflation worries are also being overshadowed by concerns that sharply cutting credit could stall growth by leaving many infrastructure and development projects unfunded.

BNP Paribas estimates that local government infrastructure projects, many of them launched as part of Beijing’s stimulus to combat the financial crisis, will require as much as Rmb4,000bn in new loans next year.

Meanwhile, land and property developers will need as much as Rmb1,500bn next year if the country is to avoid creating vast forests of half-built buildings.

China’s banking regulator has also ordered lenders to bring much of the off-balance sheet lending that proliferated this year back onto their books and this will take up at least Rmb1,000bn of next year’s quota, according to BNP Paribas estimates.

A new loan quota of less than Rmb7,000bn would leave very little for the rest of China’s rapidly growing and increasingly credit-hungry economy.

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