Wed, Jan 19, 2011 - Page 10 News List

People’s Bank of China cuts loan target

TAKING CHARGE:Unrestrained lending helped lift inflation to a 28-month high of 5.1% in November, and despite cooling since, analysts believe the respite will be only temporary


China’s central bank has reportedly cut its lending target for banks this year by 10 percent from last year in a bid to slow down free-wheeling lending and tame inflation.

Even though there are widespread expectations that China will not publicly issue an official lending target for the year after such targets were ignored by banks last year, many analysts believe the central bank will still restrict lending from behind the scenes.

China’s official Securities -Journal reported yesterday that the central bank has reduced the target for bank loans by as much as 10 percent from the value of loans handed out last year.

That means banks can lend between 7.2 trillion and 7.5 trillion yuan (about US$1.1 trillion) this year, it said.

However, data which showed China drew a record amount of foreign investment last month and for all of last year underscored the difficulties it faces in draining its economy of an abundance of money that is helping to fuel inflation.

If the latest foreign investment data is anything to go by, the central bank has reason to keep up its anti-inflation fight in the world’s second-biggest economy.

China drew a record US$105.7 billion in foreign direct investment last year, with inflows rising over 17 percent from the previous year as global firms trooped into the country to tap its vast and growing market.

“The sharp increase in foreign direct investment means the central bank must spend more money to absorb foreign exchange inflows,” said Wang Han, an economist at advisory firm CEMB in Shanghai.

“That may add more upward pressure to the already excessive liquidity in the banking system,” he said.

Foreign investment is one of the sources of the abundant cash pouring into China, alongside booming exports and speculative money inflows.

Quoting an unidentified executive from a Chinese state bank, the newspaper said many Chinese had asked the People’s Bank of China to keep this year’s lending target on par with that of last year.

“But the central bank has basically cut every bank’s proposed loan size by 10 percent,” the bank official was quoted as saying.

Banks lent 7.95 trillion yuan last year, overshooting Beijing’s 7.5 trillion yuan target and highlighting the need for more decisive policy tightening.

The newspaper said the central bank also asked banks not to lend more than 12 percent of their full-year targets this month.

The Securities Journal said regulators considered total lending of 900 billion yuan to be reasonable for this month, but will not tolerate loans exceeding 1.2 trillion yuan.

The regulator may penalize banks that exceed their loan ceilings for this month by setting specific reserve ratios for those banks or asking them to buy more central bank notes.

Unrestrained lending helped to lift annual inflation to a 28-month high of 5.1 percent in November. Although inflation may have cooled slightly last month as food prices stabilized, a Reuters poll of economists indicated that the respite is seen to be temporary.

Data on inflation last month and fourth-quarter economic growth will be released tomorrow.

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