Fri, Jan 27, 2017 - Page 10 News List

PBOC orders banks to curb new loans

ALTERNATIVE FUNDING:The campaign to cut high debt levels also aims to shrink the US$3 trillion shadow banking sector, which has driven debt growth in China

Bloomberg

The People’s Bank of China (PBOC) has ordered the nation’s lenders to strictly control new loans in the first quarter of this year, people familiar with the matter said, in another move to curb excess leverage in the financial system.

The new guidance from the central bank puts a particular emphasis on mortgage lending, the people said, as authorities grapple to contain runaway property prices.

While the central bank regularly seeks to guide banks’ credit decisions, this time it might also make errant lenders pay more for deposit insurance, one of the people said.

The central bank declined to comment.

Policymakers are trying to strike a balance between avoiding excess credit that fuels asset bubbles and keeping enough funding in the financial system to meet the seasonal surge in demand for credit ahead of the start of the Lunar New Year holiday this week.

“This is a continuation of the tightening trend we’ve seen since the second half of last year and extends from shadow banking to on-balance sheet loans,” said Wei Hou (侯煒), a Hong Kong-based analyst at Sanford C. Bernstein & Co.

The central bank might punish banks that do not comply with the new lending rules by lowering interest rates on reserves they are required to deposit with the central bank, said the people, who asked not to be identified as the discussions are private.

The central bank might also punish errant lenders by making them pay more for deposit insurance, one of the people said.

The new instructions included a request for banks to keep any increase in new mortgage lending in the first quarter below the increase seen in the fourth quarter of last year, the people said, adding that the growth rate of total outstanding mortgages should also not exceed the fourth quarter rate.

Chinese banks doled out a record 12.65 trillion yuan (US$1.84 trillion) of new loans last year, with many tending to front-load their lending in the first quarter of the year so they could record the interest income earlier. Of the total new loans, 36 percent were given out in the first quarter of last year.

In another sign of the effort to curb risks, the central bank on Tuesday unexpectedly increased the interest rates on medium-term loans that it uses to manage liquidity.

Earlier, the central bank said it would include wealth management products held off bank balance sheets in its macro prudential assessment framework for gauging risk to the financial system starting in the first quarter.

As well as setting a limit on new mortgages, the central bank told banks to keep other loans under control, the people said.

Bank of Communications Co (交通銀行) estimates that China’s new loans could reach 13.5 trillion yuan this year, which would be a new record.

China’s campaign to cut high debt levels in its economy is also aiming this year to shrink the US$3 trillion shadow banking sector, which could drain a critical source of income for the country’s banks and of funding for its fragile bond market.

Shadow banking, a term for financial agents that perform bank-like activity, but are not regulated as banks, has boomed in China as a way of circumventing government’s tight controls on lending.

It has been a key driver of the breakneck growth in debt in the economy, which UBS Group AG said rose to 277 percent of GDP from 254 percent last year, and is now a target as Beijing tries to reduce that figure before it destabilizes the economy.

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