Chinese premier attempts to calm excessive lending

Chinese Wen Jiabao (溫家寶) has ordered financial institutions to clamp down on easy lending to overheated industries, warning that inflation could threaten economic growth if investment is not scaled back.

At a key annual meeting of Communist Party and financial officials, Wen said that investment growth last year had been excessive, marking the latest and strongest in a series of high-profile warnings from leading government officials.

The launch of poorly thought out and "copy-cat" projects, which ignited runaway inflation in the early 1990s, posed a serious threat to several industries and regions in the country, Wen was quoted as saying by the China Daily.

Growth credit was not only too fast but threatened to undermine the health of the nation's financial system as the government focuses on key reforms to its ailing state banking sector, he said.

Beijing again trying to overhaul state banks with a huge bail-out package to two of the biggest, China Construction Bank and Bank of China, which could lead to a market listing and greater transparency.

Wen's underscore growing worries among China's top leadership over undisciplined lending and industrial overcapacity that could ignite a major financial crisis for the world's most rapidly developing nation.

On Monday, the China Banking Regulatory Commission launched an investigation into bank loans made to the country's most overheated sectors -- steel, aluminum, cement, real estate and automobiles.

Much the "excessive and unhealthy" lending was the fault of provincial government officials bent on pushing through their pet projects, the China Daily said.

Despite demand from manufacturers and real estate developers that has spurred headline growth, Wen blamed state corporations for not recognizing an already saturated marketplace.

Some lavish spending on urban development programs had also spurred unwanted investment growth, he added.

Last year, China's fixed assets investment jumped 26 percent to 5.5 trillion yuan (US$662 billion), compared to a 16 percent rise in 2002.

This investment binge was driven by a 21 percent jump in loan growth, compared to 16 percent in 2002, and was responsible for 46 percent of last year's 9.1 percent GDP growth.

International have frequently warned of the drastic imbalance in China's GDP-to-investment ratio, warning that such levels are unsustainable and if not reined in could be potentially disastrous.

After years of deflation, China's consumer price index started to climb in the second half of last year, hitting a six-year high of 3.2 percent in December.

Although many economists dismissed the upturn, noting the contribution of imbalances in agricultural production, Wen's speech signals that worries have permeated the highest levels.

China's bank said yesterday it aimed to restrain growth in M2, the broad measure of money supply, to 17 percent this year compared with 19.6 percent last year.

People's Bank of China governor Zhou Xiaochuan (周小春) also said that he wants to see new yuan-denominated loans fall to 2.6 trillion yuan from 2.77 trillion last year.