Bank of China (BOC) plans to sell up to 40 billion yuan (US$5.8 billion) in bonds to replenish its capital and meet government standards following a record surge in lending last year amid Beijing’s stimulus measures, a state-run news agency reported.
Regulators have warned some banks that they have fallen below minimum capital requirements after handing out some 9.5 trillion yuan in loans last year. Banks are expected to scale back lending to roughly 7.5 trillion yuan this year.
Beijing hopes cooling the pace of lending will keep its economy growing without creating inflation and overheating. Other countries are counting on that growth and a healthy demand from China for their goods for their own recoveries.
Record bank lending last year to support government spending on infrastructure and other projects under Beijing’s stimulus package has led to fears of asset bubbles and huge bank losses if too many loans sour.
The prospects for a fiscal tightening have increased following the release on Thursday of data showing the world’s third-largest economy expanded by 8.7 percent last year and 10.7 percent in the fourth quarter, analysts said.
The fastest quarterly growth rate in two years and the biggest rise in inflation in 13 months has increased the chances of further tightening measures as Beijing seeks to maintain steady economic growth, analysts said.
“We expect inflation to continue rising throughout this year, with additional tightening steps including rate hikes,” Citigroup economists Ken Peng (彭墾) and Shen Minggao (沈明高) said in a research report.
Beijing has already moved this month to calm growing inflationary pressures and the threat of asset bubbles caused by soaring bank lending, which last year nearly doubled from 2008.
The People’s Bank of China on Thursday raised the interest rate on its benchmark three-month treasury bills for the second time in two weeks in a bid to deter new lending.
It followed an earlier move on its benchmark one-year treasury bills.
Chinese banks have been ordered to increase their capital reserves — effectively limiting the amount of money they can lend out — amid mounting fears over bad debts as consumers go on a spending spree on property and cars.
As economic growth heats up, analysts said they expect policymakers to push reserve ratios even higher and further increase rates on treasury bills before resorting to more aggressive measures such as hiking interest rates.
“We look for a minor acceleration in quantitative tightening through lending restrictions and raising the reserve requirement ratio,” said Credit Suisse research analyst Tao Dong (陶冬).
Interest rates would likely stay on hold until inflation went above three percent or the US Federal Reserve raised its own rates, Tao said.
Raising rates before the US does so may encourage investors to buy the relatively higher-yielding yuan-denominated assets, exacerbating inflation and putting pressure on the yuan to appreciate. China’s consumer price index rose 1.9 percent year-on-year last month and analysts expect full-year inflation to exceed 3 percent this year.
Moody’s Economy.com associate economist Alaistair Chan (陳志雄) said rumors of an imminent interest rate hike were likely to prove unfounded.
“While this is possible, it seems a much more dramatic step than the government is willing to take,” he said.
But Chan said he expected to see further tightening measures.
“These include even higher bill yields, increased bill auctions, higher capital reserve ratios, and public and private discouragement of bank lending,” he said.
“An increase in interest rates is still expected to happen, but mid-2010 at the earliest,” Chan said.
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