China in fresh curb on bank lending

China is to extend a clampdown on new bank lending into next year because of fears that rising inflation could become unmanageable, according to bankers, officials and economists.

An annual economic policy meeting of top political and economic leaders that wraps up on Wednesday in Beijing is expected to decide to cap the value of new loans that banks can extend in 2008 at the same level as this year.

In the first 10 months of this year, before a crackdown on new loan growth was implemented, domestic and foreign banks in China had extended Rmb3,505bn ($474bn) in new loans.

The move would mean that in percentage terms, new bank loans in China would grow by around 13 per cent next year, down from the 15 per cent allowed in recent years, said Chen Xingdong, chief China economist at BNP Paribas.

Ha Jiming, chief economist for China International Capital Corp, said that would represent “a significant tightening.”

One official confirmed the bank curbs were on the agenda of the three-day meeting, much of which has been devoted to discussions about inflation and whether the economy is overheating.

The central bank and the banking regulator have already told banks they must keep their net new loans at the level they reached at the end of October, limiting them to lending only what they receive in loan repayments until the end of the year.

The government has employed such “window guidance” tactics with state-owned domestic banks in each of the last three years. But bankers say regulators seem more determined to enforce the curbs this year and have for the first time issued the same orders to foreign banks.

“We’re running around and tearing our hair out because of the difficult conversations we have to have with clients who are coming to us for money,” said one foreign banker.

In mid-November, the Financial Times reported that the government had “advised” banks to keep lending under control and not to lend to real estate projects or highly polluting industries.

In the following weeks bankers say they were called in for further meetings with the People’s Bank of China and the China Banking Regulatory Commission and told they must keep their total loan portfolios at October 31 levels or face administrative sanctions, including possibly being forced to buy low-yielding bonds from the central bank.

Bankers complain that the strict controls don’t seem to differentiate between lending for fixed asset investment and lending for working capital, meaning the ability of some companies to pay suppliers and continue operations may be affected.

Banks have also been told to limit mortgage lending because of concerns some of this money is being diverted into the Chinese stock market.