Friday, April 30, 2004

Alright, what is going on in China? Bankers reported that a central edict has suspended all lending leading up to the May 1st holiday, but the CBRC is officially denying it. In the excellent article, some issues have been clarified, but much remains murky. Was there an order issued? I tend to think that yes, such an order was issued. Although both the PBOC and the CBRC are now shying away from explicit order on such concrete matters as lending, they will issue "circulars," which are theoretically suggestions. However, there are circulars, and then there are "circulars." In this case, it was clearly a centrally enforced circular, especially given that bankers received oral orders directly from the CBRC.

Why? 1. the government wants to stop a mad rush in lending in anticipation to an interest rate hike. However, this means that the government is still divided on how much to raise interest rate and for what categories. If they are in agreement, they can simply raise interest rate right away.
2. They would rather "cut with one-knife" and suspend lending than to raise interest rate. First, cutting with one-knife for a few weeks would cause the bankruptcy of many speculative projects and companies. Second, it would not have the undesirable effect of attracting more inflow of hot money, as raising interest rate would. This tactic, however, would drive up NPL ratio.
3. They want to see how bad things really are before deciding what to do. Using temporary suspension of lending, Wen can see what effect it has on inflation and money supply, but also what effect it has on NPL ratio. If it is effective toward inflation and is not increasing NPL ratio by too much, the government might choose to stick with quantity control over lending. However, if NPL ratio is all of the sudden surging rapidly because of the loan suspension, the SC might decide to bite the bullet and raise interest rate instead of imposing a quantity control on lending. It will not do for NPL ratio to increase by over 5%.
Of course, there is probably some disagreement over what to do within the central leadership. I suspect that Jiang is on the loose monetary side, while Wen is on the tight monetary side. Thus, I think the third scenario is closest to what's happening now.

Chinese Banks Tap
Breaks on Lending

April 30, 2004

SHANGHAI -- China's financial regulators, seeking to clarify a directive that prompted many Chinese commercial banks to stop new lending, said they weren't seeking to ban loans but were urging commercial banks to avoid rushing out new loans before a weeklong May holiday, which begins Saturday.

The statement followed widespread confusion after banking executives in Beijing and Shanghai said Chinese regulators had instructed them, sometimes over the telephone, to suspend new loans for the next two days. On Thursday, several banks said they were carrying out those instructions.

In a statement released Thursday, China's Banking Regulatory Commission said it had issued "guidance" urging commercial banks not to rush out new loans before the holiday to avoid inflating April loan data. Such an action would have caused a sharp rise in April loan data as policy makers are trying to judge whether measures to tighten monetary policy are taking hold.

At the same time, the commission said it had instructed banks to heed tough new lending criteria to cool overheated sectors while continuing to support projects in line with the government's industrial policies, such as improving coal production, power generation and transportation. The commission said it was "untrue" that it had asked banks to halt new loans, according to the statement posted on its Web site.

Despite strict controls on lending to property, steel and cement plants -- and other measures to restrict capital -- China's banks continue to overshoot official lending targets by a wide margin. A commission official said that a flood of new loans at the end of April would send the wrong signal to Chinese leaders that credit-tightening efforts aren't working.

Chinese regulators Wednesday had dismissed as "rumors" reports that the commission had issued a directive to suspend all new lending ahead of the May holiday. But numerous commercial bankers said they had received instructions, in some cases by phone, from the commission to temporarily halt new lending. The banking regulator said the commercial banks misunderstood its directive.

Some banks said Thursday they had begun suspending some loans. "Companies that had made arrangements for loans were suddenly notified they couldn't get them," said a Citic Industrial Bank Shanghai Branch official. "Clients were coming here and calling us, but there was nothing we can do."

China's regulators are casting an increasingly concerned eye at the country's credit boom. Chinese bank loans, as measured by assets at the banks, have swelled nearly 50% in a little more than two years, far faster than China's sizzling economy. Loans outstanding in China's banking system grew 21% in the first quarter from a year earlier and stood at $2.02 trillion at the end of March, one-and-a-half times the level at the end of 2001.

These numbers are the result of Beijing's orders in recent years to state-owned banks to lend, and underscore the government's continued power to dictate to the sector. But "lending growth can't bail you out" of a bad-loan situation, said Keith Irving, an analyst at Merrill Lynch & Co. in Hong Kong.

As officials look for new ways to curb credit, there is talk of more drastic measures. One step is to raise interest rates, which Beijing hasn't done since 1995. Speculation about an imminent rate increase prompted selling of Chinese-government bonds Thursday.

A central-bank official played down the possibility of a near-term increase of borrowing costs. "I think in the short-term, an interest-rate increase is unlikely," said Li Yang, a member of the People's Bank of China Monetary Policy Committee. "It is only market speculation." He said an increase "is a very complicated issue and we must consider it in a prudent way."

Still, analysts expect further credit-tightening measures, that could include even more-stringent lending rules.

Some banking executives say they welcome moves to slow growth. "We support the decision made by the central bank to curb overheated investment," said a Beijing executive at Minsheng Bank. "The economy and banking system should avoid any hard landing."

-- James T. Areddy in Shanghai and Owen Brown in Beijing contributed to this artic

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