BREAKINGVIEWS-China’s tightening still embryonic

January 20, 2010

— The author is a Reuters Breakingviews columnist. The opinions expressed are her own —

By Wei Gu

HONG KONG, Jan 20 (Reuters Breakingviews) – The world is nervous about China putting the brakes on its bubbling financial system. Beijing has this week ordered some banks to slow their lending. Markets did not take it well. But as tightening goes, the moves are pretty limited.

Some 1 trillion yuan ($161 billion) of new loans were already advanced during the first half of January, compared with 1.6 trillion yuan for the first month of 2009. That is well above the pace that the authorities’ 2010 loan limit of 7.5

trillion yuan for the current year implies.

For the banking regulator, timing may be as important as actually curbing lending. Last year, almost half of all new loans were given out during the first three months, creating wide fluctuations in the economy. The authorities want 2010 to be smoother. The increased reserve requirements for some lenders

will expire after three months, letting them lend more later in

the year.

Such considerations may help explain why the market response, though negative, was relatively contained. Locally, the Shanghai stock market fell 3 percent, having risen for four days. It is hard to read much into that sort of change in this volatile index.

But investors should expect China to come up with more tightening measures in the coming months. The authorities are rightly worried that the renewed exuberance in the economy is storing up dangerous inflationary pressures. Policymakers are likely to take a lot of baby steps along the tightening road.

They risk failing to keep up with the financial excess, so that more aggressive measures will be required further out. Markets will continue to be jittery about over- and under-tightening for a while yet.


— Chinese banking authorities have instructed some major banks to curb their lending over the rest of this month, official media and banking sources said, sending the Shanghai index down almost 3 percent.

— The central bank told some lenders, including Citic Bank and Everbright Bank, to increase their reserve requirement ratio by half a percentage point for three months, banking sources told Reuters.

— Chinese banks lent 1.1 trillion yuan ($161 billion) in the first half of January, according to Reuters. Earlier in January, China’s central bank raised bank reserve requirements for the first time since June 2008.

(Editing by John Foley and David Evans)

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