Financial Regulatory Forum

EXCLUSIVE – China tells banks to ensure loans are used properly

By Reuters Staff
February 1, 2010

SHANGHAI, Feb 1 (Reuters) – China’s banking regulator has ordered lenders to conduct checks on whether any of their loans have illegally gone into the stock or property markets, a banking source told Reuters on Monday, the latest step in a clampdown on excessive lending and rising asset prices.

Credit found used for improper purposes must be withdrawn within a certain period of time, said the source, who had seen the relevant notice from the regulator. He did not elaborate on the timeframe.

The order from the China Banking Regulatory Commission (CBRC) marks further efforts by Beijing to rein in rampant lending and ensure that credit is being used to generate genuine economic activity and not simply to fuel speculation in stocks and property.

“The CBRC has recently found that some banks have loosened management of their lending practices, some industrial companies have illegally used bank credit to invest in stocks and property, while some individuals have used consumer loans to trade stocks,” said the source.

It is not unusual for the CBRC to issue such orders, though it is unclear how it will actually implement them.

For instance, it leaned on banks to cut back on short-term bill issuance last year after a spike in such credit at the start of the year, and has said in public statements over the past year that loans must be used for real economic purposes such as investment or purchasing property or goods.

Still, the order follows a series of steps over the past weeks to curb credit growth, demonstrating authorities’ seriousness about preventing a flood of credit that could fuel asset price bubbles and rising inflation expectations.

A pair of business surveys released on Monday also showed that cost pressures facing manufacturers continue to rise rapidly.

Banks lent 1.1 trillion yuan ($161 billion) in the first half of January, according to bankers familiar with the central bank; local media reported that the total had reached 1.45 trillion yuan by Jan. 19.

In addition to the central bank increasing required reserves for all banks from Jan. 18, it subsequently raised them further for some lenders that had flouted its guidance to curb lending, sources told Reuters last month.

Those steps are working to some extent, according to data reported on Monday by the Economic Information Daily newspaper. It said new loans for the full month of January reached 1.6 trillion yuan, pointing to a much slower pace of lending in the final 10 days of the month.

In a sign of the potential policy moves ahead, the central bank might increase interest rates once consumer inflation exceeds the one-year benchmark deposit rate of 2.25 percent, Ba Shusong, a prominent government adviser, told Reuters on Monday. Consumer prices rose 1.9 percent in the year to December.

But in an illustration of the uncertainty surrounding Chinese policy at this time, Jiao Jinpu, deputy head of the central bank’s postgraduate school, told the official China Securities Journal that tightening could take the form of stiffer reserve requirements rather than higher interest rates.

See also: SCENARIOS – What’s next for China’s monetary policy, please click here.

(Reporting by Victoria Bi and Jason Subler; Editing by Jacqueline Wong)

((jason.subler@thomsonreuters.com; +86 21 6104 1733; Reuters Messaging: jason.subler.reuters.com@reuters.net)) ((If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com))

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