Post by jeffolie on Nov 18, 2007 18:46:36 GMT -6
China Curbs Bank Loans To Cool Investment Fever
Lending Freeze Marks Bold Step for Beijing;
A Chill For Stocks?
By JAMES T. AREDDY
November 19, 2007
SHANGHAI -- Chinese authorities are slamming the brakes on bank lending, in one of their boldest attempts yet to curb the runaway investment that is threatening what is soon to be the world's third-largest economy.
In recent weeks, regulators in China have quietly ordered commercial banks to freeze lending through the end of this year, according to bankers in several cities. These bankers say that to comply, they are canceling loans and credit lines with businesses and individuals.
A China Banking Regulatory Commission official in Shanghai confirmed that local and Chinese subsidiaries of foreign banks have been requested to ensure that loans outstanding at year end don't exceed the levels on Oct. 31. The official described it as "guidance aimed at supporting the macrocontrol measures being implemented."
The blunt policy marks one of China's more desperate attempts yet to choke the feverish investment that is putting the world's fastest growing major economy at risk of overheating.
The most seemingly natural step for Beijing would be to raise interest rates, but that could lift the value of its currency, the yuan, to levels that could get uncomfortable for exporters. China's across-the-board lending freeze illustrates how recent problems in the U.S. economy may be complicating Beijing's policy making. Lower rates in the U.S. give Beijing less room to push up its rates without having a knock-on impact.
Bankers say they will honor the edict, partly because it comes with threats of financial penalties for noncompliance. "Which commercial bank would dare not obey this?" says Liu Haibin, chairman of the supervisory committee of Shanghai Pudong Development Bank Co.
A temporary halt in lending could chill important Chinese constituencies, including a stock market that, while off its highs, remains almost double the level of late 2006 and has emerged as a key indicator of investor sentiment.
One of the biggest signs of China's frothy economy this year has been its stock market, though the lending measure doesn't appear directly related to concerns it has turned into a speculative bubble. Still, a drop in lending could weaken earnings of key companies listed on the stock market, including banks themselves, and otherwise leave less cash in the financial system that might flow into the market.
In recent weeks, stocks have tumbled 15% or so from record highs on concern China's central bank would take steps to cool the economy, such as lifting interest rates. China's benchmark one-year lending rate is 7.02%.
Less lending may rein in China's resurgent housing market or hurt consumer confidence. Some companies operating in China, particularly smaller enterprises, may be squeezed to find basic working capital to pay staff or buy materials at year end, bankers say.
"If loan growth were to stop that would seriously disrupt investment plans and would introduce a high degree of uncertainty regarding financing," says Stephen Green, an economist at Standard Chartered Bank in Shanghai.
A lending cutoff also appears to conflict with the market-oriented philosophy Chinese officials have adopted in recent years.
But despite repeated rate increases, including four this year, economic data continue to point to risks that haphazard investment could make the economy spin out of control and possibly lead to hyperinflation or a spate of bad loans. It has been three years since Premier Wen Jiabao pledged to deal with "severe" problems associated with rampant credit growth, which prompted the central bank to begin raising interest rates.
Growth in gross domestic product, at 11.5% in the first nine months of this year, is on pace for the fastest expansion since the blowout years in the early 1990s. Soaring food prices and rising fuel charges are sowing concerns about consumer-price inflation, which in October stood at a decade high 6.5%, and are seeding social discontent. Just last week, the government said fixed-asset investment in factories and property expanded nearly 27% in the first 10 months of this year from the like period last year, one of the highest rates in recent years.
It isn't easy to quantify whether a pause in bank lending so late in the year might dent China's economy. Several bankers said the fourth quarter is generally quiet for lending anyway and that many banks have already met or even exceeded year-end lending targets. In late 2005 and 2006, regulators backed up rate increases by jawboning bankers to slow lending in the fourth quarter -- but bankers say the impact was a snapback in lending in the first quarter of the following year.
Yet, even in China, a blanket edict to stop loan growth remains rare.
A Bank of China Ltd. official in Suzhou said over the weekend his branch is pushing big corporate loans into next year, while an official of the same bank in central Henan Province said the policy amounts to applying existing lending controls on power producers and property developers over the full customer base.
Individuals may be less affected than businesses since personal mortgages are relatively small compared with corporate working-capital loans. But at least one property agency in Shanghai is advising clients to delay mortgage applications until January, while a China Construction Bank Corp. official in Shanghai said he is for now rejecting loans for everyone but established clients.
Instead of trying to target lending levels, economists say China could try to damp credit expansion by pushing up interest rates and letting the yuan appreciate against the U.S. dollar, since both adjustments would make borrowers and lenders think twice before committing to projects. U.S. officials, including Treasury Secretary Henry Paulson, continually deliver such a message, saying a more market-oriented financial system is in Beijing's own interests.
But after raising interest rates four times so far this year, the People's Bank of China appeared to question the trend when the U.S. Federal Reserve cut rates in September to offset turmoil in the subprime-mortgage market. Beijing's concern about the stability of the yuan may be the reason, since higher interest rates tend to attract more depositors, an unwelcome scenario for Chinese policy makers keen to minimize enthusiasm for the yuan. A stronger yuan could hurt exporters by making some goods more expensive for buyers paying in dollars or euros.
In fact, Beijing had been tolerating moderate strengthening of the yuan for much of this year, and it has gained about 10% since a revaluation in mid-2005. But bankers say that in recent weeks authorities have nudged large Chinese banks to buy the U.S. currency and sell yuan, transactions that pushed the yuan down 0.2% last week in Shanghai trading.
The order on loans may have a particularly disruptive effect on foreign banks with incorporated subsidiaries in China. Foreign bankers occupy only a corner of China's financial system and they say they are eager to remain on good terms with regulators. Foreign banks in the key Shanghai market -- including Britain's HSBC Holdings PLC, New York-based Citigroup Inc., Standard Chartered PLC of the U.K. and Hong Kong's Bank of East Asia Ltd. -- controlled 6.2% of industry deposits at the end of September and more than 16% of loans outstanding, according to official figures.
Since foreign banks have fewer deposits than their more entrenched Chinese counterparts and regulators are already pushing them to keep loans outstanding at 75% of deposits, they have very little financial flexibility. Their earnings could also take a hit if they need to get compliant with rules by borrowing in local money markets or selling loans.
Beijing has a long history of dictating policy to banks, which until recently were all state-owned institutions. Regulators have pushed banks to address bad loans held over from government-ordered "policy" lending in the 1990s. Since 2004, authorities have leaned on bankers to curtail lending to particular industries deemed to be squandering investment, including aluminum smelters and small property developers, to avoid another bout of rising nonperforming loans.
The latest lending directive is a reminder of April 2004, when the China Banking Regulatory Commission said it offered "guidance" to banks they slow new loan approvals. It quickly backed off when economists howled that the government should treat banks like commercial enterprises, and instead, authorities lifted interest rates for the first time in nine years.
How much lasting impact the latest loan measure may have could depend on whether it is extended in some form in January, bankers said.
online.wsj.com/article/SB119542008187297217.html?mod=MKTW
Lending Freeze Marks Bold Step for Beijing;
A Chill For Stocks?
By JAMES T. AREDDY
November 19, 2007
SHANGHAI -- Chinese authorities are slamming the brakes on bank lending, in one of their boldest attempts yet to curb the runaway investment that is threatening what is soon to be the world's third-largest economy.
In recent weeks, regulators in China have quietly ordered commercial banks to freeze lending through the end of this year, according to bankers in several cities. These bankers say that to comply, they are canceling loans and credit lines with businesses and individuals.
A China Banking Regulatory Commission official in Shanghai confirmed that local and Chinese subsidiaries of foreign banks have been requested to ensure that loans outstanding at year end don't exceed the levels on Oct. 31. The official described it as "guidance aimed at supporting the macrocontrol measures being implemented."
The blunt policy marks one of China's more desperate attempts yet to choke the feverish investment that is putting the world's fastest growing major economy at risk of overheating.
The most seemingly natural step for Beijing would be to raise interest rates, but that could lift the value of its currency, the yuan, to levels that could get uncomfortable for exporters. China's across-the-board lending freeze illustrates how recent problems in the U.S. economy may be complicating Beijing's policy making. Lower rates in the U.S. give Beijing less room to push up its rates without having a knock-on impact.
Bankers say they will honor the edict, partly because it comes with threats of financial penalties for noncompliance. "Which commercial bank would dare not obey this?" says Liu Haibin, chairman of the supervisory committee of Shanghai Pudong Development Bank Co.
A temporary halt in lending could chill important Chinese constituencies, including a stock market that, while off its highs, remains almost double the level of late 2006 and has emerged as a key indicator of investor sentiment.
One of the biggest signs of China's frothy economy this year has been its stock market, though the lending measure doesn't appear directly related to concerns it has turned into a speculative bubble. Still, a drop in lending could weaken earnings of key companies listed on the stock market, including banks themselves, and otherwise leave less cash in the financial system that might flow into the market.
In recent weeks, stocks have tumbled 15% or so from record highs on concern China's central bank would take steps to cool the economy, such as lifting interest rates. China's benchmark one-year lending rate is 7.02%.
Less lending may rein in China's resurgent housing market or hurt consumer confidence. Some companies operating in China, particularly smaller enterprises, may be squeezed to find basic working capital to pay staff or buy materials at year end, bankers say.
"If loan growth were to stop that would seriously disrupt investment plans and would introduce a high degree of uncertainty regarding financing," says Stephen Green, an economist at Standard Chartered Bank in Shanghai.
A lending cutoff also appears to conflict with the market-oriented philosophy Chinese officials have adopted in recent years.
But despite repeated rate increases, including four this year, economic data continue to point to risks that haphazard investment could make the economy spin out of control and possibly lead to hyperinflation or a spate of bad loans. It has been three years since Premier Wen Jiabao pledged to deal with "severe" problems associated with rampant credit growth, which prompted the central bank to begin raising interest rates.
Growth in gross domestic product, at 11.5% in the first nine months of this year, is on pace for the fastest expansion since the blowout years in the early 1990s. Soaring food prices and rising fuel charges are sowing concerns about consumer-price inflation, which in October stood at a decade high 6.5%, and are seeding social discontent. Just last week, the government said fixed-asset investment in factories and property expanded nearly 27% in the first 10 months of this year from the like period last year, one of the highest rates in recent years.
It isn't easy to quantify whether a pause in bank lending so late in the year might dent China's economy. Several bankers said the fourth quarter is generally quiet for lending anyway and that many banks have already met or even exceeded year-end lending targets. In late 2005 and 2006, regulators backed up rate increases by jawboning bankers to slow lending in the fourth quarter -- but bankers say the impact was a snapback in lending in the first quarter of the following year.
Yet, even in China, a blanket edict to stop loan growth remains rare.
A Bank of China Ltd. official in Suzhou said over the weekend his branch is pushing big corporate loans into next year, while an official of the same bank in central Henan Province said the policy amounts to applying existing lending controls on power producers and property developers over the full customer base.
Individuals may be less affected than businesses since personal mortgages are relatively small compared with corporate working-capital loans. But at least one property agency in Shanghai is advising clients to delay mortgage applications until January, while a China Construction Bank Corp. official in Shanghai said he is for now rejecting loans for everyone but established clients.
Instead of trying to target lending levels, economists say China could try to damp credit expansion by pushing up interest rates and letting the yuan appreciate against the U.S. dollar, since both adjustments would make borrowers and lenders think twice before committing to projects. U.S. officials, including Treasury Secretary Henry Paulson, continually deliver such a message, saying a more market-oriented financial system is in Beijing's own interests.
But after raising interest rates four times so far this year, the People's Bank of China appeared to question the trend when the U.S. Federal Reserve cut rates in September to offset turmoil in the subprime-mortgage market. Beijing's concern about the stability of the yuan may be the reason, since higher interest rates tend to attract more depositors, an unwelcome scenario for Chinese policy makers keen to minimize enthusiasm for the yuan. A stronger yuan could hurt exporters by making some goods more expensive for buyers paying in dollars or euros.
In fact, Beijing had been tolerating moderate strengthening of the yuan for much of this year, and it has gained about 10% since a revaluation in mid-2005. But bankers say that in recent weeks authorities have nudged large Chinese banks to buy the U.S. currency and sell yuan, transactions that pushed the yuan down 0.2% last week in Shanghai trading.
The order on loans may have a particularly disruptive effect on foreign banks with incorporated subsidiaries in China. Foreign bankers occupy only a corner of China's financial system and they say they are eager to remain on good terms with regulators. Foreign banks in the key Shanghai market -- including Britain's HSBC Holdings PLC, New York-based Citigroup Inc., Standard Chartered PLC of the U.K. and Hong Kong's Bank of East Asia Ltd. -- controlled 6.2% of industry deposits at the end of September and more than 16% of loans outstanding, according to official figures.
Since foreign banks have fewer deposits than their more entrenched Chinese counterparts and regulators are already pushing them to keep loans outstanding at 75% of deposits, they have very little financial flexibility. Their earnings could also take a hit if they need to get compliant with rules by borrowing in local money markets or selling loans.
Beijing has a long history of dictating policy to banks, which until recently were all state-owned institutions. Regulators have pushed banks to address bad loans held over from government-ordered "policy" lending in the 1990s. Since 2004, authorities have leaned on bankers to curtail lending to particular industries deemed to be squandering investment, including aluminum smelters and small property developers, to avoid another bout of rising nonperforming loans.
The latest lending directive is a reminder of April 2004, when the China Banking Regulatory Commission said it offered "guidance" to banks they slow new loan approvals. It quickly backed off when economists howled that the government should treat banks like commercial enterprises, and instead, authorities lifted interest rates for the first time in nine years.
How much lasting impact the latest loan measure may have could depend on whether it is extended in some form in January, bankers said.
online.wsj.com/article/SB119542008187297217.html?mod=MKTW