Cloudy with a Chance of Torrential Credit

At 3 p.m. on January 18, the monetary policy department of China's central bank convened an emergency meeting of some commercial bank executives to discuss the lending situation in the first two weeks of the year.

The hour-and-a-half meeting was unusual. According to participants, some banks with excessive lending were ordered to halt lending that week.

Even more severe than the "stop order" were punitive, differentiated reserve ratio policies. While no list was announced, participants told Century Weekly that it would be hard for Bank of China, CITIC Bank and other excessive lenders to circumvent the order, which would add half a percentage point to their 16 percent deposit reserve ratio.

Previously, the China Banking Regulatory Commission (CBRC) had promoted dynamic capital regulation, tweaking capital adequacy ratio (CAR) levels. If banks could not comply with CAR requirements, they would face lending restrictions. Introducing differentiated reserve requirements, on the other hand, only takes into account whether banks are lending according to their own year-beginning plans. "This is like being squeezed by two hands at the same time. Space for issuing new credit is being compressed," an insider at a large Chinese bank told Century Weekly.

The reason for the regulatory heavy handedness is that by January 15, financial institutions had issued 110 billion yuan of new credit. If nothing were done, the Central Economic Work Meeting estimated that banks would easily exceed the government's target of 7.5 trillion yuan of new lending in 2010.

Sources close to the central bank say that the State Council's dissatisfaction with loan growth mainly stems from its large size, uneven pace and irrational structure. "The State Council is looking at credit numbers daily," the source said.

Many observers say that the central bank's supply-side measures are of limited use because the current credit growth is demand-driven. "Without raising interest rates, they will have no control over lending. But who is willing to rashly raise interest rates?" said a banking industry source. He estimates that the central bank will continue nudging the reserve ratio up in 2010. "But history shows that this will have a limited effect."

As of January 19, data obtained by Century Weekly showed that new loans in the banking sector had reached 1.45 trillion yuan. This means that despite orders from monetary regulatory authorities and at least two banks stopping loan approvals, the Chinese banking industry had issued over 300 billion yuan of new loans in only two days.