Cloudy with a Chance of Torrential Credit

Loan-limiting Orders

In desperation, the central bank convened the aforementioned credit situation analysis meeting on the third Monday in January.

On January 19, the second day of the meeting, multiple commercial bank executives confirmed that some banks had received "loan-limiting orders" from monetary authorities calling for the immediate halt to approvals and issuances of new loans. Banks that had maintained steady lending since last year were not subject to the limits. Additionally, the limits did not apply to loans that had already been approved, which could be issued as normal.

Industry sources say that BOC, with its massive lending, bore the brunt of the "loan-limiting order." A BOC Zhejiang Branch source confirmed that the branch had received orders from the head office to suspend all lending, including note financing. Additionally, Century Weekly received confirmation that ICBC, which was second only to BOC in lending in the first half of the month, had suspended its credit approval system.

Even more substantial is the decision to place a differentiated reserve ratio on the biggest lenders, even if their CAR and provisions are in line with regulatory requirements.

A source close to the central bank said that the central bank had long ago proposed differentiated deposit reserve ratios as a means of controlling credit issuance and had told banks that if their loan rate or scale exceeded the line, their ratios would automatically increase.

Banks slapped with punitive differentiated reserve ratios are possibly those leading lending in the first part of January, such as ICBC, BOC, CEB, CITIC and Huaxia. Informed sources say that the central bank may raise the deposit reserve ratio for one large bank and one joint-stock bank by half a percentage point from the current 16 percent base and watch for results over a period of three months.

Dreams of Balanced Lending 

Monetary authorities may continue using deposit reserve ratio tools. From 2007 to May 2008, in order to curb an overheating economy, authorities adjusted the required deposit reserve ratio up 14 times. But the frequent use of this tool shows its ineffectiveness.

As to the central bank implementing differentiated deposit reserve ratios, an industry insider said, "Raising the reserve ratio leads to minor changes in the amount of the money parking with the central bank and will not weaken the bank's ability to create money. A bank will be able to make loans as long as it has deposits." In addition to this, he believes that bank lending may continue its rapid growth.

"The most effective method is to rely on administrative means to control credit quotas," a commercial banking source proposed in a sardonic tone.