FocusChina needs to tighten noose on credits in H2 - analysts

09 July 2009 08:15  [Source: ICIS news]

ChinaBy Judith Wang

SHANGHAI (ICIS news)--China needs to tighten its monetary policy in the second half of the year as heavy loans totaling yuan (CNY)7,400bn ($1,083bn) in the first half could spur inflationary pressures while its economy is still weak, analysts said on Thursday.

Also at stake is the banks’ risk profile as the strong loan volumes raise the probability of borrower defaults, economists said.

But the country may refrain from hiking interest rates to achieve this for fear the move would stifle the country's economic recovery, they said.

Based on data from the People's Bank of China, the new loans in the first six months of the year were more than 50% higher than the full-year 2008 volumes, reflecting the government's heavy pump-priming of the economy.

“We could say the cash is flooding the market at the moment. The government must tighten credit to some extent in the second half of this year,” said Bian Xubao, an economist at Shandong-based Qilu Securities.

China could not afford to raise interest rates at this point when the economy has just started to recover after being battered by the slump in external demand, economists said.

China’s economy is recovering. The central bank will not increase lending rates to nip the economy in the bud,” Bian said.

On Thursday, the central bank has issued CNY50bn in one-year bills as part of efforts to siphon off excess cash to pre-empt any inflationary pressure it could create. Too much money floating around could unnecessarily push up prices of goods while consumption is still very weak, economists said.

By attracting the banks' money, these bills would limit the funds available for credit. This finetuning of monetary policy was welcomed by economists.

“Issuing bills is a good choice,” said Bian.

The Chinese authorities need a fine balance between its monetary policy and its growth objectives, economists said. 

The government has kept to its target of hitting an 8% GDP this year. China will release next week its second-quarter GDP growth numbers, which economists have predicted to be at around 8%.

“The economy is just riding on a recovery road, so the government will not tighten the monetary policy at once. But there is no doubt that it will fine-tune [this] by some measures,” said Li Hongrong, an economist at Shenzhen-based Ping An Securities.

PBoC published China's June loan figures a day ahead of schedule, which at CNY1,530bn ($224bn) was the third highest monthly volume recorded this year. The peak so far was CNY1.89 trillion in March, followed by January's CNY1,620bn.

“Lending in June was higher than we expected, but it was the end of high lending,” said Li.

The central bank may continue to issue more bills to recoup cash in the following months, said Qilu Securities’ Bian as he expects the average monthly lending of Chinese banks to fall to around CNY600bn in the second half of the year.

Economists expect total loans this year to hit CNY10,000bn in China, indicating that volumes from July to December would significantly decline from the first half. In 2008, total loans were CNY4,910bn.

($1 = CNY6.83)

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By: Judith Wang
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