FocusChina on second year of lending cuts, borrowing costs to rise

20 January 2011 03:09  [Source: ICIS news]

By Judith Wang

SINGAPORE (ICIS)--China will likely continue raising banks’ reserve requirements and hiking interest rates this year, in line with its aim to further restrict lending that may be fuelling inflation, analysts said on Thursday.

The country is targeting a 10% cut in loans to yuan (CNY) 7,200bn-7,500bn ($1,094bn-1,140bn) in 2011 from the CNY 7,950bn released in 2010, according to state-owned newspaper China Securities Journal.

The Chinese authorities would be reining in credit for the second consecutive year, which could stall planned expansions of domestic small-scale petrochemical players, analysts said.

“The lending reduction will no doubt hurt the key economic expansion driver, [which] includes investments in the chemical sector,” said Sun Fanghong, analyst at brokerage Ping An Securities in Shenzhen.

In 2010, China had successfully expunged new loans by 17% following their unprecedented surge in 2009 to CNY9,590bn, through a series of monetary, as well as non-monetary measures directed at the property sector, based on data from the People’s Bank of China (PBoC), the country’s central bank.

Too much liquidity floating in the country’s financial system after its lending binge led consumer prices to spiral upwards this year, pushing inflation to a 28-month high in November at 5.1%.

To ensure release of new loans would be capped, and money in circulation put under control, Chinese authorities were expected to nudge up both the banks’ reserve requirement, as well as the central bank’s key policy rates a few more times, analysts said.

The central bank took the first step towards this end this month, when the banks’ reserve requirement would increase by 50 basis points effective 20 January.

The PBoC raised the banks’ reserve requirement ratio, or the portion of deposits that must be placed with the central bank, six times in 2009, while it waited until the fourth quarter last year to jack up its policy rates, careful to increase borrowing costs while the global economic recovery remained fragile.

($1 = CNY6.58)

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By: Judith Wang
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