Sinocircle

After China Halts New Loans

After the surprise revelation that record loans were given during the first two weeks of 2010, effective immediately Chinese banks are not giving anymore loans.  Likely this order will be rescinded shortly after the new year festivals end, and hence this policy change is just a jerk on the horse’s bit, a bite at corruption and the bonanza leading up to office holidays for the biggest yearly celebration in China, a few weeks when everyone scrambles for as much money to have as big a party and give as many gifts as possible mid February.  Halting new loans is also likely the government’s knee jerk reaction to expanding money supply, loan default, and inflation issues.   They want to limit the bad suprises comng back from the holidays.  To the effect that when the water goes out, it is easier to see who is swimming naked, this could also be a strategy employed to good effect by the government: a type of stress test with Chinese characteristics, stressing the customer instead of the bank, but showing everyone who is in control.  Financial blogs will reveal if this could become an ominous sign going into the new year, but it certainly won’t lighten the holiday mood for many businesses and consumers.

Whatever the canny reason for halting bank loan issuance, it demonstrates two interesting Chinese characteristics.  One is an example of the direct managerial control the government exhibits over its banks.  No other country stops all banks from giving loans today, effective immediately.  The other interesting aspect is the all or nothing way China often functions – where day-to-day changes in actual on-the-ground policy can be extreme.  Unorthodox finance is to be expected in China, and more importantly, many countries are studying China’s economics, and if the Chinese break the rules of finance, it may well be that they are rewriting them, following other rules, far more intuitive, primitive, and likely to persist as real-politic economic powers continue to lever themselves toward their goals.  For China, having built itself up off a stable base so low in 1970, anything now seems possible to its leaders, so get ready more unprecedented actions.

While discussing banks, isn’t 2010 the year foreign private banks are to be issued licences to do retail business in China?  What would happen were Chinese banks not allowed to give loans while foreign banks could?  What will happen when foreign banks are not issued licences this year?

From today’s WSJ

Last week, China Banking Regulatory Commission Chairman Liu Mingkang said the regulator expects new yuan lending to be around 7.5 trillion yuan this year. That’s down from a record 9.6 trillion yuan in new loans in 2009 but still more than double the 2008 level.

Chinese banks, which traditionally rush out loans at the start of the year, have already issued more than 1 trillion yuan ($146 billion) in new loans in the first two weeks of the year, more than double the monthly average of 400 billion yuan in the second half of last year, according to Chinese media reports, which could not be independently verified.

“In responding to such a credit surge, the People’s Bank of China has launched more aggressive quantitative tightening than we previously have thought,” said Credit Suisse economist Dong Tao.

Mr. Tao said six Chinese banks he contacted had confirmed they had suspended “new lending” across the country starting Jan. 19. He didn’t name the banks.

Article Posted From Dinny McMahon at dinny.mcmahon@wsj.com