July 12, 2011

Chinese Lending Gains Momentum

Further tightening, interest-rate hike expected as inflation threatens

Bank lending in China continued to grow despite efforts by the central bank to keep a lid on liquidity and potential inflation threats. Foreign exchange reserves reached $3.2 trillion, a new record, by Q2's end; this caused some analysts to predict that Beijing would further raise interest rates and tighten the market further in an effort to prevent inflation from causing unrest.

Reuters reported that, according to the central bank, China's banks lent nearly 634 billion yuan ($98 billion) in new yuan loans in June. That outpaced the expectation of 590 billion yuan and came in considerably above 552 billion yuan in May, despite Beijing's efforts to slow the pace of lending.

Paul Tang, chief economist at Bank of East Asia in Hong Kong, was quoted saying, "... The People's Bank of China will continue to keep a close watch on credit growth. The government will need to keep up its tightening stance in the second half of the year."

Tightening or not, the appetite for borrowing is still strong in China. The boom was kicked off by a wave of government spending in 2009 that launched a veritable borrowing binge. While officially it is working, with the first half of 2011 seeing approximately 11% fewer loans than the first half of 2010, that does not account for loans banks are hiding off their balance sheets.

Inflation is still a threat, with food, consumer goods and property prices driving June's total up to 6.4%. Some analysts cite the country's surging cash reserves as the chief driver of inflation.

David Cohen, an economist at Action Economics in Singapore, was quoted saying, "The increase in foreign exchange reserves does complicate the monetary policy. That's why we've seen the repeated raising in the reserve retirements as a way to absorb the increased liquidity." He expects another interest rate increase, along with further hikes in the bank's reserve ratios.

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