Chinese Banks Pull Back On Lending

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hide captionChairman of China's Banking Regulatory Comission Liu Mingkang speaking during the Asian Financial Forum last week.

Mike Clarke/AFP/Getty Images

Following a rush of lending at the start of the year, some Chinese banks have temporarily suspended new lending. Credit Suisse economist Dong Tao told the WSJ (subs req'd) that six Chinese banks he contacted had confirmed they had suspended "new lending" across the country starting Jan. 19.

The Chinese media is reporting that banks issued more than one trillion yuan ($161 billion) in new loans in the first two weeks of the year. While a rush of lending at the start of the year is typical, the Financial Times reports that today Beijing is "worried."

Inflation expectations are rising and a huge overhang of liquidity already exists in the system following a year in which Beijing engineered what some economists have called the greatest easing of monetary and financial conditions in history.

China's banking system is still very much a traditional deposit and lending business and the government-set spread between deposit and lending interest rates still accounts for about 85 per cent of banks' earnings.

That means the banks have few growth options beyond swelling their balance sheets with ever-larger volumes of loans.

Chinese lenders are rushing to make new loans before stricter regulations go into place as the economy recovers. The IMF's World Economic Outlook report released today predicts that China will grow 10 percent this year, compared to just 2.7 percent growth in the U.S.

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