MercoPress. South Atlantic News Agency

Beijing drastic decision to cap excessive lending shakes world markets

Chinese authorities fear speculation bubbles and inflation

Asian markets suffered their biggest one-day losses in three months, as fears over planned limits on lending by banks in China unnerved investors already jumpy at proposed curbs on United States banks.

Investors scrambled for cover on fears that Beijing might choke booming economic growth in its zeal to clamp down on rampant lending. Mainland lenders splurged 1.45 trillion Yuan in new loans in the first 19 days of the year alone.

The 1.45 trillion Yuan is equivalent to 19% of China’s Banking Regulatory Commission, CBRC full-year target. In the ensuing rout, Taiwan dived 3.48% while Shanghai lost 2.42% and Hong Kong fell 2.38%. In the rest of the world and in commodities markets the reaction was one of caution.

China is asking its lenders to set aside more reserves and lend out less money, in a move widely seen as an effort to cool its economy which grew at a blistering 10.7% in the fourth quarter of last year. But while Beijing worries about economic overheating, investors around the world fear it could be a blow to the still weak global recovery.

Credit Suisse Group AG said in a note that a countrywide lending halt that started January 19 may trigger a “meaningful” decline in manufacturing.

“This round of quantitative tightening seems to be more serious than we thought after Beijing was shocked by the lending figures in the first two weeks of this year,” Credit Suisse economist Dong Tao wrote in the report.

“We would not be surprised if banks imposed a monthly lending quota, as against a quarterly quota in 2008.”

The central bank has also moved to curb credit, ordering banks on Jan. 12 to raise the ratio of deposits they hold in reserve, limiting the amount of cash available for lending. The People’s Bank of China has also instructed lenders including China Citi Bank Corp. to boost their reserve ratios by an additional 0.5 percentage point, Reuters reported last week.

CBRC said last week lenders that failed to meet any of more than a dozen regulatory requirements have been told to limit lending. The watchdog said not all banks have been asked to rein in credit.

China will cap new credit at 7.5 trillion Yuan this year, down from a record 9.59 trillion Yuan last year, according to CBRC Chairman Liu Mingkang.