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Surging new loans may prompt credit tightening

By Zhang Yi (Xinhua)

08:50, April 12, 2013

SHANGHAI, April 11 (Xinhua) -- China's new yuan loans bettered estimates and jumped to 1.06 trillion yuan (171 billion U.S. dollars) in March, and as possible hot money flows in, analysts have predicted the country's central bank will soon tighten credit.

New local-currency lending stood at 2.76 trillion yuan in the first quarter of 2013, up 294.9 billion yuan year on year, the People's Bank of China said on Thursday.

Meanwhile, China's funds outstanding for foreign exchange have been climbing for three consecutive months, piling pressure on the central bank to draw back liquidity.

"The central bank will definitely tighten credit. China's monetary policy has been turning from loosening to neutral," Liu Ligang, chief economist with Greater China at ANZ Bank, told Xinhua.

"The regulators may use window guidance in the next one or two months. An interest rate cut is very likely in the second half this year," Liu added.

The broad measure of money supply (M2) rose 15.7 percent by the end of March, exceeding the 13-percent goal set by the Chinese government last month.

"Should the central bank be serious about its target, we would expect some form of tightening to bring down the loan growth," according to a note issued by Barclays on Thursday.

China's central bank has been recouping funds in its open-market operations. This week, its net drained 17 billion yuan by selling repos.

Aggregate financing, which includes non-bank lending, reached 6.16 trillion yuan in the first quarter of 2013, up 2.27 trillion yuan on last year.

Liu said the Chinese economy, boosted by previous monetary easing, will continue picking up in the next quarter.

However, the moderate inflation that China now enjoys is to end soon. China's Consumer Price Index (CPI) grew 2.1 percent in March since food price inflation dropped.

But as China's economy rebounds and the government deepens energy price reforms, Nomura financial services group predicted China's CPI would rise in the near term and climb above 3.5 percent year on year in the third quarter.

Inflows of foreign capital may also prompt the central bank to dampen the credit. Quantitative easing in the United States and inflationary policies in Japan injected huge funds into the global market while holding down yields on investment in developed economies. Therefore, hot money is rushing to emerging countries, especially to China where the local currency remains strong.

In February, Chinese financial institutions purchased 295.4 billion yuan of foreign exchanges after buying a record high of 683.7 billion yuan worth of foreign currencies in January.

"Since it's hard to control foreign capital inflows, regulators need to contain domestic credit expansion, in case the liquidity overflows," said Zhou Hongli, an economist with DBS Bank.

The central bank may also rein in "shadow" banking. Fitch Ratings downgraded China's yuan-denominated debt on Tuesday, saying risks over China's financial stability have grown.

As non-bank lending makes up half of China's total financing, stricter regulation over "shadow" banking could aggravate credit tightening.

"Such strong expansion of new loans in the first quarter will not be sustained," Barclays said.

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