China’s central bank has asked lenders to rein in credit supply as the surge in lending that sustained the debt-fueled coronavirus recovery left further concerns about bubbles and financial stability.
New loan growth reached 16 percent in the first two months of the year. The People’s Bank of China responded in February by instructing domestic and foreign lenders operating in the country to keep new loans at roughly the same level as last year, if not lower, in the first quarter of the year, according to people with knowledge of the situation. .
The directive could translate into a significant drop in bank lending, the main source of funding for the world’s second-largest economy.
This move underscored a shift in policy focus as Beijing has shifted regulatory oversight towards managing credit risk rather than boosting economic growth, which has already returned to pre-pandemic levels.
China’s gross domestic product grew by 6.5 percent in the last quarter of last year, making it one of the few countries to record positive economic growth for the year. Beijing has already set a target of at least 6 percent growth by 2021.
“Concerns about a pandemic-induced recession are on the way,” said Larry Hu, chief economist in China at Macquarie Group in Hong Kong. “The top priority is to reduce the indebtedness of the economy.”
The credit boom in early 2021 followed a sharp recovery in Chinese real estate transactions and investment as the pandemic stimulus from Beijing boosted the local housing market.
New home sales in China were up 133 percent in January and February this year, while real estate investment was up 38 percent. That demand helped drive real estate loan growth 14 percent over the same period, a seven-year high.
“Real estate is the safest industry to work with as there is very little collateral better than a physical apartment,” said a Shanghai banker.
But as house prices soared in China’s coastal hubs, Beijing took a slew of measures to get the housing boom under control, led by a crackdown on corporate loan abuse in real estate purchases.
This put pressure on real estate financing and made lenders with high industry exposure a prime target of the last curbs.
In December, the PBoC also tightened its limit on cross-border lending, significantly limiting the ability of foreign banks to expand in China, even as Beijing pledged to continue liberalizing capital controls and allowing foreign players to access its financial market.
The restrictions were designed to slow the renminbi’s gains, which rose nearly 7 percent against the US dollar in 2020.
But the currency’s surge threatened to undermine China’s surging exports, which surged more than 18 percent in December to push the country’s trade surplus to a monthly record in pandemic-driven demand.
Another Shanghai-based banker said the latest credit restrictions had put pressure on many smaller banks, including foreign lenders, to radically cut new loans that well exceeded the prescribed threshold.
“It is very difficult to keep real estate lending on a small portion of the loan portfolio when other industries bear more risk,” said the banker.