China's lending and M2 slow

Shanghai Daily, March 15, 2011

A bank clerk counts yuan notes at a branch in Qionghai City, Hainan Province. Banks in China extended 535.6 billion yuan (US$82 billion) of new yuan-backed loans in February, a drop from 1.04 trillion yuan in January, according to the People's Bank of China.[Shanghai Daily]

The Chinese government's tighter monetary measures seemed to have been fruitful as the country's money supply and lending slowed in February.

Banks in China extended 535.6 billion yuan (US$82 billion) of new yuan-backed loans in February, a drop from 1.04 trillion yuan in January, the People's Bank of China, the central bank, said yesterday on its website. The new loans extended were also below market expectations. Bloomberg News' survey of 19 economists forecast 600 billion yuan.

M2, the broader measure of money supply, rose 15.7 percent year on year in February, shy of an expected 17 percent increase and also short of the central government's annual target of 16 percent.

"February's broad money and loan growth fell to pre-2009 levels," said Chang Jian, a Barclays Capital economist, yesterday. "This shows the determination of the central bank to front-load policy tightening to keep liquidity and lending conditions under control."

China has raised interest rates three times and required banks to put aside more reserves five times since October, when the government declared its top priority is to control inflation. Combatting inflation was also reaffirmed at the annual session of the National People's Congress and the Chinese People's Political Consultative Conference that ended yesterday in Beijing.

New loans totaled 1.57 trillion yuan in January and February, down from 2.09 trillion yuan in the year-earlier period, when monetary tightening was also firmly in place. This has led to sharply higher effective lending rates relative to benchmark rates.

"With most local governments still setting 10 percent to 15 percent growth targets for 2011, despite being discouraged by the National Development and Reform Commission from doing so, it is crucial for the PBOC to front-load tightening (steps) and impose strict control on bank loans which have a multiplier effect of money creation," Chang said in a research note.

China hasn't disclosed its annual lending target new loans for this year, but economists are expecting 7.5 trillion yuan.