Beijing to tighten controls on credit

China's central bank yesterday warned that it planned to “strictly control” credit to some sectors of the economy after the country recorded a record surge in new bank loans and money supply in March.

The central bank's statement, made after a routine quarterly monetary policy meeting, followed the release on Saturday of the money supply data. The data appeared to confirm that Beijing's stimulus measures are revitalising the domestic economy but raised credit risk and inflation concerns.

Banks extended Rmb1,890bntrn ($278bn, €203bn, £193bn) in loans last month, according to the money supply data released by the People's Bank of China on Saturday, breaking the earlier monthly record set in January. This means bank lending is approaching the government's full-year target of Rmb5,000bn already after the first quarter – the total for the three months to March 31 was Rmb4,580bntrn.

As a result, the broad M2 measure of money supply grew to a record 25.5 per cent last month.

The central bank said yesterday it would “maintain liquidity in the banking system, and ensure that monetary supply is sufficient to meet the needs of economic development”. It added the identified the need to “give more support to the agricultural sector, small and medium enterprises and other weak links” and “concretely resolve some financing difficulties faced by companies”.

But it also said it “wanted to “strictly control lending to high-polluting, high-energy consuming industries and to those with overcapacity”.

Yu Song, an economist with Goldman Sachs, said the surge in credit in March did not fully reflect fundamental demand from the real economy, but it had been “mainly driven by the policy stimulus which requires a large amount of funding for investment projects”.

In a research note, Goldman Sachs said it expected the monetary authorities to take mild measures in coming weeks, such as window guidance meetings emphasising the importance of keeping loans growth stable and risk controls. “However, unless the government clearly specifies the amount of lending allowed and the implications for non-compliance, the effectiveness of these measures will be questionable,” it said.

State media sought to reinforce a message of confidence from the strong growth figures as they gave prominence carried prominently to remarks by Wen Jiabao, premier, on the “positive signs” in the economy.

Xinhua, the state news agency, quoted Mr Wen as saying on Saturday in Thailand that the Chinese economy showed signs of performing better than expected positive changes in the first quarter as a result of the government's stimulus package, and said this indicated a recovery.

But privately some Chinese officials warn of new domestic economic hazards risks from the surge in bank lending. Bank regulatory officials have started worrying that the push from lenders could create new credit risks. Other Some officials also warn that China could face the threat of hyper-inflation and say the government is likely to rein in credit growth later this year or in early 2010.