Shanghai: China’s banking regulator has given Chinese banks verbal instructions not rush into end-of-the-month lending, among several other loan-cooling steps, a move analysts said may further hit China’s weakening stock market and even investment in the economy.
The China Securities Regulatory Commission used traditional government “window guidance”, in which the authorities told Chinese institutions how to act in line with official policies, to guide banks to avoid lending excessively as August drew to a close, several Chinese bankers said on Friday.
The fresh controls came after a series of other steps, including tighter supervision on bank working capital, and contrasts with repeated official statements that China would keep ample liquidity in the system and maintain an easy monetary policy to support nascent economic recovery.
Banking sources told Reuters that Chinese banks had lent about 200 billion yuan ($29 billion) so far this month, with the four biggest state-owned banks lending around 100 billion yuan.
If lending in August continues at such levels, it will lag far behind the 360 billion yuan recorded in July and a monthly average of more than 1 trillion yuan for the first six months of this year.
“Most banks have been very cautious in lending so far this month, and had hoped to lend more late in the month to compensate,” said a banker at a state bank. “But the regulator’s window guidance dashes hopes for an end-of-month rush.”
Review lending patterns
The regulator has also required China’s relatively small city commercial banks to review their lending patterns or even cut lending for the rest of the year and abide by a regulatory requirement that outstanding loans must not exceed 75% of total deposits.
“The regulator particularly stresses that banks must not rush into end-of-the-period lending, proposing banks to monitor average daily lending as a way of supervision,” said another source, adding the regulator had made it clear it would punish rule violators severely.
Chinese banks typically lend in extraordinary amounts at the end of each month, quarter and year in order to book better results.
Analysts said August bank lending now appeared set to be lower than total new loans of 271.5 billion reported in August last year, and to be the first month this year that new loans record a year-on-year fall.
If this happens, liquidity worries will become a huge negative psychological burden for the market, analysts said.
“The market had expected lending to fall in August but not so sharply,” said senior economist He Zhicheng at Agricultural Bank of China in Beijing.
“Such a drop will surely weigh on the stock market, with the index possibly testing a low (for this year) for a second time,” he said, adding that the drop would also hit the recovery of the real economy, with some new projects expected to be short of funds right after the start of their construction.
On the weight of the lending news, The Shanghai Composite Index closed 2.91% lower at 2,860.688 points on Friday, posting a 3.38% loss for the week.
On 19 August, it touched a low for the year of 2,761 points after a two-week market slump driven partly by worries over liquidity. Some analysts expect the index may test its 125-day moving average, now at 2,750 points, due to mounting worries over bank lending and consequently liquidity in the stock market.