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China’s central bank has asked lenders to curb the supply of credit, as the surge in lending that has supported the country’s debt-fueled recovery of the coronavirus has renewed concerns about asset bubbles and financial stability.
New loan growth reached 16% in the first two months of the year. The People’s Bank of China responded in February by asking domestic and foreign lenders operating in the country to keep new loans in the first quarter of the year at about the same level as last year, if not lower, according to reports. people who know the situation. .
The directive could result in a considerable drop in bank loans, the main source of financing for the world’s second-largest economy.
The move highlighted a shift in political focus as Beijing shifted its regulatory review toward controlling credit risk rather than stimulating economic growth, which has already returned to pre-pandemic levels.
China’s gross domestic product grew 6.5% in the last quarter of last year, making it one of the few countries to record positive full-year economic growth. Beijing has already set a target of at least 6% growth for 2021.
“Concerns about a recession caused by a pandemic are gone,” said Larry Hu, chief economist for China at Macquarie Group in Hong Kong. “The top priority is to reduce the debt burden of the economy.”
The loan boom in early 2021 followed a strong recovery in Chinese real estate transactions and investment as the relaunch of the Beijing pandemic boosted the local real estate market.
Chinese new home sales jumped 133% in January and February this year, while real estate investment rose 38%. This demand helped push home loan growth to a seven-year high 14% over the same period.
“Real estate is the safest sector to work in because few guarantees are better than a physical apartment,” said a Shanghai-based banker.
But as house prices have taken off in China’s coastal poles, Beijing has adopted a series of measures intended to contain the housing boom, spurred on by a crackdown on the misuse of business loans in real estate purchases.
This has put real estate financing under pressure and made lenders heavily exposed to the sector a major target of the latest restrictions.
In December, the PBoC also tightened its limit on cross-border lending, which significantly limited the ability of foreign banks to expand in China even as Beijing pledged to continue to liberalize capital controls and allow actors foreigners to access its financial market.
The restrictions were aimed at slowing the rise of the renminbi, which climbed nearly 7% against the US dollar in 2020.
But the currency’s rise threatened to undermine the surge in Chinese exports, which rose more than 18% in December to push the country’s trade surplus to a record monthly demand due to the pandemic.
Another Shanghai-based banker said the latest lending restrictions had put many small banks, including foreign lenders, under pressure to “drastically” cut new loans that were well above the regulatory threshold.
“It is very difficult to keep home loans at a small proportion of the loan portfolio when other sectors bear more risk,” the banker said.
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