WRAPUP 3-China moves again on lending, economy shows strength

For link to Reuters Insider video programme, please click on
http://link.reuters.com/caq86h

* HSBC PMI at record high 57.4, official PMI falls to 55.8

* Growth strong and inflation rising, business surveys show

* Tightening fears rattle Chinese stock market

* Bank regulator orders rigorous lending checks

By Aileen Wang and Alan Wheatley

BEIJING, Feb 1 (BestGrowthStock) – China has ordered a further
clampdown on excessive bank lending to ensure credit has not
illegally entered the stock or property markets as two surveys
on Monday showed the mounting challenges faced by policymakers.

China made a strong start to the year, according to January
purchasing manager indexes (PMIs) that showed the economy runs
a greater risk of growing too quickly, not too slowly, with
rising input and output prices pointing to greater inflationary
pressures.

Worries that the government, emboldened by the robust
growth and wary of price pressures, will act more aggressively
to tighten monetary conditions weighed on the benchmark
Shanghai Composite Index (.SSEC: ), which fell to its lowest
close in more than three months. [ID:nTOE610091]

“If more forceful measures are not implemented to control
credit expansion, we will likely see considerable upside
risks,” Yu Song and Helen Qiao, Goldman Sachs economists in
Hong Kong, said in a note.

Authorities ordered banks to slow, and in some cases, to
halt loan approvals for the rest of January to try to control
unruly lenders which provided 1.1 trillion yuan in credit, or
15 percent of the full-year target, in the first two weeks of
the month.

In the latest move, the China Banking Regulatory Commission
(CBRC) ordered lenders to conduct checks on whether any loans
had been used for improper purposes, a banking source told
Reuters on Monday.

If so, the loans must be withdrawn within a certain period,
said the source, who had seen the relevant notice from the
regulator. He did not want to be identified. [ID:nTOE610090]

But for all the tremors that the government’s gradual
tightening has provoked in global markets, China’s two PMIs for
January showed an economy that is growing strongly.

The official PMI eased from a 20-month high in December but
remained firmly in expansionary territory, while an index
derived from a companion poll by HSBC scaled an all-time high.

The reports, which are important leading indicators, both
offered evidence of increasing cost pressures.

“Industrial activity continues to accelerate, implying
stronger GDP growth in the first quarter. But rising input and
output prices also point to greater inflationary pressure,
which will likely prompt more tightening measures in the coming
months,” said Qu Hongbin, chief economist for China at HSBC.

China might increase interest rates once consumer inflation
exceeds the one-year benchmark deposit rate of 2.25 percent, Ba
Shusong, a prominent government adviser, told Reuters. Consumer
prices rose 1.9 percent in the year to December.
[ID:nTOE61004A]

POLICY UNCERTAINTY

But in an illustration of the uncertainty surrounding
Chinese policy at this juncture, a central bank researcher
suggested that tightening could take the form of stiffer
reserve requirements rather than higher interest rates.

A half-point increase in required reserves that took effect
on Jan. 18 locked up 300 billion yuan. World markets tumbled in
response to the tightening, which occurred much earlier than
investors had expected.

“Whether China will increase interest rates or not will be
decided by the price situation, and prices in the first quarter
won’t be too high,” Jiao Jinpu, deputy head of the central
bank’s postgraduate school, told the official China Securities
Journal.

In a sign of China’s ability to also use more direct
administrative controls, official media reported that there had
been a sharp slowdown in lending in the last 10 days of January
after regulators ordered banks to pull in their horns.

Banks loaned 1.1 trillion yuan in the first half of
January, according to bankers familiar with the central bank;
by Jan. 19, the total had reached 1.45 trillion yuan, local
media reported.

But for the whole of January net new lending was less than
1.6 trillion yuan ($234 billion), the official Economic
Information Daily reported, without giving its source. The
People’s Bank of China releases official data next week.

Beijing’s loan quota for all of 2010 is 7.5 trillion yuan.

Until recently, Chinese policymakers had bent all their
efforts on pulling the world’s third-largest economy out of a
downturn induced by the global financial crisis.

The message from Monday’s surveys of purchasing managers
was that, with the economy now back at cruising speed after
growing 10.7 percent in the fourth quarter from a year earlier,
Beijing is now justified in paying more attention to rising
prices.

Nevertheless, Fan Gang, an adviser on the central bank’s
monetary policy committee, sounded an optimistic note on
inflation, saying that manufacturing over-capacity and an ample
food supply would restrain price pressures.

“I would say the real worry for the China economy now is
asset bubbles,” he said. [ID:nBJC002487]

Export orders were also strong in both PMI reports,
suggesting an improvement in global demand going into 2010.

HSBC’s PMI rose to a record high of 57.4 in January from
56.1 in December, while China’s official PMI fell to 55.8 from
56.6.

It was the first month-on-month deterioration in the
official index since May 2009, but it remained firmly above the
threshold of 50 that demarcates expansion from contraction.

For a graphic on China’s PMIs, click on

http://graphics.thomsonreuters.com/0210/CN_PMI0210.gif
($1=6.826 Yuan)

Stock Market Advice
(Additional reporting by Victoria Bi, Farah Master, Simon
Rabinovitch and Zhou Xin)

WRAPUP 3-China moves again on lending, economy shows strength