China Reins In Bank Lending Over Concerns About Real Estate Bubble

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BEIJING — While the rest of the world is trying to recover from recession, China is trying to slow its economy down.

Beijing took steps Tuesday to curb the kinds of high-risk loans that can create housing bubbles, as happened in the United States. It ordered banks to set aside more reserves, and its central bank raised interest rates on one-year bills.

China, which was also hit by the worldwide downturn but has bounced back fast, hopes cooling the pace of lending will keep its economy growing without creating inflation and overheating. Other nations will be watching: They're counting on a healthy Chinese economy and a steady stream of demand for their goods.

The Chinese government acted after food prices edged up and news reports said bank lending skyrocketed in the first week of January.

"This is a small first step towards reducing the very massive amounts of stimulus that they have been providing to their economy," said Mark Zandi, chief economist at Moody's Economy.com.

China is pumping 4 trillion yuan, about $586 billion, into its economy in 2009 and 2010 through public works and help for industries. About 30 percent of the money is coming from Beijing, the rest from local governments, state companies and banks.

The Obama administration has cautioned other countries not to withdraw their stimulus aid until a global recovery is firmly in place. But private economists said Beijing's action was wise, given the surge in Chinese lending. Some economists have warned of a potential real estate bubble in China.

Because Beijing can dictate lending patterns to state-controlled banks, it's been far more successful than the U.S. government in loosening the flow of credit. Bank lending has remained tight in the United States since the financial crisis erupted, despite $700 billion in bailout help for financial institutions.

Last year, under orders, Chinese banks lent $1.3 trillion in January-October – more than double the level for all of 2008. In the U.S., lending by the biggest banks dropped 9 percent last October compared with a year earlier, according to the Treasury Department.

Economists warned that China's banks could become stuck with bad loans, and Chinese leaders told them in July to reduce lending. A related fear is that too much money swirling around China's financial system could ignite runaway price increases or a plunge in asset prices.

"With inflation creeping up, the bank's broad aim seems to be to keep inflation expectations in check and to signal the likelihood of interest-rate hikes to come," said Mark Williams, China economist for Capital Economics.

Helped by Beijing's stimulus measures, China's economy is expected to grow 8.3 percent this year, according to government forecasts. The U.S. economy is believed to be growing right now at an annual pace of just 2 to 3 percent.

China's central bank raised the amount of reserves that banks must hold by 0.5 percentage point, to 15 percent of their deposits. U.S. banks must hold 10 percent in reserve, though that requirement is based on only a fraction of their balance sheets.

China faces pressure from the United States and other trading partners that claim Beijing is improperly supporting its companies with subsidies and market barriers, raising fears of a trade war at a time when governments are eager to protect jobs.

Other governments also say the Chinese yuan is kept undervalued by being effectively pegged to the dollar. That gives its exporters a price advantage and adds to its swollen trade surplus.

American manufacturers say this helps explain the huge U.S. trade gap with China, which shrank last year because Americans bought fewer Chinese goods during the recession.

Nothing in China's statement signaled any change in the yuan's value against the dollar. Paul Dales, U.S. economist at Capital Economics, said America's deficit with China will probably widen again this year, in part because China seems focused on growing its economy with exports, not domestic consumption.

China's action Tuesday came sooner than expected. Analysts suggested it might have been prompted by reports that Chinese banks lent 600 billion yuan, or about $88 billion, in the first week of January – nearly double the total for all of December.

"This is an extremely high figure, and suggests that the banks are rushing to push loans out the door ahead of the widely anticipated tightening of monetary policy," said Tom Orlik, an economist in Beijing for Stone & McCarthy Research Associates.

But the money flowing through the economy helped drive up real estate and stock prices, and Chinese leaders worry about a rise in food costs, a politically sensitive topic.

Housing prices in Beijing and Shanghai have soared since late 2008 to an average of more than 12,000 yuan ($1,700) per square meter, double the level three years ago, according to a December report by U.S. bond manager Pimco. Food prices rose 0.6 percent in November after nine months of declines.

The bulk of bank lending in China still goes to companies, but home mortgages and auto loans are gaining in popularity.

The government is clamping down on lending for second homes as a way to cool a surge in housing costs. But it says it wants to promote consumer credit to encourage spending at stores. The minimum down payment on a second home was raised from 30 percent to 40 percent in 2007 to try to curb speculative purchases.

The central bank governor and others have called for measures to prevent asset prices from rising too fast, warning that a bust could disrupt the economy and hurt banks that are left with unpaid loans.

Beijing is trying to curb foreign "hot money" coming into China to speculate in stocks and real estate. The Cabinet announced Sunday it has ordered closer scrutiny of inflows of foreign money.

Despite the lending curbs, Chinese leaders have assured the public that stimulus spending will continue in 2010. They say it will focus on helping entrepreneurs who generate the bulk of China's economic growth and new jobs but who missed out on the first year of the stimulus, which went mainly to state companies.

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McDonald reported from Beijing, and Crutsinger reported from Washington. Associated Press Writers Christopher Bodeen in Beijing, Tales Azzoni in Sao Paulo, Pan Pylas in London and Jeannine Aversa and Christopher S. Rugaber in Washington contributed to this report.

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