By Li Zengxin (chinadaily.com.cn)
Updated: 2008-01-14 14:55

The central bank has ordered the country's financial institutions to offer no more than 3.63 trillion yuan ($500 billion) in new loans this year. That amount is equal to last year's total, as the measure is intended to keep the loan growth rate under 13.86 percent, said sources familiar with the issue.

According to the December statistics from the People's Republic of China, the new loans last month were 48.5 billion yuan, 172 billion yuan less than December 2006. The growth in M2, a broad money term, has slowed to 16.72 percent, 1.73 percentage points lower than November 2006.

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Analysts attribute the slowing new loan rate to the tight monetary policy adopted by the central bank in November last year, in which regulators strengthened supervision over commercial banks' loan activities.

However, the pressure on structural composition of the new loans is still intense, said financial experts. Commercial banks cut back new loans mainly by reducing note financing and short-term loans, while letting the longer-term loans grow almost as fast as before.

Of the 48.5 billion yuan new loans, mid- to long-term loans totaled 129.9 billion yuan in contrast with a negative 90 billion yuan from note financing. In the whole of 2007, commercial banks deducted 440 billion yuan from note financing, allowing room for more profitable longer-term loans to grow.

Balance of note financing loans reached a three-year low at the end of last year, said Lin Chaohui, an analyst with Guotai Jun'an Securities. Now there is little left to squeeze from the note financing business. As a result, commercial banks are looking for another way to curb loan growth, such as an adjustment to loan structure, to keep new loans this year below the 2006 level, said Lin.

Accelerated mid- to long-term loan growth will raise the likelihood of investment driven economic overheating, said analysts. They think the central bank should strengthen the loan structure adjustment in order to control the total loan amount.

Another key feature of the rapidly growing longer-term loans is particularly rapid growth in personal mid- to long-term loans in the past year. Commercial banks should strictly stick to the supplementary provisions on second homes released late last year. On the other hand, the central bank should effectively close the interest rate gap between short-term and longer-term debts, and minimize the incentives for commercial banks to issue more mid- and longer-term loans, industrial experts said.

In addition, although the December M2 growth was lower than 17 percent, maturing central bank bills are likely to peak in the first quarter of this year. Analysts believe another hike in the required bank reserve ratio is necessary, while a hike of 1 to 1.5 percent is inevitable, Lin said.