CHINA'S financial sector will be closely watched this year as analysts monitor the nation's progress toward overtaking Japan as the world's second-largest economy.

Five areas of markets and finance are drawing the most buzz: credit levels, the reserve requirement on banks, housing loans, the Agricultural Bank of China's initial public offering and new stock listings.

Housing loans

Individual mortgage loans, the most lucrative sector in retail banking, surged last year as the property market grew, fueled by low rates and fears that housing prices will only go higher.

In December, new housing prices in Shanghai rose to 20,187 yuan (US$2,957) per square meter on average, up 8 percent from November.

Regulators have already warned banks to tighten lending for second homes to drive speculators out of the market. A minimum down payment of 40 percent is now required, double that of an average first home.

Banks in Shanghai, at the urging of regulators, also agreed to stop paying commissions of up to 1.5 percent of a home's value to agents who bring mortgage borrowers through the door.

The incentives led to some unscrupulous practices, including faking mortgage bookings and agents pressuring home buyers to do business with banks that offered the biggest commissions.

More than 30 banks in Shanghai have agreed to end the practice, which was inflating demand for housing loans, according to the Shanghai Bureau of the China Banking Regulatory Commission.

New individual mortgage loans in Shanghai grew by 10.74 billion yuan in November.

The reserve requirement

In banking, the reserve ratio remains an important monetary policy tool, according to the People's Bank of China Governor Zhou Xiaochuan, fueling speculation that the requirement may be raised to sop up excess liquidity.

The reserve requirement is the amount of deposits or other assets a bank is required to keep on hand as a percentage of total assets. China's reserve ratio is current set at 15.5 percent for the big five state-owned banks and 14.5 percent for smaller lenders.

Zhou said the central bank won't target just consumer prices in setting monetary policy but will also factor in economic growth, jobs creation and international balance of trade.

Last year's tide of new credit pumped up China's economic growth against the backdrop of a global slowdown, but the liquidity also triggered fears of asset price bubbles and expectations of inflation as money turned to stock and real estate markets.

The consumer price index, the main gauge of inflation, rose 0.6 percent in November, the first expansion in 10 months. As inflationary expectations accelerate, so does speculation that the central bank may raise interest rates. The official one-year benchmark lending interest rate in China is now 5.31 percent.

China changed neither interest rates nor the reserve requirement ratio in 2009 as the government continued its stimulus policies. Economists said the reserve requirement ratio probably will be the first weapon in the central bank's fight against credit risks.

Initial public offerings

Funds raised through initial public offerings on Chinese mainland are expected to grow rapidly this year as the economy and the capital markets become more stable, accounting firms said.

Ernst & Young said it expects initial public offerings to more than double to 380 billion yuan (US$55.6 billion) in Shanghai this year, overtaking Hong Kong, and possibly becoming the world's biggest market for new share sales.

In 2007, the Shanghai bourse led the world in initial public offerings in terms of capital raised.

PricewaterhouseCoopers is predicting that the combined capital raised from new listings on the Shanghai and Shenzhen exchanges this year will exceed 320 billion yuan.

That would compare with 185.6 billion yuan raised last year, a surge of 79 percent. New listings resumed on the Chinese mainland in the third quarter of last year after a nine-month halt induced by the global financial crisis.

ChiNext, the new Nasdaq-style board for start-up companies, began operation in late October last year in Shenzhen.

New yuan loans

China's record new yuan loans in 2009 didn't trigger the change in loose monetary policy that some had predicted.

However, Zhou Xiaochuan, governor of the People's Bank of China, warned this month that Chinese banks must pace their lending more carefully to avoid market volatility.

He said the central bank will keep a firm rein on credit growth, guiding institutions toward more balance on their books.

Economists said they expect China's new yuan loans to top 8 trillion yuan (US$1.17 trillion) this year, easing off from an estimated 9.5 trillion yuan in 2009. A sharp drop is unlikely, they said, while China maintains a relatively easy money supply. "The real challenge of 2010 is to secure a soft landing in the rapid growth of loans," said Cheng Manjiang, a BOC International analyst.

According to the latest data, Chinese banks issued 9.21 trillion yuan of new lending in the first 11 months of 2009, up from 5.06 trillion yuan a year earlier. That overshot the government's target of 5 trillion yuan for 2009.

Lu Zhengwei, an Industrial Bank senior economist, said he expects the focus of monetary policy to shift to the creditworthiness of borrowers and the structure of lending. Credit to industries showing excess production or high pollution levels will also be curbed, he said.



Agricultural Bank of China

The Agricultural Bank of China, the only one of China's big four banks that hasn't gone public, is expected to be listed in Shanghai and Hong Kong this year.

The bank, China's third-biggest by assets and mainly a lender to the rural sector, hasn't given a timetable for the share sale.

The bank got a US$19 billion government cash injection in November 2008 and restructured into a shareholding company in January 2009.

Its peers, the Industrial and Commercial Bank of China, the Bank of China and China Construction Bank, used the same three-tier strategy when they went public, wooing strategic investors before a general share sale.

By going public, state-owned banks have had to adopt a modern commercial banking model, ending state-dictated loans.