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China's loan growth may bust target

CHINA'S commitment to a loose monetary policy will likely generate as much as 8 trillion yuan (US$1.17 trillion) in new loans this year - well above the 5 trillion yuan target, analysts said.

Though the expanded credit could help turn around declining economic growth, some analysts see potential pitfalls on the horizon. The surge in loans together with expected strong growth in investment by the government and businesses will challenge the country's ability to combat asset bubbles and industrial overcapacity, economists said.

It will also put greater pressure on the long-term credit quality of the commercial banks, they added.

China will maintain a relaxed monetary policy and ensure sufficient liquidity in the banking system to sustain economic growth, the People's Bank of China said in a statement on Sunday.

The message dampened speculation that the central bank may step in to restrain credit after data showed on Saturday that fresh yuan-denominated loans and money supply surged to record levels last month.

"The credit growth was out of everyone's expectation," said Gao Yi, a senior macroeconomic analyst at Orient Securities. "Now it's clear. The central bank won't tighten in the second quarter or even in the third. That means credit growth can hit 7 trillion to 8 trillion yuan this year."

Banks in China extended a record 1.89 trillion yuan in domestic-currency backed loans in March, bringing total new credit for the first quarter to 4.58 trillion yuan. That's close to the government's target of at least 5 trillion yuan for the whole year.

Thanks to the explosive credit expansion, M2 money supply, which includes all cash and deposits, jumped by a record 25.5 percent last month, compared with a government target of 17 percent.

The central bank said in the statement that it will "maintain continuity of its present monetary policy and ensure that money supply is sufficient to meet the needs of economic development."

The tone may indicate that, although there was better-than-expected performance in the first quarter and liquidity was plentiful, the government is still concerned that conditions are fragile and the external environment will remain troublesome.

"It's a really difficult challenge to run monetary policy right now," said Stephen Green, head of China research at Standard Chartered Plc. "If you tighten too early, you risk choking off the recovery. But if you tighten too late, you run the risks of asset bubbles developing again and a lot of wasted investment."

Other analysts also fear that if banks don't increase oversight of loan approvals, credit quality may deteriorate as debt is dished out too quickly and some of the money may sneak into the stock market.

"Under such extremely hot conditions, we have doubts about the banks' abilities to manage the overall loan quality and to ensure that the money will be used in an efficient way," said Wu Ke, an analyst at the Zhongtian Investment Consulting Co.

Analysts are now playing down the need for imminent reductions in lending rates and banking reserve ratios, but they did say rate cuts are still possible in the second quarter as preemptive government measures to prevent deflation.

"The recovery is still very fragile now. We think the government will maintain relaxed macroeconomic policies for the next few quarters," Goldman Sachs analysts Helen Qiao and Yu Song said in a note. "But if economic activity figures are lower than expected in the coming months, we expect interest rates to drop."


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