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December 3, 2009

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Focus on loan quality in 2010

CHINA is likely to focus on the quality of loans next year rather than just allowing banks to lend a huge amount as they did this year, though the official policy will remain the same, economists said.

China will maintain its proactive fiscal policy and moderately loose monetary policy in 2010, said a meeting of the Political Bureau of the Central Committee of the Communist Party of China in late November. The Politburo meeting, presided by President Hu Jintao, set the tone for China's macro-economic policy next year.

"Though the tone is the same, the focus of the policy is expected to shift," said Lu Zhengwei, the Industrial Bank's senior economist.

Lu said he expected the fiscal budget to be channeled to more consumption-driven projects next year, rather than to the heavy investment in infrastructure this year.

The monetary policy will focus more on managing a steady and healthy growth of credit, rather than allowing credit to surge like it did this year.

New yuan loans in October grew at the smallest amount in a year as banks tighten credit terms.

Banks in China extended 253 billion yuan (US$37 billion) of new yuan loans in October, much smaller than the market expectations for 370 billion yuan. Analysts expect new credit to decline in November. The Industrial Bank said it expected the November loan figure to drop to 100 billion yuan to 200 billion yuan.

In the first 10 months, banks in China issued 8.92 trillion yuan of local-currency loans, up 5.26 trillion yuan from a year ago. It has already surpassed the 5-trillion-yuan target for this year.

Economists said China's rapid loan growth this year is not sustainable though they are divided on the timing of a policy turnaround.

Jing Ulrich, chairwoman of China equities and commodities at JPMorgan Chase & Co, said in a Bloomberg TV interview on Tuesday that she expects China's monetary policy to begin shifting toward a neutral stance perhaps in the middle of 2010. She said the central bank will raise interest rates twice in the second half of 2010 after raising bank reserve ratios.


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