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July 31, 2009

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Market-based lending urged

China's central bank has said it would encourage that loans be granted based more on market needs instead of using quota-style measures as it reiterated it would stick to a moderately loose monetary policy in the second half of this year.

For the third time in six days, the People's Bank of China stressed in a statement issued late Wednesday that the bank would stick to the present monetary policy stance.

The policy may ensure an ample market liquidity in the near future, but analysts forecast loan growth to moderate next year.

"China will unswervingly carry out a relatively loose monetary policy in the second half of this year to consolidate the country's economic growth," Su Ning, vice governor of the PBOC, said in the statement to ease market concerns of an abrupt policy change.

"We will emphasize the use of market tools, not quantity controls, to guide appropriate growth in money supply and lending," Su pointed out.

Chinese banks used to favor big state-owned companies for loans because of less risks. But small and medium-sized enterprises, which are the ones needing money, usually find it hard to get credit from banks.

The China Banking Regulatory Commission has demanded banks lend to those in urgent need of capital instead of simply to meet quotas.

A record 7.37 trillion yuan (US$1.08 trillion) of new loans were granted in the first half in China, an increase of 4.9 trillion yuan from a year earlier. Some economists said the explosive growth has led to a strong rebound in the country's stock and property markets because some loans were channeled there.

"China's credit growth has been running like a wild horse, and the country should take care on how the money is spent," said Sun Lijian, a finance professor at Fudan University.

"The authorities should look to the quality of such credit to ensure it goes to the real economy instead of to the stock and property markets," Sun said.


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