The "Interlinking Policy" on Credit Controls

The staggering amount of credit issued in the first week of 2010 coupled with the steady recovery of the macro economy, particularly the export sector, have caused China's regulatory authorities to finally put the brakes on new credit issuance.

Beginning January 10, the China Banking Regulatory Commission (CBRC) convened three meetings over the span of the week.

On Monday of last week, the CBRC issued a statement aimed at the credit blowout of major banks during the first week of 2010.

A three day long annual working conference then convened on Friday. During the conference, the CBRC stressed the urgent need for financial institutions in the banking industry to balance issuance of credit, match up with the restructuring of the national industry structure, supervise the intended use of loans and strictly control the flow of capital.

At the same time, the CBRC called together high level officials from China's major commercial banks to convene the Q4 economics and finance workshop and discuss detailed regulatory requirements.

On the evening of January 12, the People's Bank of China (PBC) made a surprising announcement that effective immediately the deposit reserve ratio would be raised by half a point to 16 percent. An insider at the central bank told Caixin that the momentum building for a world economic recovery is already an undisputable fact.

The move by the central bank signifies that last year's radical strategy of allowing banks to issue 10 trillion yuan in new loans to stimulate economic growth would be revised in 2010.

At the CBRC's annual working conference, officials formulated a principle of "don't say, just do" towards the amendment. A regulatory official explained the purpose of this action: "just do" refers to strengthening banks' execution of credit control measures while "don't say" refers to preventing banks from claiming local government pressure as an excuse to stall. At the same time, how regulatory institutions will go about helping financial institutions in the banking industry realize sustainable development while simultaneously supporting economic development became another focal point of discussions.  

History Repeats Itself?

Authoritative data shows that within the week from January 4 to January 8, five large state-owned commercial banks including the Industrial and Commercial Bank of China, the Agricultural Bank of China, Bank of China, China Construction Bank and Bank of Communications loaned out over 280 billion yuan. Furthermore, newly increased loans in the entire banking industry for the week reached 600 billion yuan.

If this pace keeps up, there is potential for the banking industry to surpass the total of 1.62 trillion yuan in new credit issued last year in January, a fact that is raising concern among the central bank and regulatory authorities.  

After the statistics on credit for the first week of 2010 were disclosed, the central bank's moves to increase the deposit-reserve ratio and recent actions by regulatory authorities have begun to resemble the situation that occurred two years ago.