To avoid embarrassment and shore up their often-wobbly credibility, Chinese authorities may not set new lending targets for banks this year after previous quotas have either been ignored or proved to be inadequate.
"China did not officially issue a 2011 lending target after the previous ones were circumvented by banks. However, the central bank will still restrict lending from behind the scenes and set different RRRs (required reserve ratios) for different banks in order to better moderate the lending spree," said Shuang Ding, senior China economist at Citi.
Chinese banks issued Rmb7.95 trillion ($1.2 trillion) of new loans in 2010, according to the People's Bank of China (PBoC), exceeding Beijing's Rmb7.5 trillion target set for the year. In 2009, the banks provided Rmb9.6 trillion of new credit versus a Rmb5 trillion lending target originally planned by the government for that year.
Other targets have been missed, too. Beijing set an official goal to keep annual consumer inflation at no more than 3% at the beginning of last year, a target that looked increasingly out of reach as prices continued to surge towards the end of 2010. Ding predicts that the consumer price index (CPI), which is due to be released today, will have averaged 3.2% to 3.3% last year.
Beijing is addicted to setting goals and making plans. Not long after communist China was newly founded, the powerful State Planning Commission (SPC) was established to centrally plan the nation's economy. The SPC later got a less dictatorial name - the National Development and Reform Commission -- yet, central planning remains a key feature in China and runs into every vein of the economy.
However, the planning process often becomes a game of cat-and-mouse with enterprises and firms, state-owned and private alike, always trying to figure out how to circumvent the barriers.
According to Charlene Chu, head of financial institution ratings for China at Fitch Ratings, talk of a substantial slowdown in credit growth in China is premature, because "in reality, lending (in 2010) has not moderated (from 2009)." It has been diverted into other channels, such as re-packaging of loans into wealth management and trust products.
She believes that even if the Chinese authorities set a conservative target of Rmb6 trillion to Rmb7 trillion of new loans for 2011, credit conditions are likely to remain loose until the problem of leakage is effectively contained and/or the cost of capital rises significantly.
And, even if regulators take a harsh stance against both activities in the coming months, new pathways and innovations are likely to take their place, the firm said in a report.
However, even if the market does not see an official target for credit growth, China's central bank will have a goal for its own reference. The PBoC has cut its lending target by 10% from last year, the official Chinese newspaper, Securities Journal, reported this week, citing unidentified sources. The central bank has also asked lenders not to lend more than 12% of their full-year targets in January, the paper said.
Chinese lenders are estimated to have issued as much as Rmb1 trillion of new loans in the first two weeks of this year. Chinese Premier Wen Jiabao said in a statement posted on the government website that the nation "must avoid abnormal issuance of credit at the beginning of the year".
"Rapid new lending in the first couple of weeks can be attributed to suppressed demand accumulated towards the end of last year. New loans by Chinese banks are typically the biggest in the first month of the year mostly for the same reason," said Citi's Ding.