A senior Chinese banking regulator expects new loans to reach at least 8 trillion yuan (US$1.17 trillion) in China this year, further adding to beliefs that the government won't stem loan growth after a credit boom in the first quarter.

However, a senior economist in a Cabinet think tank suggested that the nation tighten its ultra-loose monetary policy to prevent a surge in credit risks and avoid a sudden economic slowdown if loans were to drop abruptly.

Cai Esheng, vice chairman of the China Banking Regulatory Commission, said that due to rising demand and banks' pursuit of profits, lending won't slow sharply for the rest of this year.

Loans rise

"We feel obliged to beef up oversight," Cai told a financial forum in Beijing over the weekend. "But it's too early to judge if we will succeed in fully warding off the risks."

Lenders in China extended a combined 4.58 trillion yuan in domestic currency-backed loans in the first three months. It was close to the Cabinet's official goal of at least 5 trillion yuan for the entire year.

The People's Bank of China, the central bank, said on April 12 that it plans to maintain its "appropriately loose" monetary policy and ensure money supply is sufficient to meet the needs of economic development.

The central bank last week summoned major banks and required them to lend at a steadier pace while the banking regulator has started checking loan quality at commercial lenders. But neither of them indicated it would rein in credit.

Economists have predicted China will unlikely curb bank loans or withdraw money from the financial system this year on worries that conditions for economic recovery are fragile amid a weak external demand.

"Despite the recent signs of recovery, the foundation for a strong rebound is still not so firm," Bank of America's economists Ting Lu and T.J. Bond wrote in a note on Friday. "We think the likelihood for financial regulators to put a brake on bank loans or liquidity is extremely small in 2009."

But Ba Shusong, an economist with the Development Research Center under the State Council, called the central bank's policy "excessively loose" and warned that once rapid lending ends, economic growth could collapse.

"As economic indicators have shown positive signs, we should revert to the 'properly easy' policy as defined previously (instead of an ultra-loose one)," Ba said in remarks published by the Economic Information Daily yesterday.

Ba said that risk controls will be hard if banks continue the current lending pace.

(Shanghai Daily April 28, 2009)