Regulator says it will closely watch lending to small enterprises

China will ensure the growth of new loans to rural areas and small enterprises this year, the banking regulator said on Thursday.

That's despite the likelihood that the People's Bank of China will restrain overall lending to curb excessive liquidity.

"We will ensure that the growth rate of rural lending and loans to small enterprises will be no less than the average growth rate of all other lending," said Tian Jianhua, deputy director of the Cooperative Finance Department of the China Banking Regulatory Commission.

New loans to the country's rural areas amounted to 2.63 trillion yuan ($405 billion) in 2010, accounting for one third of the 7.95 trillion yuan in new loans last year. Among those new loans, 590.9 billion yuan was held by rural households, according to the regulator.

By the end of 2010, the country's total rural lending had reached 11.77 trillion yuan, an increase of 92.3 percent from 2007, whereas total loans to small enterprises amounted to 7.27 trillion yuan.

Tian said that the regulator will closely monitor the amount of new loans to rural areas and small enterprises this year. That's as the top policymakers will be under increasing pressure to control overall credit growth to tame rising inflation and asset bubbles.

The People's Bank of China, the central bank, has not yet set a clear new-loan target for this year, leading to speculation that further policy tightening is on the cards and that the measures will remain aggressive. The central bank has raised the reserve requirement ratio twice this year, after hiking the benchmark interest rate in February.

In January, banks extended 1.04 trillion yuan of new loans at a rate of growth slightly slower than market expectations. Economists said the central bank is unlikely to loosen its monetary stance anytime soon, as the country still faces an uphill battle to cool rising consumer inflation.

Tian said that the regulator will vigorously promote the development of micro loans in rural areas and expand the network of local financial institutions to maintain rural lending growth amid renewed efforts to cut the credit supply.

In the meantime, the regulator will offer more incentives to rural financial institutions by removing the tax on interest income from loans under 50,000 yuan. It will also allow rural banks to have a reserve requirement ratio of between 4 and 6 percentage points lower than large and medium-sized commercial banks, Tian said.

"We want to use market-driven measures instead of administrative orders to encourage rural financial institutions to extend more loans in the future," he said.