Bloomberg News

China Lending Shrinks as Wen Wrestles With Inflation Over 6%

October 14, 2011

(Updates with currency-reserves figures in fifth paragraph.)

Oct. 14 (Bloomberg) -- China’s bank lending last month was the least since 2009 as inflation stayed above the government’s target, highlighting the risk that efforts to tame prices will trigger a slowdown.

New loans were 470 billion yuan ($73.7 billion), central bank data showed today. Consumer prices rose 6.1 percent compared with a 4 percent goal, the statistics bureau said. M2, the broadest measure of money supply, rose 13 percent from a year earlier, the least in almost a decade, and data for foreign-exchange reserves pointed to capital outflows.

Premier Wen Jiabao’s government must weigh whether to ease monetary policy after data yesterday showed exports grew at the slowest pace in seven months and as small businesses complain of a credit squeeze. Asian policy makers face a “delicate balancing act” as inflation remains elevated while Europe’s sovereign-debt crisis threatens growth, the International Monetary Fund said yesterday.

“The government will not ease policy in a broad-based manner until late November or early December, although it may ease in a targeted way,” said Ding Shuang, a Hong Kong-based economist at Citigroup Inc. He said that the money-supply figure may understate liquidity because of the popularity of wealth- management products.

A $4.2 billion increase in China’s currency reserves in the third quarter to $3.2 trillion was the smallest gain since 2000, according to Bloomberg data.

Euro Weakness

Weakness in the euro pulled down the dollar value of China’s holdings in that currency and capital outflows may also have limited the gain, Ding said.

The Shanghai Composite Index closed 0.3 percent lower. The yuan rose 0.1 percent to 6.3776 per dollar in Shanghai as of 3:49 p.m. local time. While today’s inflation number underscores pressure on the government to allow gains in the currency to restrain prices, a worsening export outlook may lead officials to limit appreciation. percent every month this year.

The central bank “is now between a rock and a hard place,” said Liu Li-Gang, an economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. “Inflation is high which means monetary conditions need to be tight but with a lot of bank lending happening off balance-sheet, conditions in reality aren’t as tight as would appear from this data.”

The IMF said that the current pace of monetary tightening is warranted in Asian nations including China where “overheating pressures remain high.” The People’s Bank of China last raised interest rates in July, lifting the key one- year lending rate to 6.56 percent.

Growth in China is already slipping, with analysts forecasting that data next week will show a 9.3 percent expansion in the third quarter, down from 9.5 percent in the previous three months.

Property Slowdown

In Beijing, officials are monitoring a slowdown in the housing market after increases in interest rates and bank reserve requirements and a campaign to rein in speculation. Home prices fell month-on-month for the first time in a year in September, according Soufun Holdings Ltd., China’s biggest real- estate website owner.

The State Council this week unveiled tax breaks to support small businesses after some manufacturers collapsed in the city of Wenzhou in Zhejiang province.

While inflation exceeded 6 percent for a fourth month, the rate has come down from a three-year high of 6.5 percent in July and may moderate further because of so-called base effects.

Food prices rose 13.4 percent in September from a year earlier, the same pace as in August, as pork costs jumped 44 percent, today’s report showed. Non-food inflation cooled to 2.9 percent from 3 percent.

Producer prices rose 6.5 percent in September from a year earlier, the bureau said. That was less than the 6.9 percent median estimate in a Bloomberg survey of economists and also the smallest gain this year. In August, the increase was 7.3 percent.

Asian Response

Singapore cut its growth forecast today and said it will slow currency gains, easing monetary policy for the first time since 2009. Indonesia reduced interest rates this week, the Philippines has announced stimulus measures, and South Korea’s central bank says “downside risks” have increased.

In Beijing, officials are monitoring a slowdown in the housing market after increases in interest rates and bank reserve requirements and a campaign to rein in speculation. Home prices fell month-on-month for the first time in a year in September, according Soufun Holdings Ltd., China’s biggest real- estate website owner.

The State Council this week unveiled tax breaks to support small businesses after some manufacturers collapsed in the city of Wenzhou in Zhejiang province.

Inflation reached a three-year high of 6.5 percent in July and may moderate in coming months partly because of so-called base effects. The government’s full-year target is 4 percent.

Yum! Brands Inc., owner of the Taco Bell and KFC restaurant chains, said last week it expects food inflation in the “mid- teens” in China this quarter and plans to increase prices gradually to offset labor and commodity costs.

--Li Yanping, with assistance from Ailing Tan in Singapore and Jing Jin in Shanghai. Editor:

To contact Bloomberg News staff for this story: Li Yanping in Beijing at yli16@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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