China to order banks to curb new loans in Q1

Bloomberg

China’s central bank has ordered the nation’s lenders to strictly control new loans in the first quarter of the year, people familiar with the matter said, in another move to curb excess leverage in the financial system.
The new guidance from the People’s Bank of China puts a particular emphasis on mortgage lending, the people said, as authorities grapple to contain runaway property prices. And while the PBOC regularly seeks to guide banks’ credit decisions, this time it may also make errant lenders pay more for deposit insurance, one of the people said.
The central bank declined to comment. Policy makers are trying to strike a balance between avoiding excess credit that fuels asset bubbles and keeping enough funding in the financial system to meet the seasonal surge in demand for credit ahead of the start of the Lunar New Year holiday this week. President Xi Jinping and his top economic deputies reaffirmed last month that they plan to prioritize the control of financial risks in the economy to prevent asset bubbles.
“This is a continuation of the tightening trend we’ve seen since the second half of last year and extends from shadow banking to on-balance sheet loans,” said Wei Hou, a Hong Kong-based analyst at Sanford C. Bernstein & Co.

Record Lending
The PBOC may use its MPA framework to punish banks which don’t comply with the new lending rules by lowering interest rates on reserves they are required to deposit with the central bank, according to the people, who asked not to be identified as the discussions are private. The central bank may also punish errant lenders by making them pay more for deposit insurance, one of the people said.
The new instructions included a request for banks to keep any increase in new mortgage lending in the first quarter below the increase seen in the fourth quarter of last year, the people said. The growth rate of total outstanding mortgages should also not exceed the fourth quarter rate, they added.
Chinese banks doled out a record 12.65 trillion yuan ($1.8 trillion) of new loans in 2016, with many tending to front-load their lending in the first quarter of the year so they could record the interest income earlier. Of the total new loans, 36 percent were given out in the first quarter of last year.
In another sign of the effort to curb risks, the PBOC unexpectedly increased the interest rates on medium-term loans that it uses to manage liquidity. Earlier, the central bank said it will include wealth-management products held off bank balance sheets in its macro prudential assessment framework for gauging risk to the financial system starting in the first quarter.
Property Controls
The government has been targeting home loans since the fourth quarter to contain runaway property prices in areas deemed overheated.
At their annual economic work conference last month, Chinese leaders singled out property, saying that “houses are built to be inhabited, not for speculation,” according to a post-meeting statement released by the official Xinhua News Agency. Apart from mortgage curbs, China’s government is encouraging city-specific measures such as raising down-payment requirements.
As well as setting a limit on new mortgages, the central bank told banks to keep other loans under control, the people said. Bank of Communications Co. estimates that China’s new loans may reach 13.5 trillion yuan in 2017, which would be a new record.