China Eyes 2008 Credit, Financial Innovation

China will intensify its policy tightening next year to curb credit growth, deputy central bank governor Liu Shiyu said in remarks published on Monday.

He told a weekend conference that the central bank would use a variety of monetary policy tools in 2008, including higher reserve requirements, open market operations, interest rate increases and window guidance -- arm-twisting by regulators to get banks to do their bidding.

"We must further increase the force of macro controls, curb the total amount of loans and adjust the structure of credit," the official China Securities Journal cited Liu saying.

To cushion the impact of tighter policies, Liu said China should widen the channels for companies to raise money from non-bank sources.

To that end, China needs to work to launch medium-term notes, high-yield bonds, trust and leasing products, as well as policies to promote venture capital and other investment funds, he said.

China will launch credit default swaps and credit-linked notes next year when the time is ripe while continuing to approve issues of asset-backed and mortgage-backed securities.

Liu said banks should curb the growth of medium- and long-term loans, especially to firms that pollute, are heavy energy users and operate in industries that already suffer overcapacity.

By contrast, the central bank would like banks to lend more for agricultural development, innovation by small firms and for affordable housing, he said.

The central bank will encourage domestic mergers and acquisitions in the financial sector, and support qualified large financial firms to expand overseas, he said.

Too Much Money

Separately, Fan Gang, an academic economist who sits on the the central bank's monetary policy committee, said China may face even more serious excess liquidity problems next year as central banks pump cash into global markets to cushion the blow of U.S. subprime turbulence.

Because of that, China needs to work harder to prevent economic overheating, he told the China Securities Journal.

A slowdown in U.S. growth, which Fan expects to be 1 percent next year, would have limited impact on China's exports, as the country is shipping more goods to Asia and, in particular, to Europe due to the yuan's decline against the euro, he said.

Xia Bin, a senior economist with the Development Research Centre, a top think-tank under the State Council, China's cabinet, said the central bank should not aim to bring about an abrupt drop in bank lending.

"If loan growth declines too much next year, it will probably have a big impact on the real economy," the paper cited Xia as telling another conference over the weekend.

He suggested targets of 16 percent growth in M2 money supply next year and 14-14.5 percent growth in yuan loans.

The broad M2 measure of money supply grew 18.45 percent in November from a year earlier and banks granted 3.58 trillion yuan ($485 billion) in new loans in the first 11 months. Lending in November alone was up 17.0 percent from a year earlier.

Xia said he expected new yuan lending for all of 2007 to be 3.6 trillion yuan, implying December loan growth of just 20 billion yuan or so, due to intensified credit tightening.

Banks extended 87.4 billion yuan in net new loans in November, down from 302.9 billion yuan as recently as August.

Xia saw room for further rises in banks' required reserves, which are now at a historical high of 14.5 percent, and said China would continue to work towards lifting inflation-adjusted deposit rates into positive territory in 2008.

He suggested the central bank could raise deposit rates by more than lending rates to narrow banks' net interest margin. That would deter lenders from expanding credit and thus encourage banks to develop more fee-based businesses.