China's Bank Lending Effectively Frozen

China's Banking Regulatory Commission has been providing "guidance" to local and foreign banks in recent weeks, apparently instituting a freeze on new domestic lending for the remainder of the year at Oct. 31 levels. A Commission spokesman denied a Wall Street Journal report of a "freeze" in lending, but acknowledged "informal guidance" has been provided. Still, the guidance effectively serves as a freeze, because lenders that exceed a 15% cap potentially face penalties and future difficulties in receiving approval for branch and product expansions. Bloomberg reports A Hong Kong-based Goldman Sachs senior economist says the Commission also denied a lending freeze in 2004 when curbs were imposed. Year-to-date through October, Chinese banks have issued new loans totalling the dollar equivalent of $471B for a 15.6% increase from year-end 2006. Since continued rate and reserve requirement hikes -- to a nine-year high of 7.29% and at least a 20-year high of 13.5%, respectively -- have largely failed to slow lending, Beijing is taking an alternative non-market approach. Although economists widely agree the most prudent measure is to raise rates further, Beijing wants to avoid excessive yuan appreciation in fear of hurting its export growth engine. Foreign lenders are seen as being most impacted due to their small size, but overall, most bank lending traditionally slows in Q4 and picks up from Q1, thus the impact on banks' earnings is expected to be limited. Nevertheless, bank stocks struggled Monday as the Shanghai Composite fell for a third-straight session, losing 0.9% to 5,269.82.

Sources: Bloomberg, Wall Street Journal
Commentary: Bulging Economic Data Make China Rate Hike Likely • China Inflation Matches Decade High; Trade Surplus Widens • Chinese Banks Covet U.S. Expansion
Stocks to watch: FXI, GXC, PGJ, CAF

Seeking Alpha's news briefs are combined into a pre-market summary called Wall Street Breakfast. Get Wall Street Breakfast by email -- it's free and takes only seconds to sign up.