For China, the Worry Now is Growing too Fast

By: Joe McDonald, Martin Crutsinger, Christopher Bodeen, Tales Azzoni, Pan Pylas, Jeannine Aversa, Christopher S. Rugaber - AP Writers
By: Joe McDonald, Martin Crutsinger, Christopher Bodeen, Tales Azzoni, Pan Pylas, Jeannine Aversa, Christopher S. Rugaber - AP Writers

BEIJING (AP) - While the rest of the world is trying to recover
from recession, China is trying to slow its economy down.

Beijing took steps Tuesday to curb the kinds of high-risk loans
that can create housing bubbles, as happened in the United States.
It ordered banks to set aside more reserves, and its central bank
raised interest rates on one-year bills.

China, which was also hit by the worldwide downturn but has
bounced back fast, hopes cooling the pace of lending will keep its
economy growing without creating inflation and overheating. Other
nations will be watching: They're counting on a healthy Chinese
economy and a steady stream of demand for their goods.

The Chinese government acted after food prices edged up and news
reports said bank lending skyrocketed in the first week of January.

"This is a small first step towards reducing the very massive
amounts of stimulus that they have been providing to their
economy," said Mark Zandi, chief economist at Moody's Economy.com.

China is pumping 4 trillion yuan, about $586 billion, into its
economy in 2009 and 2010 through public works and help for
industries. About 30 percent of the money is coming from Beijing,
the rest from local governments, state companies and banks.

The Obama administration has cautioned other countries not to
withdraw their stimulus aid until a global recovery is firmly in
place. But private economists said Beijing's action was wise, given
the surge in Chinese lending. Some economists have warned of a
potential real estate bubble in China.

Because Beijing can dictate lending patterns to state-controlled
banks, it's been far more successful than the U.S. government in
loosening the flow of credit. Bank lending has remained tight in
the United States since the financial crisis erupted, despite $700
billion in bailout help for financial institutions.

Last year, under orders, Chinese banks lent $1.3 trillion in
January-October - more than double the level for all of 2008. In
the U.S., lending by the biggest banks dropped 9 percent last
October compared with a year earlier, according to the Treasury
Department.

Economists warned that China's banks could become stuck with bad
loans, and Chinese leaders told them in July to reduce lending. A
related fear is that too much money swirling around China's
financial system could ignite runaway price increases or a plunge
in asset prices.

"With inflation creeping up, the bank's broad aim seems to be
to keep inflation expectations in check and to signal the
likelihood of interest-rate hikes to come," said Mark Williams,
China economist for Capital Economics.

Helped by Beijing's stimulus measures, China's economy is
expected to grow 8.3 percent this year, according to government
forecasts. The U.S. economy is believed to be growing right now at
an annual pace of just 2 to 3 percent.

China's central bank raised the amount of reserves that banks
must hold by 0.5 percentage point, to 15 percent of their deposits.
U.S. banks must hold 10 percent in reserve, though that requirement
is based on only a fraction of their balance sheets.

China faces pressure from the United States and other trading
partners that claim Beijing is improperly supporting its companies
with subsidies and market barriers, raising fears of a trade war at
a time when governments are eager to protect jobs.

Other governments also say the Chinese yuan is kept undervalued
by being effectively pegged to the dollar. That gives its exporters
a price advantage and adds to its swollen trade surplus.

American manufacturers say this helps explain the huge U.S.
trade gap with China, which shrank last year because Americans
bought fewer Chinese goods during the recession.

Nothing in China's statement signaled any change in the yuan's
value against the dollar. Paul Dales, U.S. economist at Capital
Economics, said America's deficit with China will probably widen
again this year, in part because China seems focused on growing its
economy with exports, not domestic consumption.

China's action Tuesday came sooner than expected. Analysts
suggested it might have been prompted by reports that Chinese banks
lent 600 billion yuan, or about $88 billion, in the first week of
January - nearly double the total for all of December.

"This is an extremely high figure, and suggests that the banks
are rushing to push loans out the door ahead of the widely
anticipated tightening of monetary policy," said Tom Orlik, an
economist in Beijing for Stone & McCarthy Research Associates.

But the money flowing through the economy helped drive up real
estate and stock prices, and Chinese leaders worry about a rise in
food costs, a politically sensitive topic.

Housing prices in Beijing and Shanghai have soared since late
2008 to an average of more than 12,000 yuan ($1,700) per square
meter, double the level three years ago, according to a December
report by U.S. bond manager Pimco. Food prices rose 0.6 percent in
November after nine months of declines.

The bulk of bank lending in China still goes to companies, but
home mortgages and auto loans are gaining in popularity.

The government is clamping down on lending for second homes as a
way to cool a surge in housing costs. But it says it wants to
promote consumer credit to encourage spending at stores. The
minimum down payment on a second home was raised from 30 percent to
40 percent in 2007 to try to curb speculative purchases.

The central bank governor and others have called for measures to
prevent asset prices from rising too fast, warning that a bust
could disrupt the economy and hurt banks that are left with unpaid
loans.

Beijing is trying to curb foreign "hot money" coming into
China to speculate in stocks and real estate. The Cabinet announced
Sunday it has ordered closer scrutiny of inflows of foreign money.

Despite the lending curbs, Chinese leaders have assured the
public that stimulus spending will continue in 2010. They say it
will focus on helping entrepreneurs who generate the bulk of
China's economic growth and new jobs but who missed out on the
first year of the stimulus, which went mainly to state companies.


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