China January Loan Growth, Consumer Prices Probably Accelerated

China’s banks probably made more new loans in January than the previous three months combined as lenders sought to head off a credit clampdown by policy makers seeking to stem rising inflation pressures.

New bank lending totaled 1.38 trillion yuan ($201 billion) last month, according to the median estimate of 16 economists in a Bloomberg News survey ahead of a government report scheduled for this week. Separate figures are projected to show consumer prices rose the most since 2008 and export gains accelerated.

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Regulators are seeking to slow a credit boom loosed last year that may now be inflating a bubble in China’s property market. The week’s economic reports are likely to reinforce expectations for the central bank to start raising interest rates and loosen controls on the yuan in coming months, moves that might trigger similar steps across the region.

“Central banks are looking at China’s policy moves,” said Brian Jackson, an emerging-market strategist at Royal Bank of Canada in Hong Kong who previously worked at the Federal Reserve Bank of New York and Bank of England. “More aggressive policy tightening from China, including interest-rate increases and yuan appreciation, will make it easier for the rest of the region to move as well.”

Year-on-year percent changes in some of China’s January economic data may have been distorted by the lunar new year holiday, which was in January last year but February in 2010. Most businesses close for the week-long celebration.

Inflation Quickens

At the same time, trends show accelerating price pressures across the economy poised to become world’s second biggest this year, behind the U.S. Aluminum Corp. of China Ltd., the nation’s top producer of the metal, on Jan. 4 raised alumina prices for the third time in five months. Beijing Yanjing Brewery Co. Jan. 15 raised prices for some of its beer about 10 percent, citing rising costs of fuel and rice.

“Inflation fears are beginning to take over from China’s growth euphoria as both consumer and producer inflation continue to climb,” said Kevin Lai, an economist at Daiwa Institute of Research in Hong Kong. “The central bank must tighten policies more aggressively,” said Lai, who expects the People’s Bank of China to start lifting its benchmark rate as soon as this month.

Consumer prices probably advanced 2.1 percent in January from a year before, a third straight gain, the median estimate shows. Producer price inflation probably quickened to 3.5 percent, according to the survey. Growth of the M2 money supply measure probably slowed for a second month to 25.9 percent, the median projection shows.

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Regional Response

Inflation is also accelerating from South Korea to Vietnam as commodity and food prices rise amid the Asia-led global recovery. Still, South Korea, India, Indonesia, Thailand, Malaysia, Taiwan and the Philippines have yet to raise rates and policy makers in countries including Thailand and Taiwan are restraining currency gains, traders say.

In China, authorities have kept the yuan at about 6.83 per dollar since July 2008 to help exporters after letting it appreciate about 21 percent the previous three years. China may allow the yuan to begin appreciate this quarter, which may make its Asian neighbors more comfortable in allowing their currencies to advance, said RBC’s Jackson.

Any need to restrain the yuan may be easing. Exports probably jumped 28 percent last month from a year earlier, and imports probably surged 85 percent, leaving a trade surplus of $20 billion, Bloomberg surveys show.

Growth Quickens

Economic growth accelerated to a 10.7 percent year-on-year pace last quarter, the fastest since 2007, responding to an unprecedented 9.59 trillion yuan of credit extended by banks in 2009 and a 4 trillion yuan two-year fiscal stimulus plan.

The estimate for new lending in January is 48 percent more than the total extended in the last three months of 2009. It’s also 18 percent of the 7.5 trillion yuan Premier Wen Jiabao’s government set as the target for this year.

Property prices in 70 major cities climbed 7.8 percent in December, the most in 18 months, responding in part to the record credit surge.

“There are literally trillions and trillions of renminbi of, frankly, defaulting loans already in China,” Neil McDonald, a business restructuring and insolvency partner in Hong Kong with law-firm Lovells LLP, said at conference last week, using another term for the yuan. “At some point there’s going to be a reckoning for that.”

The Shanghai Composite Index has slumped 10 percent since the year began on concern the government will curb lending to cool the economy.

The central bank asked lenders to set aside more money as reserves on Jan. 12, the first such increase since June 2008. Some lenders have since been asked to limit credit, punished by even higher reserve ratios.

Bank of China Ltd., the nation’s third-largest lender by market value, on Feb. 3 reduced discounts for some mortgages, citing concern about rising property-market risks. Industrial & Commercial Bank of China Ltd., the world’s largest bank by market value, said Jan. 27 it “stabilized” loan growth after lending rose “relatively fast” in the first half of the month.

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