China’s central bank has ordered the nation’s lenders to strictly control new loans

Bloomberg.com are reporting that China’s central bank has ordered the nation’s lenders to strictly control new loans in the first quarter of the year in another move to curb excess leverage in the financial system.

The new guidance from the People’s Bank of China puts the emphasis on mortgage lending, as they have a problem with runaway property prices.

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.

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Banks which don’t comply with the new lending rules may be punished by lowering interest rates on reserves they are required to deposit with the central bank.

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.

China’s central bank has ordered the nation’s lenders to strictly control new loans

People’s Bank of China

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.

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The PBOC on Tuesday 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.

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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 deposit requirements.

As well as setting a limit on new mortgages, the central bank told banks to keep other loans under control. Bank of Communications Co. estimates that China’s new loans may reach 13.5 trillion yuan in 2017, which would be a new record.

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