Aileen Wang

SHANGHAI/BEIJING - China's central bank has reportedly cut its 2011 lending target for banks by 10 percent from last year in a bid to slow down free-wheeling lending and tame inflation.

Even though there are widespread expectations that China will not publicly issue a 2011 lending target after these targets were ignored by banks in 2010, many analysts believe the central bank will still restrict lending from behind the scenes.

China's official Securities Journal reported on Tuesday that the central bank has reduced the target for bank loans by as much as 10 percent from the value of loans handed out last year.

That means banks can lend between 7.2 trillion and 7.5 trillion yuan (about $1.1 trillion) this year, it said.

It is unclear if the target will be officially announced by the central bank or if it will serve as guidance to banks on how much they should lend.

It is customary, for instance, for China's banks to seek approval from the central bank for their individual annual loan targets at the start of each year.

But data which showed China drew a record amount of foreign investment in December and for all of 2010 underscored the difficulties it faces in draining its economy of an abundance of money that is helping to fuel inflation.

If the latest foreign investment data is anything to go by, the central bank has reason to keep up its anti-inflation fight in the world's second-biggest economy.

China drew a record $105.7 billion in foreign direct investment in 2010, with inflows rising over 17 from the previous year as global firms trooped into the country to tap its vast and growing market.

The sharp increase in foreign direct investment means the central bank must spend more money to absorb foreign exchange inflows, said Wang Han, an economist at advisory firm CEMB in Shanghai.

That may add more upward pressure to the already excessive liquidity in the banking system, he said.

Foreign investment is one of the sources of the abundant cash pouring into China, alongside booming exports and speculative money inflows.

NEW YEAR LENDING BINGE

Quoting an unidentified executive from a Chinese state bank, the newspaper said many Chinese had asked the People's Bank of China to keep the 2011 lending target on par with that in 2010.

But the central bank has basically cut every bank's proposed loan size by 10 percent, the bank official was quoted as saying.

Banks lent 7.95 trillion yuan ($1.2 trillion) in 2010, overshooting Beijing's 7.5 trillion yuan target and highlighting the need for more decisive policy tightening.

The newspaper said the central bank also asked banks not to lend more than 12 percent of their full-year targets in January.

Chinese banks had started the year with their usual lending frenzy, handing out 500 billion yuan ($75.6 billion) in new loans in the first week of January alone.

The Securities Journal said regulators considered total lending of 900 billion yuan to be reasonable for the month of January, but will not tolerate loans exceeding 1.2 trillion yuan.

That has led some banks to slow down their of pace of lending to stay under January's target of 900 billion yuan.

Chinese banks, led by Big Four lenders Industrial and Commercial Bank of China <601398.SS><1398.HK>, Bank of China <3988.HK> <601988.SS>, Agricultural Bank of China <601288.SS> <1288.HK> and China Construction Bank <0939.HK> <601939.SS>, may have already lent close to 800 billion yuan in the first two weeks of January, the newspaper said.

The regulator may penalise banks that exceed their January loan ceilings by setting sp

ecific reserve ratios for these banks or ask them to buy more central bank notes.

Unrestrained lending helped to lift annual inflation to a 28-month high of 5.1 percent in November. Inflation may cool slightly in December as food prices stabilised, a Reuters poll of economists showed, but the respite is seen to be temporary.

Data on December inflation and fourth-quarter economic growth will be released on Thursday.

($1=6.592 Yuan)

orting by Soo Ai Peng, Ruby Lian and Zhou Xin; Editing by Ken Wills & Kim Coghill)

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