Chinese Premier Wen Jiabao vowed on Tuesday to slam the brakes on a credit surge at the start of this year, following reports that the central bank has cut the 2011 lending target for banks by 10 percent.

Wen's comments highlighted growing official concern that a tide of bank loans on the back of rapid capital inflows is complicating the government's efforts to rein in inflation.

We must avoid abnormal issuance of credit at the start of the year, Wen said, in a statement published on the government's website, www.gov.cn.

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.

That followed the extension of 7.95 trillion yuan in new loans in 2010, overshooting Beijing's 7.5 trillion yuan target and highlighting the need for more decisive policy tightening.

Wen told a meeting of the State Council, China's cabinet, that the authorities would use a mix of policy tools to ensure reasonable expansion in credit and money supply.

In addition, Beijing would maintain its year-long campaign to curb speculative demand on housing, Wen said.

The Chinese central bank raised required reserves on Friday, the fourth hike in just over two months, or the seventh since early 2010. China also raised interest rates twice last year.

NEW YEAR LENDING BINGE

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.

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.

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

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.

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.

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.

ABUNDANT CASH

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 stabilized, 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.

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.

($1=6.592 Yuan)

(Reporting by Soo Ai Peng, Ruby Lian, Zhou Xin, Langi Chiang; Writing by Kevin Yao; Editing by Miral Fahmy)

China Inflation