Worries that the government, emboldened by the robust growth and wary of price pressures, will act more aggressively to tighten monetary conditions weighed on the benchmark Shanghai Composite Index, which fell to its lowest close in more than three months.

China has ordered a further clampdown on excessive bank lending to ensure credit has not illegally entered the stock or property markets as two surveys on Monday showed the mounting challenges faced by policymakers.

China made a strong start to the year, according to January purchasing manager indexes (PMIs) that showed the economy runs a greater risk of growing too quickly, not too slowly, with rising input and output prices pointing to greater inflationary pressures.

Worries that the government, emboldened by the robust growth and wary of price pressures, will act more aggressively to tighten monetary conditions weighed on the benchmark Shanghai Composite Index, which fell to its lowest close in more than three months.

“If more forceful measures are not implemented to control credit expansion, we will likely see considerable upside risks” Yu Song and Helen Qiao, Goldman Sachs economists in Hong Kong, said in a note.

Authorities ordered banks to slow, and in some cases, to halt loan approvals for the rest of January to try to control unruly lenders which provided 1.1-trillion yuan in credit, or 15% of the full-year target, in the first two weeks of the month.

In the latest move, the China Banking Regulatory Commission (CBRC) ordered lenders to conduct checks on whether any loans had been used for improper purposes, a banking source told Reuters on Monday.

If so, the loans must be withdrawn within a certain period, said the source, who had seen the relevant notice from the regulator. He did not want to be identified.

But for all the tremors that the government’s gradual tightening has provoked in global markets, China’s two PMIs for January showed an economy that is growing strongly.

The official PMI eased from a 20-month high in December but remained firmly in expansionary territory, while an index derived from a companion poll by HSBC scaled an all-time high.

The reports, which are important leading indicators, both offered evidence of increasing cost pressures.

“Industrial activity continues to accelerate, implying stronger GDP growth in the first quarter. But rising input and output prices also point to greater inflationary pressure, which will likely prompt more tightening measures in the coming months” said Qu Hongbin, chief economist for China at HSBC.

China might increase interest rates once consumer inflation exceeds the one-year benchmark deposit rate of 2.25%, Ba Shusong, a prominent government adviser, told Reuters. Consumer prices rose 1.9% in the year to December.

POLICY UNCERTAINTY

But in an illustration of the uncertainty surrounding Chinese policy at this juncture, a central bank researcher suggested that tightening could take the form of stiffer reserve requirements rather than higher interest rates.

A half-point increase in required reserves that took effect on Jan. 18 locked up 300-billion yuan. World markets tumbled in response to the tightening, which occurred much earlier than investors had expected.

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last night, the central bank announced that from June 5 yuan from financial institutions to raise the deposit reserve ratio by 0.5 percentage points. From May 19 yuan from financial institutions raised benchmark deposit and lending interest rates. Analysis of Shanghai researcher points out that this is the last 10 years the first time also announced that raising the deposit reserve rate and the benchmark deposit and lending interest rates. Shows that the management tried to reduce market risk, and resolve the determination of a speculative bubble. This is for real estate loans has little effect on the insurance industry and good.

The first time the five-year deposit interest rate increases 0.54
banks face earnings pressure
It is worth noting that this at the central bank announced that financial institutions in the five-year benchmark deposit interest rates 0.54 percentage points, and contrast, the five-year benchmark lending rate 0.09 percentage point hike alone. Personal housing accumulation fund the five-year loan rate was only 0.09 percentage points adjusted upwards accordingly.

In this regard, the Central Plains Analysis Securities researcher said, “This is the profitability of the mainland banking sector will constitute the new pressures. Prior to China’s deposit and lending rates increase in the basic, as adjusted and the bank to pay interest on deposits has improved significantly, while the lending interest rate to accelerate the decline in access. This has always been dependent on income spreads most commercial banks, will have a negative impact. “It is understood that this adjustment, the long-term deposit, loan spreads at 2.25, while the original rate of 2.7, reduced 0.45 points to reach 17% decline.

At the same time, Lyon, a researcher at that “interest rate increase the profitability of insurance companies for the mainland to form good, because the current structure of insurance assets ratio of more than 20% for bank deposits. Research data indicate that rising interest rates 0.27 basis points each, life insurance companies and other large stock price is expected to be up 5 percent support. ”

Short-term lending rates higher than long-term
curb excessive speculation
At the same time, the adjustment of short-term Loan interest rates range, significantly higher than long-term. Galaxy Securities analyst Gao Xiaofeng analysis, “the original short-term lending rates relatively low, since the first quarter of this year, subject to hot pursuit, this part of the funds into the stock market. The encounter marked increase, which would lead banks to tighten short-term loans due in order to market liquidity will gradually shrink, but it also requires a process will have obvious market reaction. ”

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The laws that govern Asia’s property markets serve many gods. A range of cultural values affects land ownership. Political considerations in the region encompass everything, from free democracies, to tightly controlled communist regimes. And of course, there is economics. In many cases this is the driving force behind regulatory changes that cool down, or speed up, investment.

“It’s very much a mixed bag,” says Jane Niven, regional general counsel for Jones Lang LaSalle. “You have Singapore, Hong Kong and India, which follow a common law based on the English system, as well as French and German influences elsewhere in Southeast Asia, an Australian system (Torrens), which has been adopted in some countries, and of course heavily regulated systems in Communist China and Vietnam.

“India is a title-based system, but it operates within such a corrupt environment that there are no guarantees of land ownership. People can claim an interest in property, even if they don’t have an interest, and they can tie it up in court for years and years, frustrating a legitimate owner’s ability to deal with that land for years at a time.

“There has been quite a lot of change in Malaysia, where there’s a recognition of the need to improve the private land situation, particularly with regard to foreign investment. “And many of these countries – Indonesia, the Philippines, Malaysia – will put legislation out for consideration which can take 18 months, two years, even up to five years to be passed.”

And yet, if Asian property law development has a common denominator, Niven contends, it is a reticence to encourage foreign ownership. This is an area that her team spends a good deal of time monitoring.

“Unquestionably, it’s one of the driving factors. You see it in places like Indonesia, changes to the laws in Thailand, particularly company laws which this year have made it more difficult for foreign corporations to operate and own property,” Niven says.

“Even in China, although they’ve introduced legislation to free up private ownership, they’ve actually made it much more difficult for foreign entities to own property, and that is an attempt to slow down the economy more than prevent foreigners from owning land.”

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