China's Credit-Tightening Moves Could Boost the Dollar and Yen

China's decision to rein in credit may help to strengthen both the yen and the dollar as investors look to avoid risk. The chairman of China's Banking Regulatory Commission, Liu Mingkang, said last week that he expects new yuan lending in 2010 to be around 7.5 trillion yuan ($1.1 trillion). That's down from 9.59 trillion yuan ($1.4 trillion) in 2009, but still more the double the 2008 level.But the decision to by China's central bank to tighten lending rules has virtually halted loans by major banks for this last week of January. For example:
  • Industrial & Commercial Bank of China, which is China's biggest lender by assets, told its Beijing branches not to issue new loans for the rest of January;
  • China Citic Bank suspended new lending in Shanghai for those banks that have already used up their quotas;
  • Bank of China Ltd. stopped extending new corporate loans in Shanghai, except for clients that had already repaid previous loans;
  • And China Construction Bank told its branch in Shanghai to screen applications for personal loans and mortgages more carefully, and to stop new lending once a monthly quota is met.
The People's Bank of China is now requiring banks hold higher minimum reserves and is pushing other efforts to slow China's economic growth. By requiring higher reserves, the government can shrink the amount banks have to lend. And, after announcing that China had exceeded its target growth rate of 8% in 2009, ending the year with an 8.7% rate, Beijing signaled that it was beginning to exit its bank-led stimulus program.

In the first two weeks of 2010, China's banks issued more than 1 trillion yuan worth of new loans. That was more than double the monthly average of 400 billion yuan in the second half of 2009. Without strong action by the government, China was on a path to exceed 2009 lending levels.

Why do these moves help strengthen the dollar? News that China is taking steps to slow its growth rate is making markets more sensitive to risk, which lowers demand for riskier, higher-yielding assets and higher-yielding currencies. Traders instead are likely to seek safety in the dollar and the yen until they fully understand the impact China's changes will have on growth rates in China and other developing nations.
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