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