China Freezes Lending

Sunday, November 18, 2007 19:12

Last week I got a short message from my good friend Jay Boyle (you have seen his posts here).

Simply put, it said China will stop all loans.

At the time I wasn’t sure what that meant in the grander schemes of things .. and I stil don’t.

But Jay put it to me in terms I could understand..  CPI must be much higher than is being reported.


In an announcement that is sure to make a lot of investors ask themselves how strong the foundation of the Chinese economy is.  After all, one of the primary functions of a bank is to LEND MONEY.

However, with “rampant investment” flowing into China, and a number of failed regulatory, tax, and other measures, the CBRC decided to pull the emergency brake.

according to the WSJ article  China Curbs Bank Loans To Cool Investment Fever

A China Banking Regulatory Commission official in Shanghai confirmed that local and Chinese subsidiaries of foreign banks have been requested to ensure that loans outstanding at year end don’t exceed the levels on Oct. 31. The official described it as “guidance aimed at supporting the macrocontrol measures being implemented.”

Forgive me for being blunt, but this step is not guidance… it is turning banks into cooperative credit unions where all they are allowed to do is accept deposits and give bad service.

Over the next few days, the shakeout will become more and more obvious, but I would expect the stock market to “decline” and Back Alley Bankers (See CATO report) to move in to supply the market with funding

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18 Responses to “China Freezes Lending”

  1. Dave S. says:

    November 18th, 2007 at 8:40 pm

    Hey… You guys better sort this story out for us. Kudlow and Bloomberg are both live right now saying this is complete hogwash. What’s the deal?

    Note… I wouldn’t put it past Marxists to do this, so I’m inclined to believe it’s true.


    Dave S.

  2. John Guise says:

    November 18th, 2007 at 9:11 pm

    I wonder if this measure is just going to push businesses — private businesses especially — into using underground financing networks for short term loans. Supposedly companies that are already doing that are destroying some cities’ local economies (


  3. Rich says:

    November 18th, 2007 at 10:47 pm


    thanks for the added pressure!!!

    I am currently waiting to hear back from a few people on this as there seems to be some confusion. I have heard that the guidance is specific to real estate and heavy polluters (neither of which is new news).. and I have heard that this is wider. the question I am waiting to have answered by those in the banking community is just how wide this goes.

    John –

    I think there is genuine concern about the pace at which certain sectors in certain regions… however, what I am concerned about is (1) This is a macro solution to what I see right now as micro problem – a few inflated areas (2) by using this, I am now concerned a bit that the system itself is still too weak to properly self regulate

  4. Dave S. says:

    November 18th, 2007 at 11:17 pm

    “(1) This is a macro solution to what I see right now as micro problem – a few inflated areas”

    Sure, I agree…

    “(2) by using this, I am now concerned a bit that the system itself is still too weak to properly self regulate”

    Well, in the eyes of a western banker, this is like dropping a nuclear weapon on the credit markets, isn’t it?

    Jeez… As far as I can see, if this is true, it’s the financial news story of the year at minimum. Talk about draconian! The world markets are delicately balanced at the moment you must agree. This would be a MAJOR black swan.

    I’ll watch for developments – thanks for the quick response.

  5. Rich says:

    November 18th, 2007 at 11:31 pm


    I would agree that this would be probably the story of the year for the financial markets, and I am looking forward to seeing what the real story ends up being.

    What boggles my mind on this, is that if it is indeed just real estate and heavy polluters, then there is no story. this is something the NDRC, CBRC, SEPA have been putting out publicly for 6 months.

    Bloomberg is now reporting that this is just stronger “guidance”.. but again, is that because the local branches have to this point avoided the guidance? walking further out on the limb and looking past ground zero, what could today’s mess of a story mean on a wider scale with regard to the strength and internal controls of Chinese banks? Should investors be concerned?

    but if that is the case, then why did this hit the front page of the WSJ and why are several people in the banking industry here talking about it as if this were a new thing?

    Anyway… more soon I am sure!

  6. Dave S. says:

    November 18th, 2007 at 11:39 pm


    That Bloomberg link returned blank.

    Sorry to pester – Thanks a bunch.

    BTW… I won’t touch securities with a ten foot pole. I do care what happens, though; I’ve got currency in my wallet, and I’ve got money buried in my yard, if you get my drift. 😉 That’s the sole extent of my ‘investing’.

    Thanks again!

  7. Jay Boyle says:

    November 19th, 2007 at 12:09 am

    Whether the CBRC decided to act on this or not. I can not comment. What I can comment on is that on Friday the loan officer in a US bank in Pudong has stopped the withdrawal of a facility with a guarantee from the US parent bank and stated:

    “the “PBOC” and “CBRC” have halted all bank lending”

    This decree is “Neibu” or internal and there is no formal written documentation for it.

    I have been in China for almost 12 years and last time a similar decree came down was during the 97 Asian Contagion.

    Almost overnight you could not send money out of China for about a month. Later it was modified to allow payments for trade only.

    If you can imagine trying to explain to your head office. “I know we are legally allowed to repatriate profits but the bank won’t let me. There is a policy. No they won’t show it to me it is “Nei Bu” (internal) No I don’t know when they will let us send money again.”

    So in the past 3-4 months we came to the realization that credit risk was mis-priced for CDO’s now hopefully people will realize the Shanghai Composite index is also mis-priced.


  8. Rich says:

    November 19th, 2007 at 12:27 am

    Hi Dave,

    Actually, I was walking down the street with my girlfriend yesterday and I made the comment that those nice villas will be cheap once the market comes off. I still do not understand how people think Alibaba is a good value at the valuation it has. It has a good brand, but so did

    Try this link.


  9. Rich says:

    November 19th, 2007 at 12:31 am


    Thanks for the clarity on what you are hearing, and your insights into how this can impact a firm. I am sure that this will reverberat in NY trading…. they question is. Should I short the Bank of China?


  10. Dave S. says:

    November 19th, 2007 at 12:46 am


    Whooee! You guys are painting a much scarier picture than the guys at Bloomberg. You may want to give them a ring.

    I’ll bet Marc Faber’s phone is ringing off the hook right now, eh? Jimmy Rogers must be thinking real hard, too.

    Thanks guys.

  11. Rich says:

    November 19th, 2007 at 12:52 am


    I don’t know about jay’s motivations for painting his picture. I am just trying to drive traffic 🙂

    Seriously, I am trying to understand how scary it could get. It could be a blip of old news that was digested the wrong way, or it could be one of those things that really is scary. The next few days will show what the real case is, but in the meantime I will just speculate worst case scenarios so that if nothing else it forces people to think.


  12. Jay Boyle says:

    November 19th, 2007 at 9:12 am

    Hmmm. Motivations. My opinions will not move markets. Although a big fan of both, I am not Rogers or Greenspan and am too small for anyone to really pay attention to me. So how about for some PE firms, Hedge Funds and Multinationals setting up shop in China that I might have a clue and they should use my services. 😀

    On Wall Street the national pastime is to second guess the FED. Let’s for a moment try and armchair quarterback the the PBOC and the CBRC.

    So here is the way I see it. All governments whether in the west or in Asia want to remain in power and the best way to remain in power is full employment and low inflation. So they will promote policies to keep full employment and low inflation. (Keep in mind that the Chinese are particularly worried about inflation as historically inflation has led to civil unrest and sometimes the change of a dynasty) And FWIW nobody not Zhou Q Public or the international markets or governments as much as they like to bash China wants to see an unstable China.

    Over the last 10 years over capacity in the Chinese labor pools and manufacturing has seen serious downward pricing pressure as Chinese peasants have left their farms to work in the factories. However, with the factories coming on line and the rise of Chinese incomes and consumption there has been also a rise in demand driven commodity prices. This rise in commodity prices is creating some upward pricing pressure. Recently we have some additional upward pressure as China is trying to move away from certain low value added goods and unfortunately Chinese farmers are not skilled enough to do this type of work. As China tries to move up the value chain to produce the higher value added goods, and they are doing this by changing their encouraged industry list, the workers capable of producing them become fewer and there is more wage inflation pressure. I am betting that local governments and statistical bureaus have under reported this inflation. (This is a common problem in China as no government report is willing to give bad news so they always fudge the report)

    The semiskilled and skilled labor that is capable of doing this work is in high demand and in the last year we have seen wage inflation. A recent report I saw from Booze Allan and Hamilton stated it was 7% but I have talked with GMs of factories in Suzhou that complained it maybe closer to 20%. As a general rule companies experience a 15 to 20% employment turn over. As you may imagine with that kind of turn over there is no way efficiency will keep up with this type of wage pressures so real inflation kicks in.

    Now lets for a minute put ourselves in the PBOC and CBRC’s shoes. Your goal is to maintain stability at all costs. You have been missfed inflation data from your statistical bureaus, and inflation is a lot higher then you expected.

    If you raise interests rates much higher you may cause increased inflows as speculators bet that the currency will rise and this further hurt your relationships with your largest trading partners (who have been naively screaming for revaluation but we won’t get in to that at this time.)

    If you don’t do something about this inflation you have 800 Million farmers marching on Beijing probably right about the time the Olympics will hit.

    So what do you do? Of course you reduce the supply and the demand for money but how?

    Traditionally you would see both an increase in interest rates and a decrease in fiscal policy. However China is not about to put the breaks on its government spending when most of it is earmarked for the Olympics (serious loss of face) And we already know why they will not jack up interest rates so what do they do?

    Really it is just Econ 101 the answer is rationing! This is what happens anytime a free market is stopped from working and the invisible hand of Adam Smith is not allowed to work it magic. We either end up with a surplus or a shortage. Unfortunately as Rich pointed out we will also end up with a black market.

    I’ll write about the fall out in another post.


  13. Joe Z. says:

    November 20th, 2007 at 7:32 pm


    I’m a little late to this point but the fact is that de facto lending stoppages occur every year at this time. It’s not a big deal and it certainly shouldn’t be cause for fear.

    Historically, banks have hit lending quotas by Oct / Nov and essentially skate through the next two months while closing the books. We saw this every year from year 2000 – today.

    Some officials may use this seasonal occurrance to try to advance the notion that they actually control lending and that banks are following orders. But this truth is that bank lending slows at this time of year anyway…..offically mandated or not.

  14. Rich says:

    November 20th, 2007 at 8:38 pm

    Hi Joe,

    Thanks for the comments.

    My question would be though, is this a phenomenon that is across the board? specific to a sector? other?

    As I said above, “guidance” mean to curb over investment in real estate is not a new story, and if as you say this is a common historically… then there is nothing to worry about.

    however, if you are speaking to a specific sector, and now the phenomenon has spread wider… should that be something to run through with a finer comb?

    At any rate, given there has been no shock to the economy at this point, I would say that what you have said is correct and that there really was nothing big about the story… had it been, then we would have seem more reports… but for the sake of a good old academic debate…

    What if?

  15. Ed says:

    November 22nd, 2007 at 9:08 pm

    Hi Guys, I am a US citizen and can speak some Mandrin. I have been living in China on and off since 2003 and own several properties here. From a lending perspective, China has put restrictions on Home Loans (DID NOT STOP LENDING) for 2nd properties (& foriengers) where the investor has to have a 40% deposit. The goverment is also seeing a need to start reserving land for lower-income housing, approximatly 50% of the goverment property in the cities is the local goverments are trying to plan for the future. Saying that, China has the largest population of 1.3 billion (ie.. 1US person = 4 Chinese people ), average salary is $3,000 RMB per month in the larger cities, so the average person can not afford a 150,000 USD Luxury apartment. They can affort a reasonably priced $30,000 (15-30 year loan) flat so profits are still out their to be made, the goverment is just trying to change the direction some.

    Happy investing!

  16. Rich says:

    November 23rd, 2007 at 10:52 pm

    Hi Ed,

    Have you recently applied for a loan though? Per your comments, the restrictions have been ongoing for the last 2.5 years, howveer it is most recently that the new banking “freeze” seems to have just been put in place. According to Joe, this is an annual thing… perhaps this year is different?

    One of the most interesting restrictions I saw 18 months ago was aimed at ensuring local buyers could continue to afford housing. What they did was say that 70% of all new investments needed to be under 97m. From that point on, you would think that would have changed the market… but what actually happened was that the definition was widened so that developers could argue a neighborhood was still under 70%, and thus it was ok…


  17. Ed says:

    November 24th, 2007 at 1:39 am

    Hi Rich,

    A good source for most recnet Business information in China is: and

    Bank where recent loans have been secured through HSBC in China…Anyway –> China continutes to grow at a 11-12% GDP and the goverment wants to get the bad seeds out of the market.

    A recnet artical:
    Govt. to clamp down on new projects “The government has tightened project approvals since late 2004 and is trying to restrain the expansion of factories that are heavy polluters and energy consumers.”

    The government said last week that it would delay the approval of some projects in the fastest-growing regions.”

    For those businesses that have assets and a proven trackrecord and do not dump hazardous materials into China’s water supply, no need to worry much. China is also in the process to establish a national credit system, just went live in 2006..I’m sure we will all hear more news about that in the future.


  18. Rich says:

    December 5th, 2007 at 4:57 am

    Small update as the FT has posted (h/t Jay Boyle) China in fresh curb on bank lending where the lead paragraph is:

    China is to extend a clampdown on new bank lending into next year because of fears that rising inflation could become unmanageable, according to bankers, officials and economists