New loans from China's financial institutions registered this year's first annualized decline in October, soothing worries among central bankers and economists that the persistently rapid increases in money supply may overheat the economy.

New renminbi loans by the financial institutions last month were 10.6 billion yuan (US$1.27 billion) less than the same period last year, indicating that "the momentum in the growth of loans is, to some extent, easing," the central People's Bank of China (PBOC) said yesterday in its monthly monetary report.

The bank noted the reversal in loan growth was accompanied by a continued increase in deposits and further gains in inter-bank activity that pushed up interest rates in money markets.

"This shows that the policy effects of a series of macroeconomic and financial measures taken by the central bank are starting to emerge," the report stated.

Chinese banks stepped up lending this year, largely as a result of improved economic activity and partly as an effort to dilute their non-performing loan ratios.

Loans, including both renminbi and foreign currency lending, kept growing at a fast pace this year, totalling 2.75 trillion yuan (US$331 billion) for the first 10 months, compared with the 822.3 billion yuan (US$99 billion) of loans granted during the whole of 2002.

The central bank, worried that the high growth of loans may overheat the nation's fast-growing economy, announced a 1 percentage point hike in the required reserve ratio at commercial banks in August - to 7 percent - which was estimated to have frozen 150 billion yuan (US$18 billion) in funds.

The rise in reserve requirements, coupled with the central bank's increased open market operations, had helped produce a marginal slowdown in the growth of M2, the broad measure of money supply that covers cash in circulation and all deposits, in September.

China's M2 stood at 21.4 trillion yuan (US$2.6 trillion) at the end of September, up 20.7 percent from a year earlier but slightly down from the 20.8 percent recorded at the end of June.

The fastest pace so far this year - a worrisome 21.6 percent, which was more than 3 percentage points than the all-year growth target of 18 percent - was recorded at the end of August.

But M2 growth picked up speed slightly again last month, with the outstanding volume jumping by 21 percent year-on-year to 21.45 trillion yuan (US$2.58 trillion) at the end of October, the People's Bank reported.

The biggest part of new loans in the first 10 months went to infrastructure construction projects, it said. Other high-growth areas included commercial bill financing, consumer loans and short-term loans.

Deposit growth continued on the fast track last month. All outstanding deposits, including both renminbi and foreign currencies, rose by 21.2 percent on a year-on-year basis to 21.65 trillion yuan (US$2.6 trillion) at the end of October, 1.2 percentage points faster than the end of last year.

(China Daily November 13, 2003)