The central bank's decision last Friday to raise reserve requirements for commercial banks was meant to drive home the monetary authorities' resolution to rein in excessive lending and fixed-asset investment.
By increasing the reserve ratio 0.5 percentage points to 8 per cent starting on July 5, the People's Bank of China will squeeze 150 billion yuan (US$18.7 billion) of liquidity from the banking sector.
Though a small sum compared with the surge in bank loans, this reduction of money supply might signal the beginning of the end of easy credit.
New loans granted by domestic banks reached 2.12 trillion yuan (US$264 billion) in the first five months of this year, accounting for about 85 per cent of the central bank's annual target. Meanwhile, urban investment in factories, infrastructure and real estate jumped 30 per cent year-on-year.
The monetary authorities certainly cannot afford to allow banks to continue lending at such a pace.
As the central bank correctly pointed out in an earlier report, the rapid expansion of credit, along with increased fixed-asset investment, is largely a result of domestic banks' desire to make greater profits and local governments' relentless pursuit of investment-led economic growth.
Since lending is domestic banks' major source of profits, they have ample reasons to grant as many loans as possible. This may particularly be the case in a period when newly listed domestic banks are eager to woo investors from home and abroad. And when the cost of money remains very low, local governments and enterprises naturally have a strong incentive to borrow and invest more.
