China's bank lending dips as authorities tighten policy

A surge in real property prices has created fears of formation of asset bubbles in China

China's banks extended fewer than expected new loans in May as the country kept up its efforts to rein in rising prices.

Chinese banks lent 551.6bn yuan ($85bn; £52bn) in new loans, compared with 739.6bn yuan in April, according to the People's Bank of China.

Authorities have been trying to slow down lending in an attempt to rein in rising property prices and inflation.

China is the world's second largest economy.

"The lending growth last month is slower than market expectations, showing that tightening measures are biting," said E Yongjian of Bank of Communications in Shanghai.

Lending spree

As the global financial crisis gripped the world, Chinese authorities set lending targets for banks in an attempt to provide capital to the markets to boost growth.

That saw the country's banks lend record amounts of money, issuing a combined 17.5tn yuan of new loans in 2009 and 2010.

However, analysts say that the affects of that policy are taking their toll on the banks.

"China has witnessed a long program of extending loans for the past two years," said Peter Hoflich of The Asian Banker.

"This can't go on for ever, the banks may even be running out of capital," he added.

Tightening measures

While the record lending spree contributed to the growth of the Chinese economy, it has also created problems.

Availability of cash saw investments into sectors like real estate surge, sending the property prices soaring.

The country has also had to deal with rising prices of food and other essential commodities.

Worried by the prospect of formation of asset bubbles and overheating of the economy, the government has tightened its policies in an attempt to slow down lending.

China's central bank has raised the amount of money that lenders must hold in reserve four times this year.

It has also asked banks to maintain better loan-to-deposit ratio making it difficult for banks to lend.

Analysts said that they expect the government to tighten its grip even further.

"We expect the tightening monetary stance to continue in the future, as curbing inflation remains the government's top priority," said Li Huiyong of Shenyin & Wanguo Securities.