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Slowing economic growth is constraining banks' lending, with domestic institutions likely to have done far less business in the first quarter than expected, analysts said.
It is "highly likely" that new loans in the first quarter missed the central bank's target of 2.4 trillion yuan ($380.3 billion), even though in March alone, banks made about 800 billion yuan in new loans, said Lu Zhengwei, chief economist with the Industrial Bank Co Ltd.
Some economists, including Wang Tao with UBS AG, said the March loan figure might have been larger, but that doesn't change the big picture.
The official quarterly loan figures haven't yet been released. But the figure for March may be followed by gradual increases in the next few months, Lu said.
Beginning from the second quarter, with China seeking to support GDP growth, credit demand will increase, bankers said.
Lu noted that corporate funding demand has been rising, as shown by an increase in commercial paper market rates in late March. The rise indicated that companies were demanding more working capital, he said.
Larger companies are borrowing more. That could explain why Yang Kaisheng, governor of the Industrial and Commercial Bank of China Ltd, which traditionally lends to large State companies, said his bank had not seen a decline in credit demand.
Lu said a recovery in the sale of second-hand housing since February would mean growth in medium- and long-term personal loans in March.
New capital investment and clearer government policies on local government debt, still to be released, would also spur credit demand, he said.
In January and February, banks extended fewer new yuan loans than forecast, raising concerns about the effectiveness of the central government's policies to spur economic growth. Banks lent 710.7 billion yuan in February, against a forecast of 750 billion yuan. In January, they lent 738.1 billion yuan, against a forecast of 1 trillion yuan.
Jin Lin of Orient Securities Co Ltd said banks were reluctant to lend more in the first quarter, as they were under central bank pressure to control loan quality and avoid more non-performing loans.
The fourth quarter saw the first increase since 2005 in NPLs and their ratio of total outstanding loans.
As of Dec 31, the NPL ratio was 0.96 percent. Liao Qiang, a researcher with Standard & Poor's Financial Services, said the ratio could reach 5 percent in 2012.
Credit demand also fell as economic growth slowed, said Wu Xiaoling, former deputy governor of the People's Bank of China, the central bank, and now vice-chairman of the National People's Congress Financial and Economic Affairs Committee.
Loan demand will rise, said E Yongjian, an economist at Bank of Communications Co Ltd. Though companies are guarded about profit prospects and hesitant to borrow, banks are in a position to lend, having gained many new deposits as they usually do at the end of every quarter.
New yuan deposits reached 1.6 trillion yuan in February, up 282.4 billion yuan year-on-year. With easier monetary policy anticipated, loans will rise, he said.
Zhang Zhiwei, chief economist for China at Nomura Holdings Inc, agreed, saying there was pent-up demand for credit. He noted the central bank's cut in the reserve requirement for 379 branches of the Agricultural Bank of China, which freed up 23 billion yuan for rural borrowers.
Also, he said, Premier Wen Jiabao said in early March that China needed to finish key rail projects and start urgently needed new projects in 2012.
Zhang forecast that the central bank would soon cut rates to boost loan demand, because cuts in the required reserve ratio wouldn't address loan demand directly.
Yao Wei, China economist at Societe Generale SA, suggested a relaxation in regulations, such as a lower loan-to-deposit ratio, to boost lending capacity.
The LDR ceiling is 75 percent for most lenders. According to the China Banking Regulatory Commission, as of Dec 31, the average LDR for commercial lenders was 64.9 percent, down 0.5 percentage point from a quarter earlier.
Yao said holding the LDR unchanged would make it difficult to achieve the government's goal of new loans of 8 trillion yuan this year.
"Even if there is no change in the regulation implementation may not be as strict."
The government may also lower risk weightings, she said, by allowing more excess loan loss reserves to be counted as banks' supplementary capital and tolerating higher NPLs for lending to small and medium-sized enterprises.
Bloomberg News has reported that China might ease loan restrictions for ICBC, China Construction Bank and Bank of China.