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Reining In Bank Lending Further

The central bank is playing a finely balanced game. It is asking the big state owned banks to provide assessments of their uncollateralized loans, especially to local and provincial governments who have used captive investment vehicles to get round budgetary restrictions on their spending, loans that often find their way into real estate speculation..

The banks may well be told find assets to back loans that aren’t collateralized, such is the way of administrative guidance. If the banks can’t they may have to declare the loans as non-performing.

The risk there is that neither the banks nor the economy is in rude enough health to take the hit. There are plenty of people nervous enough about the prospect of a property bubble driven crash for it to become self-fulfilling if the bank loan spigot is turned off too abruptly, though turned down at the very least it most assuredly must be. Last weekend’s increase in bank’s reserve requirements may be another formal step to rein in bank lending, but a bit of arm twisting will be more effective — providing the central bank knows quite how hard to twist short of breaking something.

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