China bank lending fuels inflation: Fitch

LONDON: The growth of undisclosed lending activity by Chinese banks is making it harder for Beijing to curb inflation, raising the risk of more aggressive monetary tightening in the near future, Fitch Ratings said on Friday.

The informal securitisation of loans, including the repackaging of debt into retail investment products, is allowing Chinese banks to elude attempts by the authorities to clamp down on credit growth and is weakening the People's Bank of China's (PBOC) ability to cool the economy, said Charlene Chu, head of Chinese bank ratings at Fitch.

"The PBOC has less and less power to control inflation.

(The off-balance sheet activity) undermines its preference for monetary policy, which is to use administrative measures to try to control credit," Chu told a Fitch conference on emerging economies in London.

"That is becoming increasingly difficult as more credit creation is happening outside the banking system. A lot of credit has been shifted to off-balance sheet," she added.

Chinese leaders have identified fighting inflation as the top policy priority and taken measures that range from repeated hikes in interest rates and banks' reserve requirement ratios as well as moderate yuan appreciation since the start of the year.

An August reading showed Chinese inflation pulling back from a three-year high.

Chu said the gradual opening of China's capital account posed another challenge as mainland Chinese companies are now able to raise financing from Hong Kong banks.

"The entire growth model for China up to now has been predicated on funnelling very cheap credit to state-owned companies. But inflation has changed the dynamic in that it has become serious enough for (the authorities) to raise the cost of borrowing and constrict the flow," she said.

Fitch expects activity uncaptured on bank balance sheets to exceed 3.5 trillion yuan ($548 billion) this year.

The ratings agency this week warned that it might downgrade China's local-currency debt rating over the next 12 to 24 months, citing worsening bank asset quality amid still strong lending growth.

Copyright Reuters, 2011