In trading today, the two major Chinese stock indices both declined in response to an official media outlet’s report that some banks have been ordered by authorities to cease lending for the rest of January. This claim was denied by China’s top bank regulator, Liu Minkang. He did say today at the Asia Financial Forum held in Hong Kong that the country's overall credit growth would be restricted to 7.5 trillion yuan in 2010 (compared to last year's record 9.59 trillion yuan) – confirming concerns about lending restrictions on the banks. A separate media report said interest rates will be raised on Friday. China’s central bank had already raised banks’ reserve ratio by 0.5 percentage points last week, and investors fear that all these moves will put the brakes on the country’s growth momentum.

 

However, rather than stopping growth cold in its tracks, these tightening measures are meant to tamper growth to prevent overheating. It is also a good sign of robust Chinese economic strength and shows the Chinese government is proactive. If regulators sat on their hands while liquidity continued to increase unchecked, China could very well develop the massive bubbles some analysts had called for.

 

In a government conference this week, Premier Wen Jiabao confirmed China’s stance to enhance governmental macro-economic control to balance stable growth with contained inflation.