China’s central bank has asked lenders to rein in credit supply, as the surge of lending that sustained the country’s debt-fuelled coronavirus recovery renewed concerns about asset bubbles and financial stability.

New loan growth hit 16 per cent in the first two months of the year. The People’s Bank of China responded in February by instructing domestic and foreign lenders operating in the country to keep new loans in the first quarter of the year at roughly the same level as last year, if not lower, according to people with knowledge of the situation.

The directive could translate into a considerable drop in bank lending, the largest source of financing for the world’s second-largest economy.

The move underscored a change in policy focus as Beijing has shifted regulatory scrutiny to controlling credit risks rather than boosting economic growth, which has already returned to pre-pandemic levels.

Previous tightening measures, led by stricter quota on real estate lending, have so far failed to quell credit growth. China’s medium-to-long-term consumer loans, comprised mainly of mortgage lending, rose 72 per cent to hit a record Rmb1.4tn in the first two months of this year. 

China’s swift recovery has provided vital support through the pandemic for the global economy and multinational companies, offering a strong source of demand for consumer goods and raw materials.

China’s gross domestic product expanded 6.5 per cent in the final quarter of last year, making it one of the few countries to register positive full-year economic growth. Beijing has already set a target of at least 6 per cent growth for 2021.

With the economy humming, policymakers have turned their attention to the risk of overheating, and launched a broad crackdown on excess lending and financial risk.

“Worries about a pandemic-driven recession are gone,” said Larry Hu, chief China economist at Macquarie Group in Hong Kong. “The top priority is to lower the economy’s debt burden.”

The lending boom at the beginning of 2021 followed a sharp recovery in Chinese real estate transactions and investment as Beijing’s pandemic stimulus lifted the local housing market.

Chinese new home sales surged 133 per cent in January and February this year, while property investment rose 38 per cent. That demand helped push real estate loan growth up 14 per cent, a seven-year high, over the same period.

“Real estate is the safest industry to work with since few collaterals are better than a physical apartment,” said a Shanghai-based banker.

But as home prices took off across China’s coastal hubs, Beijing enacted a slew of measures designed to bring the housing boom under control, led by a crackdown on misuse of business loans in real estate purchases.

That put property financing under pressure and has made lenders with heavy exposure to the sector a significant target of the latest curbs.

In December, the PBoC also tightened its limit on cross-border lending, which significantly constrained foreign banks’ ability to expand in China even as Beijing vowed to continue liberalising capital controls and allowing foreign players into its financial market.

The restrictions were intended to slow the rise of the renminbi, which climbed close to 7 per cent against the US dollar in 2020.

But the currency’s rise threatened to undermine China’s surging exports, which increased more than 18 per cent in December to push the country’s trade surplus to a monthly record on pandemic-driven demand.

Another Shanghai-based banker said the latest lending curbs had put many smaller banks, including foreign lenders, under pressure to “radically” reduce new loans that had well exceeded the regulatory threshold.

“It is very difficult to keep real estate lending at a small proportion of the loan book when other industries bear more risks,” said the banker.