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Prepare for tighter quotas on yuan and forex loans
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Tighter monetary measures are expected this month, despite signs that the central bank's efforts to rein in lending are bearing fruit, say economists.

"The central bank will keep its credit controls on yuan lending besides issuing central bank bills, and speed up the appreciation of yuan as part of its tight monetary policy," said China International Capital Corp in its latest note.

CICC said the central bank is likely to increase interest rates and increase the reserve requirement ratio on yuan deposits at banks this month.

Measures may also expanded into foreign currency lending, analysts said.

China's M2, the broadest measure of money supply, rose 17.5 percent to 42.1 trillion yuan (US$5.9 trillion) from a year ago, slower than January's 18.9-percent growth.

Outstanding local currency loans jumped 15.7 percent to 27.2 trillion yuan at the end of February, down from January's 16.74 percent and December's 16.1 percent.

Lenders extended 243.4 billion yuan of new loans last month, down 170.4 billion yuan from a year ago.

"This was February, when factories were closed (for the Spring Festival holidays), so underlying demand for lending would have been low," said Stephen Green, senior economist at Standard Chartered Bank. "However, it does suggest that the credit quota is holding."

The central government last year said that it would tighten monetary policy to ward off inflation and overheating in the economy.

The central bank raised interest rates six times last year and increased the banks' yuan reserve requirement ratios 11 times to a record high of 15 percent. The central bank also imposed tougher lending quotas on banks to lock up liquidity.

China's central bank has reportedly started to rein in commercial banks' loan extension each month instead of each quarter.

"The tight monetary policy is bearing some early fruits based on the February monetary figures, but it is still difficult to maintain the momentum," said Guosen Securities Co in a research note. "More measures are expected to be rolled out to achieve the target."

The consumer price index, the main gauge of inflation, rose 8.7 percent year on year in February, the biggest jump since 8.9 percent in May 1996. The growth was beyond market expectations.

Inflation in China more than tripled to 4.8 percent last year from 1.5 percent in 2006 as food costs surged.

Credit crunch

Total yuan lending issued in January and February already accounts for about 29 percent of this year's credit quota. The central bank wants credit issued this year to be kept under last year's 3.63 trillion yuan.

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