Chinese firms facing credit crunch

The central bank seeks tighter lending controls. The short-term effects could be painful for some.

Posted: June 29, 2013

BEIJING - Like a boxer slimming down for a fight, Li Zhongjian is shrinking his 20-year-old cigarette-lighter manufacturing business to brace for a credit crunch he sees looming over China's entrepreneurs.

Li's workforce in the southeastern city of Wenzhou has shrunk by half, to 300, this year and he isn't replacing employees who leave. He said he used to borrow money but was preparing to do without credit that might no longer be available as regulators try to force Chinese banks to cool a lending boom they worry could race out of control.

"I won't try to get loans for my business anymore. I'll wait and see how the market and policies are doing. I won't invest, either," Li said.

A cash shortage that hit China's credit markets this month was the first shock wave from what analysts say could be Beijing's most drastic clampdown on credit in two decades. The central bank has called for tighter lending standards, which should reduce risk but is likely to reduce financing for a private sector that generates China's new jobs and wealth.

China will benefit in the long run from a safer financial system, but the short-term cost could be a painful squeeze on entrepreneurs. Some say a recovery that already was faltering could weaken further.

The government has yet to say how extensive the controls will be or what it might do to ensure lending for producers whom Chinese leaders have said they want to support.

Some branches of two of China's biggest lenders - Bank of China and the Industrial & Commercial Bank of China - have temporarily suspended lending to businesses and individuals, the business magazine Caixin reported, citing sources at the banks.

The credit clampdown hits amid uncertainty about whether China's lackluster recovery from its deepest downturn since the 2008 global crisis is stalling.

Economic growth decelerated to 7.7 percent in the first quarter from 7.9 percent the previous quarter. May retail sales fell short of forecasts, and export growth slowed. An HSBC Corp. survey of manufacturers showed June activity fell to a nine-month low and was contracting.

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