This kind of direct limiting of lending does slow things down, and can cause a credit implosion induced hard landing. It’s like a cut in govt spending.

It doesn’t have to be a hard landing, but it’s a serious risk, especially going into the second half of the year.

China 2011 new lending seen around 6.7 trln yuan -paper

July 6 (Reuters) — Chinese banks are seen issuing 6.7 trillion yuan ($1.04 trillion) worth of new loans this year, an official paper said on Wednesday, suggesting lending could slow markedly in 2011 as part of Beijing’s drive to tame inflation.

Drawing on its own calculations and without citing sources, the China Securities Journal said the pace of new bank lending could ease considerably from last year’s 7.95 trillion yuan.

The pace of bank lending is a focal point in China’s monetary policy as it is used by Beijing to manage economic growth and inflation. The government tells banks how much they should lend by setting loan quotas.

Although Beijing did not publicly announce a loan quota this year, it is widely believed to have an informal target of 7 trillion-7.5 trillion yuan.

Chinese banks likely lent 4 trillion yuan worth of new loans in the first six months of this year, after lending 3.5 trillion between January and May, the paper said.

Accordingly, total new lending for the year would hit around 6.7 trillion yuan if Chinese banks control their pace of lending according to a formula stipulated by the central bank, the paper said.

It said the formula calls for banks to lend 60 percent of annual loans in the first half of the year, and the remaining 40 percent in the second.

With inflation at 34-month highs and a lending spree by Chinese banks in 2009 feeding worries about a build-up of bad debt, Beijing wants to temper bank lending this year.

Since October, it has increased interest rates four times and raised the reserve requirement ratio for banks six times, effectively ordering banks to lock a record 21.5 percent of deposits with the central bank.