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

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

The directive could result in a considerable drop in bank loans, the main source of financing for the world’s second-largest economy.

The move highlighted a shift in policy direction as Beijing shifted its regulatory review toward controlling credit risk rather than boosting economic growth, which has returned to pre-pandemic levels.

Previous tightening measures, led by tighter quotas on home loans, have failed to dampen credit growth. China’s medium- and long-term consumer loans, comprised mostly of mortgages, rose 72% to a record 1.4 billion rupees ($ 213 billion) in the first two months of this year. year.

China’s rapid recovery provided vital support during the pandemic to the global economy and multinational enterprises, providing strong demand for consumer goods and raw materials.

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

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

“Concerns about a recession caused by a pandemic are gone,” said Larry Hu, chief economist for China at Macquarie Group in Hong Kong. “The top priority is to reduce the debt burden of the economy.”

The loan boom in early 2021 followed a strong recovery in Chinese real estate transactions and investment as the Beijing stimulus pandemic boosted the local real estate market.

Chinese new home sales jumped 133% in January and February, while real estate investment rose 38%. This demand helped push home loan growth to a seven-year high 14% over the same period.

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

But as house prices have taken off in China’s coastal poles, Beijing has adopted measures designed to contain the housing boom, spurred on by a crackdown on the misuse of business loans in real estate purchases. .

This has put real estate financing under pressure and made lenders heavily exposed to the sector a major target of the latest restrictions.

In December, the PBoC also tightened its limit on cross-border lending, which significantly limited the ability of foreign banks to expand in China even as Beijing pledged to continue liberalizing capital controls and allowing actors foreigners to access its financial market.

The restrictions were aimed at slowing the rise of the renminbi, which climbed nearly 7% against the US dollar in 2020.

But the currency rise threatened to undermine the surge in Chinese exports, which rose more than 18% in December to push the country’s trade surplus to a record monthly demand due to the pandemic.

Another Shanghai-based banker said the latest lending restrictions had put many small banks, including foreign lenders, under pressure to “drastically” cut new loans that were well above the regulatory threshold.

“It is very difficult to keep home loans at a small proportion of the loan portfolio when other sectors bear more risk,” the banker said.