China has upstaged itself on the eve of today’s release of important economic figures for the 2009 year and for the month of December and the December quarter by slamming on the brakes in a rather crude and brutal way.

A multitude of media reports in Beijing and Hong Kong yesterday revealed that the country’s bank regulator had ordered many banks to stop lending for the rest of this month, or longer, according to some of the reports.

No market operations, lift in rates, or even an increase in the reserve asset ratio (which happened last week anyway), just an order to several banks, large and small to stop making loans. It was regulation at its crudest and most direct.

On top of this, a Hong Kong TV station claimed that government and the central bank would allow a 0.27% rise in official interest rates tomorrow, a day after the release of the figures for growth, investment, industrial production, retail sales and consumer and producer inflation. That would follow the 0.5% rise in the reserve asset ratio last week and two money-market rises in the benchmark one year bill rate by the central bank.

The latest reports varied, some said all banks were instructed to halt lending, others said several major banks were told to stop making loans for the rest of this month. Either the news will prove to be a brief event, designed to send a message to the banks (and the West) that China is taking steps to cool the economy or it will be the start of a more protracted battle to slow the strong growth momentum by strangling bank credit creation.

News of the loan orders was widely reported and came as a shock, sending markets into a tiz. They fell in Australia, with the Aussie dollar dropping more than 1 cent against the greenback. Markets in Europe and the US also fell, helped by disappointment with earnings reports from leading banks, IBM and the realisation that the Cadbury takeover by Kraft wasn’t the start of a new bid boom. China’s markets fell by around 3% yesterday.

The news came after reports in some Chinese and Western media this week that banks had lent an incredible 1.1 trillion yuan in the first two weeks of this year, which compared to the 9.59 trillion lent in 2009. In a comment on Tuesday, Premier Wen Jiabao urged the government to optimise credit structure and maintain a proper pace of credit supply to guard against financial risks. That was ignored at first, but now it was seen as approval for the directive to banks by the banking industry regulator.

Bloomberg reported that the order was made after some banks had failed to meet requirements including those for capital and quoted Liu Mingkang, chairman of the China Banking Regulatory Commission, who made a major speech in Hong Kong yesterday.

Liu told the conference that CBRC hasn’t asked all Chinese banks to halt lending. He didn’t identify which banks were told to limit loans.

“We have a number of regulatory requirements to ensure prudent supervision,” Liu said. “For those that failed to meet these standards, we told them to limit lending.”

Reuters reported:

The official China Securities Journal on Wednesday cited unnamed banking sources as saying that some banks had been told to stop all lending, including short-term bills, for the rest of the month.

Big branches of the Bank of China received a notice from their headquarters to stop all bill issuance until further notice, the newspaper cited one unnamed source as saying.

A senior official with China Merchants Bank and a senior executive with Agricultural Bank of China both told Reuters that their banks would stop approval of new loans until the end of January.

Chinese banks went on an orgy of lending in 2009, boosting loans to a record 9.59 billion yuan ($US1.4 trillion), compared with the official state limit of 5 trillion yuan.

Bloomberg also reported that the Industrial and Commercial Bank of China, the Bank of China and other lenders “have effectively stopped granting new loans after the banking system extended about 1.5 trillion yuan in new credit during the first two weeks of this month.

Liu also revealed that the government expected Chinese banks to lend 7.5 trillion yuan in new loans this year, down sharply from the 2009 total.

Last year’s massive rise in lending has raised concerns that the credit expansion would fuel asset bubbles in real estate and stock market investments, which in turn could spark a damaging rise in banks’ non-performing loans ratios. The central bank yesterday said  that home lending in China jumped by 48% to record levels in 2009.

Official Chinese media were more circumspect. Xinhua reported on the new loan limits for 2010, but buried a denial that some banks had been told to stop lending, rather than lead its report with the statement from the bank regulator.