CHINA'S central bank is no longer imposing a cap on the amount of loans that commercial banks can make.
The move marks the dumping of a frequently criticised policy as the country redoubles efforts to sustain economic growth amid the global financial crisis.
The lifting of caps also follows a string of three interest-rate cuts, the most recent unveiled last Wednesday.
A spokesman for the People's Bank of China clarified the bank's policy in a dispatch by the official Xinhua news agency.
Some economists had questioned whether the rate cuts would help boost credit flow to households and businesses because the central bank, since late 2007, had also imposed strict limits on the amount of new loans that banks could make.
Those limits were designed to keep China's economy from overheating, when growth had been running relatively high.
Central bank spokesman Li Chao said those credit curbs were no longer being enforced. “The central bank is no longer applying hard constraints to the lending plans of commercial banks," Mr Li was quoted as saying by Xinhua.
Mr Li defended the original decision to impose the limits on loans as being justified by the economic conditions of the time, which included high inflation and the threat of excess capacity.
“These policies were necessary and effective.”
The comments by the spokesman marked the first time that the central bank has formally acknowledged the existence of the credit curbs.
Although the controls on lending were open secrets among businesses and in the press, the central bank never publicly discussed them. Its instructions on how much banks could lend were delivered orally to top executives, a practice that business groups criticised as unnecessarily secretive and arbitrary.
The loan limits were partially eased, though not removed, at the beginning of August.
The use of credit quotas - a practice that had been largely phased out in recent years as China's state-controlled banks were reorganised to run on a more commercial basis - was an attempt to curb growth in bank lending without raising interest rates.
The measures appeared to be effective, reducing growth in lending from a pace of above 17 per cent last year to nearer 14 per cent in recent months.
Critics, however, have said that much of the growth in credit simply ended up in sectors that were harder to track, like ‘underground’ lenders, or off-balance-sheet vehicles set up by banks.
News of the end of the credit quotas came amid further signs of a slowdown in China's economy, which is being battered by weakening in overseas demand and in the domestic housing market.
The purchasing managers’ index, published by the China Federation of Logistics & Purchasing, last month fell to its lowest level since the index was launched in January 2005.
The reading of 44.6, down from 51.2 in September, indicated a sharp contraction in manufacturing activity, led by a decline in both new export orders and demand for construction materials like steel.
The worsening economic outlook for China, which has deteriorated more rapidly than most analysts expected, had already generated calls for the removal of the loan constraints.
In a commentary published last week, Fan Jianping, the chief economist of the State Information Centre, a major government think tank, suggested canceling the loan-quota system in 2009.
The willingness to abandon the policy before then gives some backing to Chinese officials' repeated vows to be flexible and open minded in finding ways to deal with the impact of the financial crisis and global economic slowdown.
“To guard against the economic and financial impact of this crisis on China, we will flexibly adjust economic policies, including monetary policy, when necessary, and strive to minimise the possible negative effects of this crisis,” said Mr Li, the central bank spokesman.
