China has announced a credit squeeze to...

China has announced a credit squeeze to control “market chaos” caused by a soaring money supply and excessive loans.

Official reports quoted the State Council, the equivalent of a Cabinet, as saying loans would not be made to construction projects outside state planning or to “enterprises suffering from poor product quality and low economic results.”

The restrictions were ordered by the central People’s Bank of China after interest rate increases last week described by some Western diplomats as “too little, too late” to cool the economy.

The China Daily said 164.5 billion yuan ($44.5 billion U.S.) of bank notes were in circulation at the end of July, a rise of 39% over a year ago. Bank loans in the first seven months of the year rose by 46% over the same period in 1987, but deposits actually decreased.

Even after last week’s interest rate hikes, rates for bank deposits and loans of around 8% to 10% are lower than price inflation, officially estimated at an annual 13% in the first half of 1988.