Chinese authorities ordered some big banks to curb lending for the rest of January, intensifying their efforts to prevent the world’s third-largest economy from overheating.

The news weighed down stocks in Asia and Europe and oil fell towards $78 a barrel on fears that demand in China, the world economy’s main source of growth, may now slow down as authorities tighten policy.

China’s central bank told some banks, including Citic Bank and Everbright Bank, to increase their reserve requirement ratio by half a percentage point, banking sources told reporters.

A surge of new lending in January has triggered a series of intensifying steps by authorities to rid the financial system of excess cash that can fuel inflation and asset bubbles.

In early January, the central bank raised bank reserve requirements for the first time since June 2008.

“The question now is not whether we need to control credit and money supply but when and how to control it,” said Chen Xingdong, chief China economist at BNP Paribas in Beijing. “Policy will not be a straight line.”

Chinese banks lent 1.1trn yuan ($161bn) in the first half of January, sources said, citing central bank data. That puts total new loans in January on track for the highest since June 2009, when banks doled out 1.5trn yuan in new lending.

The top four banks together lent more than 500bn yuan during the same period, the sources said.

Last year, Chinese banks lent a record 9.6trn yuan. The surge, combined with Beijing’s four trillion yuan stimulus plan, helped kick-start the economy after a slump, but aroused investor fears of overheating.

Zhu Baoliang, chief economist at a government think tank, said consumer inflation has accelerated a lot in December and would likely push policymakers to raise interest rates by the middle of the year.

Slow new loan growth
There were conflicting accounts of what exactly authorities would do.

The official China Securities Journal cited unidentified banking sources as saying that some banks had been told to stop all lending for the rest of the month.

However, a source at the China Banking Regulatory Commission, who spoke on condition of anonymity, said the CBRC had not ordered banks to halt lending for the rest of January, though it continued to crack down on lenders that do not meet criteria.

“It is our long-standing principle that banks that do not meet regulatory requirements must not lend any more,” the source said.

In any case, after the increase in bank reserve requirements, a rise in one year bill yields, and steps to root out speculation in the property market, the message from authorities is clear: fast growth in credits and money supply will not be tolerated because the stakes are too high.

A senior official with China Merchants Bank and an executive at Agricultural Bank of China told reporters that their banks would stop approving new loans until the end of this month.

Bank stocks stung
Worries over the impact of a lending clampdown knocked Shanghai’s benchmark index 2.9 percent lower, weighed on other Asian markets and hurt the Australian dollar.

China has been leading the way in a global recovery, so any potential for slower growth causes investors to reassess risk exposure.

Shares of Bank of China and China Construction Bank traded in Hong Kong tumbled more than three percent.

“I think the markets may have overreacted,” said Dong Dezhi, a senior money market analyst at Bank of China in Shanghai. “The government will anyway read CPI and overall economic performance to decide when and how much it will raise interest rates, not bank loans.”

Consumer price inflation on an annual basis is expected to have quickened to 1.5 percent in December from 0.6 percent in November.

Another CBRC official told reporters the lending surge in the first two weeks of January would probably trigger a policy change and that the regulator would probably further curb loan growth as the central bank’s steps to date had not been effective enough.

In the run-up to the reserve ratio rise, the central bank has pushed up its bill yields at its regular auctions over the past couple of weeks.

“This year we will continue to control the pace and amount of credit supply,” Liu Mingkang, head of the CBRC, told a financial conference in Hong Kong.

He added that new loans this year were estimated to total 7.5trn yuan, according to the transcript available on the CBRC’s website, although that comment was later deleted from the CBRC’s text of the speech.