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Lending by China’s banks rose again in September.

That isn’t good news. It explains why the People’s Bank has reportedly decided to raise reserve requirements for six of China’s biggest banks another 0.5 percentage points to 17.5%. And I’ll bet that it will lead to other steps to restrain bank lending that will be announced now that the annual Communist Party meeting, which began on October 15, is over.

New bank loans in September climbed to 596 billion yuan ($89.2 billion), up from 545 billion yuan in August, according to the People’s Bank. For the first nine months of the year bank lending totaled 6.3 trillion yuan ($942 billion).

That brings the total for the year dangerously close to exceeding the government’s target of $1.1 trillion in new bank loans for 2010.

Back in August when new loans soared to $80 billion, up from $78 billion in July, I calculated that new bank lending would have to average no more than $73 billion a month for the last four months of 2010 for 2010 to finish below Beijing’s target. Now with September’s $89.2 billion in new loans, the last three months of the year will have to come in at an average of just $52 billion to keep the quota intact.

No way, Wen Jiabao.

What’s the difference between new loans at the quota of $1.1 trillion and a total of $1.2 trillion at the current rate of increase? Even the higher total would be well below the $1.4 trillion of 2009 when bank lending ran completely out of control.

The People’s Bank, bank regulators, and the Beijing leadership face a crisis of credibility here. The $1.1 trillion quota was seen, when first announced, as laughably high if China were serious about slowing the rise of real estate speculation and heading off higher inflation. If the government can’t even meet that target, then an increasing number of overseas investors and economists will move to the “China’s growth is out of control” camp. That’s not a debate that Beijing wants to stoke.

One real possibility–for after the party meeting—would be the implementation of all or part of the draft plan put together by bank regulators that would impose much higher capital requirements on China’s banks. (For more on what was on the agenda at the party meeting see my post ) That would send banks back to the capital markets to raise capital before they could even think of making new loans. The worry has been that such a plan would slow China’s economy too much. But with bank loan growth still refusing to come down that alternative is increasingly the least bad of two dangerous policies.

China’s stock market has swung this year between bullishness when reports of higher loan growth and rumors of an end to tighter bank rules dominate investors’ thinking and bearishness when worries about higher loan growth setting off another round of regulations rules. Right now is one of those bullish periods but I can certainly see the rising odds for the pendulum swinging back in the other direction.