The (PBOC), the nation's central bank, knows this only too
well: Too much money too soon can cause problems.
As the economy's excess liquidity has been accumulating rapidly,
the bank has finally raised lenders' reserve requirements to fend
off inflation and cool down the ongoing investment fever.
PBOC officials announced last week the ratio of deposits, which
commercial banks must place with the central bank, will be lifted
from 6 percent to 7 percent beginning on September 21.
"This is to guarantee a stable monetary and financial
environment for the economy," said a PBOC spokesman.
The reserve increase will not cover rural co-operatives, as it
could affect the ongoing reforms within those institutions, the
spokesman said.
PBOC's decision came after the central bank issued, since April,
445 billion yuan (US$53.6 billion) in commercial bills to drain
money circulation through open market operations.
The move, PBOC officials hope, will freeze about 150 billion
yuan (US$16 billion) worth of deposits with banking firms and,
subsequently, will contain the ballooning cash supply.
Money supply surged 20.8 percent by the end of July compared
with a year ago, although PBOC's official target for this year's
growth is 18 percent.
The excessive growth has been fuelled by commercial banks'
credit expansion and international hot money, or speculative funds,
which has managed to enter the system.
The increase of bank loans this year, by the end of July,
reached 1.89 trillion yuan (US$228.4 billion), even more than last
year's total loan increase of 1.85 trillion yuan (US$223.6
billion).
"Bank loans will continue to grow if there is no interference,"
said PBOC's spokesman.
"The relentless growth would harm the economic health and cause
some structural imbalance in the system."
Ma Kai, minister of the State Development and Reform Commission,
also warned last week relentless growth in bank loans would "easily
lead to new non-performing loans."
Earlier, several official reports confirmed many of these loans
flowed into government-sponsored construction projects and sectors
showing signs of oversupply.
Bank loans have financed exceptionally high growth in the
automobile, real estate and steel-production sectors, experts
said.
Nationwide automobile manufacturing capacity, in the year's
first half, reached 5.5 million units, including 2.5 million units
of sedans, which far exceeded the market's demand, indicates a
recent report by the State Information Center.
Investments in real estate during the same period increased by
about 30 percent, the report said.
The growth of China's steel output reached 21 percent - the
world's highest - in the year's first half, doubling analysts’
earlier predictions.
PBOC since June has tightened loans to property developers and
buyers of second homes and/or luxury apartments.
Inflows of foreign currency have added to banks' lending
capacity and the cash in circulation.
A recent report by investment bank Credit Suisse First Boston
(CSFB) indicates, despite Chinese authorities' tight foreign
exchange control, up to US$25 billion in short-term speculative
funds have sneaked into the country.
It could be traced by examining the gap between the increase of
China's foreign reserves and the country's trade surplus in the
year's first half, said Tao Dong, a Hong Kong-based analyst with
CSFB.
China's foreign exchange reserves reached US$356.5 billion at
the end of July, Ma said.
While speculators have bet on possible sharp appreciation of the
renminbi, China's currency, PBOC has released cash reserves to keep
the currency's exchange rate stable.
The renminbi has since 1994 been kept in a narrow band around
8.28 yuan to the US dollar.
Chinese officials have reiterated - despite mounting pressure
from Japan, the European Union and the United States - they have no
plans to revalue the yuan.
PBOC, meanwhile, fearing increasing interest rates would
heighten speculative purchases of the renminbi, has promised
lending and deposit rates will remain for the rest of the year.
This, however, has left the central bank with few options - by
using monetary policies - to fight inflation, experts said.
China's concerns about inflation come after the domestic
consumer price index (CPI) rose, for the seventh consecutive month,
0.5 percent in July.
The CPI had fallen 14 straight months before it finally picked
up early this year.
China's retail sales, another gauge of consumption, soared 8.3
percent in the year's first seven months compared with a year
earlier.
However, government-led investments jumped 32.7 percent in the
same period.
PBOC Governor Zhou Xiaochuan expressed concern last week that
"expansionary monetary and fiscal policies have led to growth in
the savings rate, but not in consumption."
Overheating in parts of the economy might not mean an immediate
threat of inflation, but could still harms China's long-term
growth, experts said.
"Since food-related products still dominate CPI, they have
reduced the index' sensitivity as a whole," Tao said.
"Economic overheating could lead to a market glut in a few
years, and could erode companies' profits."
Last week's reserve hike prompted fears among financial
institutions the stricter obligations would cause a short-term
drain of money on the Shanghai-based interbank market.
PBOC, days later, issued seven-day repurchase agreements, or
repos, in open market operations, injecting 60 billion yuan
(US$7.25 billion) into the market.
This marked the central bank's first injection of cash over the
past eight months.
Commercial banks have scrambled for the subscription, and pushed
up annual rates for the benchmark seven-day repo rate 0.75
percentage points.
China said last Tuesday it will examine foreign exchange deals
by some banks in a bid to halt illegal foreign currency
inflows.
The State Administration of Foreign Exchange will conduct
special checks on the trading of foreign exchange at banks.
(China Daily September 7, 2003)