HONG KONG - China's money supply grew as
commercial banks continued to increase their
lending in the first seven months of this year,
despite the government's belt-tightening policy,
according to latest statistics from the People's
Bank of China (PBoC), the central bank.
This fuels anticipation that the
government will have to take sterner measures if
it really wants to tighten credit. As Beijing may
remain reluctant to raise interest rates, it is
more likely that it may instead ease
foreign-exchange controls to allow greater
flexibility in the exchange rate of the yuan.
The figures, as reported by the Xinhua
News Agency, show that new loans by China's
commercial banks in the first seven months of this
year have reached 2.3 trillion yuan (US$288
billion), taking
up
94% of their total lending quota for the whole
year.
While in the past couple of months
the government and the central bank have imposed
tougher credit-tightening measures, the PBoC
statistics show that new loans, which slightly
decreased in June, began to soar again in July. In
that single month, Chinese banks lent 171.8
billion yuan. As a result, all outstanding loans
totaled 21.7 trillion yuan at the end of last
month, up 16.3% year on year.
And as bank
loans grew, China's money supply in the
January-July period also increased. The broad
money supply, or M2, grew 18.4% last month, 2.1
percentage points higher than a year ago. The M1,
which reflects changes in the amount of money in
the hands of residents and institutions, was up
15.3% in July, which was 1.4 percentage points
higher than the previous month.
Analysts
say that as long as China's trade surplus
continues to grow, and foreign money keeps pouring
in, it is difficult if not impossible for the
government to curb bank loans and money supply,
for under China's current foreign-exchange regime,
the government has to buy any foreign currency
flowing into the country.
The rise of the
money supply was caused by China's ballooning
trade surpluses and skyrocketing foreign-exchange
reserves, Zhang Liqun, a macroeconomics research
fellow with the State Council's Development and
Research Center, was quoted by Xinhua as saying.
In July China's foreign-exchange reserves
totaled $941.1 billion, and they are growing at a
rate of about $20 billion a month. At this rate,
China's reserves should top the equivalent of $1
trillion by the end of the year. About 70-80% are
in US currency.
And in July, China's
monthly trade surplus increased to another record
of $14.6 billion, up 40.6% year on year. An
unspecified amount of foreign capital also flowed
in last month in anticipation of yuan revaluation.
The China Securities Journal, a leading business
daily published by Xinhua, said the government
spent 190 billion yuan to buy in foreign exchange
in July.
This may explain the unusual
growth of money supply and bank lending last
month. Normally, July is a dry season, and the
incidence of new loans in the month used to fall
off.
It is also apparent that commercial
banks rushed to lend before August 15, when they
have to increase their deposit reserve with the
central bank.
As part of Beijing's
macroeconomic controls, the PBoC has taken a
series of measures to curb bank lending and money
supply. It increased the one-year benchmark
lending rate by 27 basis points to 5.85% and twice
within five weeks raised commercial banks'
required reserve ratios by half a percentage
point. The last increase took effect on Tuesday.
However, the latest PBoC statistics
demonstrate that the central bank's measures
appear too moderate to achieve their purpose,
analysts say. A Beijing-based economist likens the
Chinese economy to a "a vigorous man" saying the
central bank's "gentle adjustments have barely
left a scratch on his body".
Economists
generally agree that the more powerful
monetary-policy weapons to curb liquidity are to
increase interest rates and to revalue the yuan.
However, such measures cannot be decided by the
central bank alone. In China the central bank is
just a department under the State Council and does
not operate independently. Therefore, any
readjustment of interest rates or the exchange
rate of the yuan remains a political decision to
be made by the State Council.
Liu Lida, a
senior PBoC official in monetary-policy research,
told an economic summit in Beijing last month that
the central bank would take more radical moves if
current credit-tightening measures proved
ineffective.
He hinted that if the central
bank could independently make the decision, it
would have increased interest rates. "It would be
more efficient if it is entirely up to the central
bank to decide on interest rate increases," he
said. However, since a decision on interest rates
was to be made by the State Council, the cabinet
had to balance views from various departments, he
said.
The State Council has to worry about
more than monetary policy. The cabinet has so far
been extremely cautious regarding interest-rate
hikes. This could lead to more unemployment, which
could threaten social stability. Interest-rate
increases would also draw in more hot money to
speculate on yuan appreciation. Any significant
yuan revaluation at present would have the same
negative effects on China's economy.
Despite all this, analysts say the latest
central bank statistics suggest that China needs
more effective measures to curb liquidity in money
market. The central bank could continue to raise
banks' deposit reserve ratios. However, this could
prove ineffective if, at the same time, it keeps
injecting money into the market to buy in foreign
exchange.
It is not possible for China to
narrow its trade surplus quickly or to bar foreign
capital from pouring in, hence the only
alternatives in monetary policy left are either to
increase interest rates or to revalue the yuan.
Reports in China's official media these
days strongly suggest that it is more likely that
the government would prefer easing its
foreign-exchange policy and letting the exchange
rate of the yuan become more flexible. This means
Beijing may have ruled out any imminent
interest-rate increase for fear that the country's
economy might be hurt badly by such moves.
John Ng is a freelance
journalist based in Hong Kong.
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