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Return to normality for PBOC
By Zhou Xin and Alan Wheatley |
November 25, 2010, Thursday
|
Print Edition
Print Edition
The People's Bank of China will use all the policy tools at its disposal to steer money and credit growth back to normal, Hu Xiaolian, a deputy central bank governor, said in remarks published yesterday.
Her remarks were a clear pointer that policy is likely to be tightened further to keep a lid on inflation, which reached a 25-month high of 4.4 percent in the year to October.
Hu said the central bank would use price tools - usually a reference to interest rates - as well as quantitative measures over the rest of 2010 to slow lending growth.
"Strengthening liquidity management is the priority for monetary policy, and a key aspect of bringing monetary conditions back to normal," she said.
So far this month, the central bank has already raised interest rates once and banks' reserve requirements twice. Big banks must hold a record 18.5 percent of their deposits in reserve instead of lending them out.
Nevertheless, keeping net new loans within the PBOC's 2010 target of 7.5 trillion yuan would be a challenge, Hu said.
"We will continue to make full use of various monetary policy tools ... quantitative and price tools as a way of maintaining reasonable liquidity levels in the banking system," she said.
In the first 10 months of the year, banks made loans totaling 6.88 trillion yuan, leaving them room to lend 620 billion yuan in November and December before the country's quota is exhausted.
Lin Songli, an economist with Guosen Securities in Beijing, said China was embarking on a tightening cycle to counter capital inflows that could lead to much higher required reserves.
"For the reserve requirement ratio, there is actually no upper limit. It wouldn't be too surprising if the ratio was steadily increased to a level of 25 percent," Lin said.
He said higher interest rates were also on the cards, but increases might not be as aggressive as for reserve requirements in order to deter hot money inflows.
"The government will announce a "prudent" monetary policy stance soon, but in practice it will be a tightening stance," he added.
Liu Hongke, an economist with CCB International in Beijing, said she expected the PBOC to raise either interest rates or reserve requirements next month.
But Liu doubted how effective such tightening would be. Hopes of a stronger yuan rise would keep driving capital into China, she said.
"It seems China will have to use more forceful administrative measures to curb capital inflows and also take more steps to control speculative funds within the economy," Liu said.
Hu said the West's easy-money policies shared some of the blame for the unwanted tide of cash washing up in China.
"Major developed countries have continued to implement quantitative easing policies, which are exacerbating excess liquidity on a global scale," Hu told Chinese bankers on Tuesday.
"As expectations of yuan appreciation grow, global liquidity is flowing into China continuously, intensifying upward pressure on inflation and on asset prices and making it harder for China to manage liquidity," she pointed out.
Her remarks were a clear pointer that policy is likely to be tightened further to keep a lid on inflation, which reached a 25-month high of 4.4 percent in the year to October.
Hu said the central bank would use price tools - usually a reference to interest rates - as well as quantitative measures over the rest of 2010 to slow lending growth.
"Strengthening liquidity management is the priority for monetary policy, and a key aspect of bringing monetary conditions back to normal," she said.
So far this month, the central bank has already raised interest rates once and banks' reserve requirements twice. Big banks must hold a record 18.5 percent of their deposits in reserve instead of lending them out.
Nevertheless, keeping net new loans within the PBOC's 2010 target of 7.5 trillion yuan would be a challenge, Hu said.
"We will continue to make full use of various monetary policy tools ... quantitative and price tools as a way of maintaining reasonable liquidity levels in the banking system," she said.
In the first 10 months of the year, banks made loans totaling 6.88 trillion yuan, leaving them room to lend 620 billion yuan in November and December before the country's quota is exhausted.
Lin Songli, an economist with Guosen Securities in Beijing, said China was embarking on a tightening cycle to counter capital inflows that could lead to much higher required reserves.
"For the reserve requirement ratio, there is actually no upper limit. It wouldn't be too surprising if the ratio was steadily increased to a level of 25 percent," Lin said.
He said higher interest rates were also on the cards, but increases might not be as aggressive as for reserve requirements in order to deter hot money inflows.
"The government will announce a "prudent" monetary policy stance soon, but in practice it will be a tightening stance," he added.
Liu Hongke, an economist with CCB International in Beijing, said she expected the PBOC to raise either interest rates or reserve requirements next month.
But Liu doubted how effective such tightening would be. Hopes of a stronger yuan rise would keep driving capital into China, she said.
"It seems China will have to use more forceful administrative measures to curb capital inflows and also take more steps to control speculative funds within the economy," Liu said.
Hu said the West's easy-money policies shared some of the blame for the unwanted tide of cash washing up in China.
"Major developed countries have continued to implement quantitative easing policies, which are exacerbating excess liquidity on a global scale," Hu told Chinese bankers on Tuesday.
"As expectations of yuan appreciation grow, global liquidity is flowing into China continuously, intensifying upward pressure on inflation and on asset prices and making it harder for China to manage liquidity," she pointed out.
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