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No 'crowding out' of private sector
By Liu Jie and Cheng Yunjie |
March 19, 2009, Thursday
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CHINA plans to offer several hundred billion yuan in treasury bonds this year to finance its record fiscal deficit.
This debt plan is raising concern about possible "crowding out" of private sector borrowers and investment.
However, many economists and analysts interviewed by Xinhua said China would be able to avoid that outcome.
China plans 950 billion yuan (US$139 billion) in treasury bill sales, of which 200 billion will be issued on behalf of local governments, to fund the record fiscal deficit and spur growth during the global slowdown.
The actual number could be more than one-third higher. The Central T-bond Registration and Settlement Co Ltd (CTRS), the depository house for China's major bonds, forecast in a report in January that total government debt issues would exceed 1.3 trillion yuan this year, a rise of 60 percent from 2008.
Economic theories say that a large influx of treasury bonds will push up market interest rates, or the borrowing costs for individuals and institutions.
As a result, the private sector will find it too costly to borrow and scale back investment, thus impeding economic growth. But professor Zhu Qing of the School of Finance at Renmin University of China said: "The 'crowding out' effect has a precondition: that the market has a pressing need for money, which is not a reality among all Chinese enterprises."
Bank lending has ballooned this year, with new loans exceeding 2.69 trillion yuan in the first two months.
"Profitable large enterprises don't have an urgent need for money. As for smaller ones, they don't have an appetite to borrow as declining demand has dampened their desire to expand production," Zhu said.
Thus, even with huge government bond sales, interest rates were unlikely to edge up, and the "crowding out" effect on private investment would not occur.
"Interest rates rise only when money becomes scarce," Zhu explained.
Liu Yuhui, researcher with the institute of finance of the Chinese Academy of Social Sciences, said: "As money for treasury bill purchases mainly comes from deposits held by individuals and institutions, overall money supply remains steady, so there won't be inflationary pressure."
China's treasury bond sales averaged 760 billion yuan a year from 2004 to 2006, while the country was pursuing a "prudent" monetary policy.
Sales totaled 812.5 billion yuan last year as the economy began to cool.
Can the market absorb this year's bond sales, which could total as much as 1.3 trillion yuan?
Data from the PBOC last week showed that deposits held by individuals and institutions totaled 4.98 trillion yuan by the end of February.
"The planned treasury bond sales value would be equal to 26 percent of deposits, so it won't be difficult for Chinese banks to underwrite those bonds," said Bai Jingming, an economist with the Ministry of Finance.
(The authors are Xinhua writers.)
This debt plan is raising concern about possible "crowding out" of private sector borrowers and investment.
However, many economists and analysts interviewed by Xinhua said China would be able to avoid that outcome.
China plans 950 billion yuan (US$139 billion) in treasury bill sales, of which 200 billion will be issued on behalf of local governments, to fund the record fiscal deficit and spur growth during the global slowdown.
The actual number could be more than one-third higher. The Central T-bond Registration and Settlement Co Ltd (CTRS), the depository house for China's major bonds, forecast in a report in January that total government debt issues would exceed 1.3 trillion yuan this year, a rise of 60 percent from 2008.
Economic theories say that a large influx of treasury bonds will push up market interest rates, or the borrowing costs for individuals and institutions.
As a result, the private sector will find it too costly to borrow and scale back investment, thus impeding economic growth. But professor Zhu Qing of the School of Finance at Renmin University of China said: "The 'crowding out' effect has a precondition: that the market has a pressing need for money, which is not a reality among all Chinese enterprises."
Bank lending has ballooned this year, with new loans exceeding 2.69 trillion yuan in the first two months.
"Profitable large enterprises don't have an urgent need for money. As for smaller ones, they don't have an appetite to borrow as declining demand has dampened their desire to expand production," Zhu said.
Thus, even with huge government bond sales, interest rates were unlikely to edge up, and the "crowding out" effect on private investment would not occur.
"Interest rates rise only when money becomes scarce," Zhu explained.
Liu Yuhui, researcher with the institute of finance of the Chinese Academy of Social Sciences, said: "As money for treasury bill purchases mainly comes from deposits held by individuals and institutions, overall money supply remains steady, so there won't be inflationary pressure."
China's treasury bond sales averaged 760 billion yuan a year from 2004 to 2006, while the country was pursuing a "prudent" monetary policy.
Sales totaled 812.5 billion yuan last year as the economy began to cool.
Can the market absorb this year's bond sales, which could total as much as 1.3 trillion yuan?
Data from the PBOC last week showed that deposits held by individuals and institutions totaled 4.98 trillion yuan by the end of February.
"The planned treasury bond sales value would be equal to 26 percent of deposits, so it won't be difficult for Chinese banks to underwrite those bonds," said Bai Jingming, an economist with the Ministry of Finance.
(The authors are Xinhua writers.)
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