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Slower lending gives breathing time
By Sean Maguire |
February 12, 2010, Friday
|
Print Edition
Print Edition
CHINA'S stimulus package has, by popular consensus, worked extremely well, but even as the markets post impressive growth numbers, some policy makers are becoming increasingly sensitive to the side effects of monetary expansion.
The People's Bank of China is acutely aware of emerging inflationary signals, in particular the expansion of money supply with M1 - usually a good predictor of future inflation - increasing by 34.6 percent in December year-on-year. This appears to have clinched the argument against continuing credit liberalization at last year's levels.
After doling out 9.5 trillion yuan (US$1.39 trillion) in loans last year, regulators have warned that some banks have fallen below minimum capital requirements and steps have been taken to address the issue.
The Bank of China plans to issue 40 billion yuan in bonds, deliver an upward nudge to inter-bank lending rates, but most conspicuously, commercial banks' reserve requirement has been raised by 0.50 percent. This latter move is expected to take 300 billion yuan out of circulation.
Although Western central banks rarely alter the reserve requirement, the People's Bank of China uses changes in reserve requirements as an inflation-fighting tool to mop up excess cash generated by its trade surplus and speculative inflows.
January's lending figures showed a marked slowdown of bank lending. Chinese banks lent a total of 1.39 trillion yuan in new loans in January. However, the new loans issued in January was more than the total banks issued in the previous quarter in anticipation of possible tightening policies
Yet 1 trillion of government bills recently matured which, if not rolled over, will add three times more money to the economy than the increased reserve requirement will absorb.
Moreover, the capital ratio in the banking system in aggregate is already two points over what is strictly required, so it is difficult to see what immediate effects the recent hike will have on lending.
The year 2007 witnessed multiple increases in the reserve requirement and it looks like we are going to see more of the same as the central bank slips into full liquidity tightening mode.
There is some concern that these recent moves to scale back lending may have a withering effect on nascent global recovery.
Assisted by the credit boom, China has been able to slake its formidable thirst for foreign goods from coal to copper to oil, and this sea change in policy has sent waves of anxiety rippling across global financial markets.
The Bank of China played down the significance of the policy change saying that it was simply attempting to manage liquidity and introduce some stability into the lending system.
Indeed, the bank faces a delicate task of managing an economy that runs the risk of growing too quickly.
The increase in required reserves provides a much-needed breathing space in which to consider other policy initiatives, and more initiatives there will be.
(The author is a lawyer at Allbright Law Firm. The views expressed are his own. Shanghai Daily condensed his article. His email:sbjmaguire39@yahoo.co.uk)
The People's Bank of China is acutely aware of emerging inflationary signals, in particular the expansion of money supply with M1 - usually a good predictor of future inflation - increasing by 34.6 percent in December year-on-year. This appears to have clinched the argument against continuing credit liberalization at last year's levels.
After doling out 9.5 trillion yuan (US$1.39 trillion) in loans last year, regulators have warned that some banks have fallen below minimum capital requirements and steps have been taken to address the issue.
The Bank of China plans to issue 40 billion yuan in bonds, deliver an upward nudge to inter-bank lending rates, but most conspicuously, commercial banks' reserve requirement has been raised by 0.50 percent. This latter move is expected to take 300 billion yuan out of circulation.
Although Western central banks rarely alter the reserve requirement, the People's Bank of China uses changes in reserve requirements as an inflation-fighting tool to mop up excess cash generated by its trade surplus and speculative inflows.
January's lending figures showed a marked slowdown of bank lending. Chinese banks lent a total of 1.39 trillion yuan in new loans in January. However, the new loans issued in January was more than the total banks issued in the previous quarter in anticipation of possible tightening policies
Yet 1 trillion of government bills recently matured which, if not rolled over, will add three times more money to the economy than the increased reserve requirement will absorb.
Moreover, the capital ratio in the banking system in aggregate is already two points over what is strictly required, so it is difficult to see what immediate effects the recent hike will have on lending.
The year 2007 witnessed multiple increases in the reserve requirement and it looks like we are going to see more of the same as the central bank slips into full liquidity tightening mode.
There is some concern that these recent moves to scale back lending may have a withering effect on nascent global recovery.
Assisted by the credit boom, China has been able to slake its formidable thirst for foreign goods from coal to copper to oil, and this sea change in policy has sent waves of anxiety rippling across global financial markets.
The Bank of China played down the significance of the policy change saying that it was simply attempting to manage liquidity and introduce some stability into the lending system.
Indeed, the bank faces a delicate task of managing an economy that runs the risk of growing too quickly.
The increase in required reserves provides a much-needed breathing space in which to consider other policy initiatives, and more initiatives there will be.
(The author is a lawyer at Allbright Law Firm. The views expressed are his own. Shanghai Daily condensed his article. His email:sbjmaguire39@yahoo.co.uk)
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