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Securitization to help China reduce excessive liquidity

(Xinhua)
Updated: 2007-04-12 13:28

Large-scale securitization by banks could soak up excess liquidity and assist macro-economic management in China, according to a report released by Standard & Poor's.

Excessive liquidity in the banking sector is a major problem for the country's economy, it said.

The report, "Absorbing Excessive Liquidity In China Through Asset Securitization", says the Chinese authorities are resorting mainly to lifting interest rates to deal with investment bubbles induced by excess liquidity.

However, most of the liquidity is caused by the trade surplus and "hot money" used to speculate on the renminbi. Interest rate hikes are futile and may even attract more hot money, says the report.

"Developing the securitization market provides an attractive alternative solution," said Joseph Hu, managing director and China country manager at Standard & Poor's.

"Most of the money that investors use to buy securitized products is from bank deposits," Hu said. "Issuing securitized products leads to reductions in assets and liabilities in the banking industry. It absorbs liquidity."

In securitization, banks sold their loan and credit assets to investors, squeezing the money supply, said Hu.

The report concludes that excess liquidity reflects a deep-rooted contradiction in the economic structure - an underdeveloped bond market.

To solve the problem, the central bank should build an advanced bond market to absorb liquidity while implementing controlling policies.

"The Chinese economy has maintained a robust trend of high growth, low inflation and low interest rates, but the skyrocketing prices of financial assets reveal the contradiction between the accumulation of wealth and the supply of financial assets," Hu said.

"If people concentrate investments excessively on stocks, the risks are self-evident," Hu said. "Investors not only face the risk of concentration, but also the lack of other investment products, especially when the market lacks a benchmark rate of investment return."

These factors made the stock market vulnerable to manipulation and developing the bond market would help expand direct financing and strengthen capital market stability, he said.