Economy

Markets

Industries

Insights

Reports

Events

Rein in credit growth

(China Daily)
Updated: 2007-04-09 09:06

The latest hike in the reserve ratio for banks made clear Chinese policymakers' resolve to pre-empt an excessive growth in credit.

Though key economic indicators for the first quarter are yet to be published, the People's Bank of China, the country's central bank, promptly opened up its monetary toolbox again.

The frequency of such efforts to mop up excess liquidity may seem surprisingly high. This is the third time this year that banks have been told to increase the ratio of their deposit reserves by 0.5 of a percentage point. And the move comes less than a month after the central bank raised interest rates on March 18. Central bank is ready to respond to rapid liquidity growth with all available means.

As credit growth is picking up considerably to fuel a rebound in fixed-asset investment growth, such a tightening effort is more than needed.

A reasonable growth in money supply is crucial to the sound growth of the national economy. But in February, M1, or cash in circulation and deposits, increased 21 percent year-on-year, the highest in the past 37 months.

Besides, in just the first two months of this year, domestic banks already extended new loans of 982 billion yuan ($127 billion), about one-third of the total amount they granted last year.

Under such circumstances, it is no coincidence that urban fixed-asset investment has rebounded again since the beginning of this year, after a gradual slowdown since last July.

On the one hand, the soaring trade surplus and continuous inflow of foreign direct investment are the fundamental reasons behind China's ballooning foreign exchange reserves that pump more liquidity into the domestic market.

On the other hand, extensive investment growth puts increasingly unbearable pressure on the country's resources and environment.

Standing between them are domestic banks that are eager to make the most of the still large gap between saving interest rates and loan interest rates to maximize their profits.

In order to cut their lending capacity, it is necessary to raise the ratio of deposits that banks are required to set aside as a reserve.

Nevertheless, to effectively check excessive credit growth, they may also need to fix such problems as a huge interest rate gap between deposits and loans that encourage banks to lend as much as possible.