China's central bank said on Thursday it is to enhance its macro
management capacity to ensure an appropriate loan growth.
In its first-quarter monetary policy report released on
Thursday, the People's Bank of China (PBC) said rapid growth in
trade surplus and foreign exchange reserves is posing a severe
challenge to the effectiveness of its monetary policy.
China's forex reserves continued on an upward climb in the first
quarter of the year, rising by 8 percent from the end of last year
to US$659.1 billion, partly on the back of a greater trade
surplus.
The increases in forex reserves theoretically translate into a
far larger amount of local monetary supplies, which the PBC is
trying to stem to prevent the economy from overheating.
The bank said it will further increase the effectiveness of open
market operations, a major monetary policy tool, in buffering the
impact of factors such as forex reserve increases.
Inflationary pressures "still deserve attention," it said,
noting that while consumer prices are largely under control,
producer price increases were more rapid in the first quarter than
for the same period last year.
Inflationary pressures are a major factor when the PBC considers
the possibility of a further interest rate increase this year, but
many analysts have said the pressures are not yet strong enough to
justify an immediate rate rise.
The bank announced its first interest rate increase in nine
years last October, and another is expected sometime later this
year.
In other news, the central bank formally endorsed the role of
private financing in a report released on Wednesday.
Private financing could optimize the allocation of financial
resources and reduce lending risks in the banking system, although
it challenges the regulators' supervisory capacity and may be a
potential threat to financial and social stability, the report
said.
The PBC's China Regional Finance Report is the first
official recognition of growing lending activities between Chinese
individuals and private enterprises. Analysts believe private
financing has been a major engine in driving the growth of China's
private sector over the past few years.
"In order to promote the healthy development of private
financing, there needs to be better policy guidance and financial
innovation to promote the circulation of funds," the report
said.
Further legislation is needed to clarify the difference between
private financing and illegal fund raising among the public, and
efforts will be made to encourage participants to officially
register private financing operations.
Financial innovation needs to be enhanced while restrictions on
private investment in some sectors are removed to provide more room
for private funds, the bank said.
Wealthier private entrepreneurs and farmers put more of their
funds into the private lending market last year as it offered
higher returns than the stock market which remained weak.
The trend was reinforced by readjustments to lending policies at
commercial banks, many of which are closing down unprofitable
branches in far-flung areas, and tightening lending to small
businesses largely because of risk and cost concerns.
Last year, Chinese banks were urged to restrict lending to
overheated sectors such as steel and cement as part of efforts to
stabilize the economy's phenomenal growth. But economists say some
banks have been excessively strict in lending and many small firms
are suffering liquidity difficulties because of this.
According to a PBC survey, private funding accounted for 15-25
percent of new lending last year in east China's Zhejiang Province,
south China's Fujian Province and north China's Hebei Province.
The strong funding demand pushed up interest rates to as high as
14.4 percent in Wenzhou, Zhejiang Province, more than twice the
corresponding bank rate.
As for the financial industry, the central bank said overall
loan growth slackened last year as macro management continued. Loan
growth in more than half of the provinces, autonomous regions and
municipalities fell within the 10-20 percent range.
Backed by rapid business expansion, most financial institutions
in central and western China made a profit last year, with those in
northwest China's Gansu Province reporting their first combined
profit in 20 years.
(China Daily May 27, 2005)