(PBOC) to raise its annual growth target twice last year.
This year, if money supply is to grow faster to fuel growth, loans, which contribute about 70 percent of money supply, also need to accelerate and the central bank is expected to take the initiative by encouraging lending, analysts say. Containment of financial risks is of great importance in the process, but over-prudence in lending may lead to an unwanted shrinkage in economic activity and amplify commercial banks' operational risks, they warn.
The prospect of the central bank opting for another interest rate cut this year to boost lending remains dim, as the current level - with the one-year deposit rate at a decades low of 1.98 percent - leaves little room. But lending rates could well be allowed a broader range to float, which would give the risk-averse banks stronger incentives to lend.
There is more room in lowering the interest rate the PBOC pays to commercial banks on their deposits reserves, however.
As bank assets increasingly diversify and promising loan projects remain in short supply, commercial banks' deposit excesses hit 3.4 trillion yuan (US$409 billion) at the end of June and their payment reserves continued to grow to a peak of 7.9 percent of total deposits for the year.
Another monetary policy tool, or the PBOC's rediscounting commercial bills from commercial banks, may also lend a hand should the central bank lower the rediscount rate to spur the inert business. The rate was raised to 2.97 percent from 2.16 percent in September, 2001, squeezing profit margins at commercial banks and bringing the operation to a near standstill.
The outstanding rediscount volume started to shrink month by month, to 1.2 billion yuan (US$144.5 million) in September last year from 96 billion yuan (US$11.5 billion) a year earlier.
Other economists attach more importance to the quality of money supply, urging the government to channel more funds into the underfunded small and medium-sized enterprises (SMEs) and the vast rural areas.
"The problem is not if the monetary policy is strict or loose," says professor Xu Guangjian of the Renmin University of China, "but about reforming banks' operational mechanisms and the funding needs of microeconomic entities."
China's vast SMEs are still suffering a funding anemia as major commercial banks focus on big business. An anticipated acceleration in the development of the country's 110 city commercial banks, which lend more than 80 per cent of their loans to SMEs, promises to alleviate that funding shortage in the years to come.
Central bankers made it clear late last year that private and foreign investors are encouraged to take equity stakes in city commercial banks.
More needs to be done in the countryside to fill widening funding gaps partly created by post offices' enhanced absorption of savings that were redeposited at the central bank.
(China Daily January 6, 2003)
