Central bank controls loan growth ( 2003-08-25 06:50) (China Daily)
After months of debate, China's central bank has
decided to cool down loan growth to prevent financial institutions from
supporting unnecessary copycat projects and the emergence of an economic
overheating.
the People's Bank
of China
The People's Bank of China on Saturday announced a hike in rate of reserve
requirements -- the ratio for the part of financial institutions' deposits that
they must redeposit at the central bank -- from 6 to 7 per cent, effective on
September 21.
The central bank said the increase applied to all commercial banks and
deposit-taking financial institutions except for rural and urban credit
co-operatives, which are undergoing painstaking reorganization.
However, the increase mainly targets commercial banks, which are responsible
for the bulk of the credits.
A higher reserve ratio would reduce the funds available for banks offering
new loans and is expected to prompt the banks to focus funding on real lucrative
projects.
What the central bank would also like to see is that the commercial banks cut
back on their support for duplicated projects, which will lead to credit risks
for the banks themselves and to structural problems for the economy.
The central bank voiced its intentions to raise the ratio in a May report.
The report ignited rounds of debates among economic and business circles.
"Now the relevant government departments agree that money supply is growing
too quickly... This will lead to low-quality economic growth and structural
problems,'' the central bank said in the statement on Saturday.
New renminbi loans granted during the first seven months of the year totalled
1.89 trillion yuan (US$228 billion), which was more than the total new loans for
all of 2002, standing at 1.85 trillion yuan (US$223 billion).
A main reason behind the sufficient fund resources for commercial banks was
the rapid growth of the country's foreign exchange reserves, the central bank
said. The central bank must buy amounts of foreign currencies with renminbi,
with domestic funds eventually going to commercial banks.
With the continuing influx of foreign funds expected for the second half of
the year, renminbi available to the banks will abound, the central bank said.
"If we don't take counter measures, credit will continue expanding,'' it
said.
The last time the central bank adjusted the reserve ratio was in 1999, when
it slashed the ratio from 8 per cent to 6 per cent to help the bank increase
financial support for economic growth.
