Bank of China

More investment options urged to soak up liquidity

PUBLISHED : Monday, 28 May, 2007, 12:00am
UPDATED : Monday, 28 May, 2007, 12:00am

Interest rate rises alone will not solve the mainland's serious problem of excessive liquidity and more investment channels are necessary, Bank of China vice-president Zhu Min said on the sidelines of an academic forum in Shanghai.

The excessive liquidity was mainly caused by people switching from long-term to short-term deposits and the central government must adopt measures based on this change, Mr Zhu said at the Shanghai Forum held by Fudan University yesterday.

'It is important to provide more investment products with higher yields and provide citizens with more pension and medical insurance coverage,' Mr Zhu said.

'It is not a bad thing for people to draw out money from banks for investment. But it is necessary to give them instructions and encourage them to diversify their portfolios.'

Mr Zhu said the size of the banking sector had doubled over the past five years due to mainland citizens' preference for depositing money, despite the fact that mainland interest rates are significantly lower than those of the United States or Europe.

He said bank deposits on the mainland increased by 16 to 18 per cent annually over the past several years and 11 trillion yuan sat idle in domestic banks, about half of the country's gross domestic output.

Last month, the mainland's M2, a broader index that measures money supply, jumped 17.3 per cent from March, while first quarter gross domestic product grew at 11 per cent.

The People's Bank of China has raised interest rates four times since April last year, most recently on May 19, when the one-year deposit and loan interest rates were increased to 3.06 per cent and 6.57 per cent.

But since last year, people have poured billions into the stock market and deposits in domestic banks decreased in April to 167.4 billion yuan, the second monthly drop in six years, the People's Daily has reported.

'It is a new phenomenon and people now have a new idea that they can make money from shares,' Mr Zhu said.

He said two-thirds of the money pumped into the stock market came from individuals, mostly through cash transfers, while the rest was from institutions.

According to China Securities Depository and Clearing Corp, about 300,000 new stock-trading accounts were opened every day this month and the total number of account numbers on the mainland is expected to exceed 100 million this week. This compares to less than 5,000 accounts opened each day just two years ago.

Mr Zhu said excessive liquidity would cause asset price inflation, but whether there was the possibility of a bubble depended on real economic growth.

Early this month the central bank announced it was raising the bank reserve ratio 0.5 of a percentage point to 11 per cent, the eighth rise since the beginning of last year, while increasing the one-year deposit rate 27 basis points to 3.06 per cent and the one-year lending rate 18 basis points to 6.57 per cent.

'The central bank's efforts to curb liquidity are more aggressive and are having bigger results. Now domestic banks have much less liquidity,' Mr Zhu said.

Bank of China loans increased 8.8 per cent last year, the lowest jump among mainland banks.

It is expected to issue 10 per cent more this year.