Raising bailout funds may soak up market liquidity

PUBLISHED : Monday, 23 February, 2009, 12:00am
UPDATED : Monday, 23 February, 2009, 12:00am

One of bond analyst Qu Qing's main jobs is to monitor liquidity in the financial market, but he is still unsure how the 4 trillion yuan (HK$4.54 trillion) stimulus plan will affect the market.

He is concerned that the government bond issues could crowd out regular company investment, soaking up available funds from individual and corporate investors.

He can take some comfort from data suggesting that the mainland's tremendous corporate and household savings are more than enough to support all the government bond issuances.

According to the People's Bank of China, the country's broad monetary supply, or various yuan-denominated deposits, had ballooned to 49.61 trillion yuan by January, while household savings had reached about 22 trillion yuan.

Still, many companies are forecast to pull back from investment on expectations the global financial crisis will worsen and China once again will be hit by deflation, leaving a glut of savings to buy the government bonds.

However, in the long run, the lack of corporate investment activity will lead to a tightening of money supply and credit that has sloshed around in the country despite a high level of bad loans. Lending skyrocketed by a record high 1.62 trillion yuan in January.

'This must result in the tightening of liquidity in the financial market because of companies hoarding cash,' Mr Qu said.

Unlike the surge in M2, the narrow M1 monetary supply, comprising all corporate deposits, only increased 6.88 per cent, close to a historic low.

The trade surplus, another source of liquidity for the mainland financial market, will also dry up as exports slide and the stimulus package boosts imports.

'That will not be good news for the bond markets. At a minimum, it will ramp up the [government bond] funding costs for the Ministry of Finance,' Mr Qu said.