Central bank maintains relaxed monetary policy

PUBLISHED : Monday, 13 April, 2009, 12:00am
UPDATED : Monday, 13 April, 2009, 12:00am

China's central bank said yesterday it will maintain a relaxed monetary policy to ensure sufficient liquidity to support economic growth, easing concerns it will tighten credit following strong money-supply growth last month.

The People's Bank of China yesterday said measures taken to boost economic growth had shown early good signs and a 'moderately loosened' monetary policy and keeping ample liquidity in the banking system would continue to be implemented.

The comment was greeted with caution by analysts and economists who said last month's growth in credit was encouraging rather than alarming as it was driven by the government's stimulus package. The figures could also have been exaggerated by interest rate arbitrage activities by lenders, they said.

However, some observers warned that banks that did not exercise care with their credit controls could face rising bad loans.

Adding fuel to those concerns was the fact that after the latest jump, new loans made in the first quarter amounted to 4.58 trillion yuan (HK$5.19 trillion), close to the government's target of 5 trillion yuan for the whole year.

In a statement, the PBOC said it would continue to 'implement the macroeconomic controls set by the central party committee and the State Council, implement a moderately loosened monetary policy [and] maintain continuity and stability of monetary policy'.

The comment came after data released on Saturday showed that new loans soared to a fresh monthly high of 1.89 trillion yuan last month from the previous high of 1.62 trillion yuan in January and 1.07 trillion yuan in February. M2 growth accelerated 25.5 per cent year on year, higher than market expectations.

Premier Wen Jiabao had earlier said in Pattaya, Thailand, that the mainland economy was on the mend, and the difficulties faced by some industries and enterprises had begun to show signs of easing. He was also quoted by Reuters as saying industrial output growth accelerated to 8.3 per cent last month, picking up from a record low of 3.8 per cent in the first two months of the year.

Economists said the key issue confronting policymakers was to ensure that the credit was finding its way to labour-intensive small and medium-sized enterprises, which so far had yet to benefit from easier money, most of which was going to infrastructure projects.

The PBOC aims to pump more financial support into these enterprises and the agricultural industry.

However, that intention was not captured in the data that showed that the proportion of medium and long-term loans among new loans last month had risen to 47.9 per cent from 32.6 per cent in February.

Analysts said this reflected increased credit supplied to large-scale projects backed by the 4 trillion yuan fiscal stimulus package the central government announced in November last year.

In contrast, the proportion of discounted bills in the loan total fell significantly to about 20 per cent from 46 per cent in the previous month. Such bills are typically used for enterprise working capital and dilute bank loan margins.

'While we do believe there are anomalies such as interest rate arbitrage activities using discount bills, which do not reflect fundamental demand from the real economy, the surge in credit growth has been mainly driven by the policy stimulus which requires a large amount of funding for investment projects,' said a Goldman Sachs report.

The latest financial reports from the nation's Big Four state-owned banks revealed that the lenders had cut the manufacturing sector's share of loans by shifting new loans grants in the fourth quarter of last year to electricity, gas and infrastructure construction sectors.

Guo Tianyong, a professor with the Central Economic and Financial University in Beijing, said with the surge of lending, banks needed to be aware of the risk of bad loans.

However, Jing Ulrich, the China equities chairman at JP Morgan, said tighter risk management practices might have led to a growing disparity in the amount of credit available to large corporations compared with smaller businesses.

'Chinese banks have continued to be highly selective in lending to private companies in the manufacturing industry,' Mrs Ulrich said.

Mr Guo said the loan growth seen last month would slip this month.