The People's Bank of China recently announced various measures to combat inflation. How effective will they be? Let's start with a story.
It was late June. I was chatting with a mainland punter about the stock market, with lacklustre trading showing in both the indices and turnover. 'The market will be alive again in a week's time,' he said.
He did not have a crystal ball but a good understanding of the monitoring processes of the banking regulators and their mid-year checks on bank loan growth. Banks had been urging their customers either to make handsome deposits to earn attractive rates before June 30, or not to draw any money before July 1.
'Call it a nationwide deposit campaign,' the punter said. The sole purpose was to make up a decent deposit-to-loan ratio and satisfy the regulators. Once the checks were over, everything would be back to normal.
Believe it or not, the market did rebound in early July. Is that a result of 'things getting back to normal?' No one can tell. But one thing is for sure. Mainlanders are maestros at playing the cat-and-mouse game. Regulations and official lending ceilings are there to be circumvented.
Combine this skill with controlled interest rates and therefore protected profit and you have banks with an eye only on asset growth, eye-popping loan growth and climbing inflation. In the first 11 months of last year, new yuan-denominated loans exceeded 99 per cent of the government's 7.5 trillion yuan (HK$8.78 trillion) limit. Analysts expect the figure for the year will reach 8 trillion yuan. To combat this trend, administrative interference is always the quick fix. Interest-rate reform and the building of risk awareness is too long term and remote a solution to help.
So instead of mid-year or annual checks, regulators will now do monthly inspections on the credit and capital levels of commercial banks. Instead of the China Banking Regulatory Commission - whose main job is not to combat inflation - the central bank will do the checks. Banks that fail the test will be ordered to set aside more reserves, with a lower interest rate from the central bank for the money set aside.