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Monetary policy may be too loose

By Ye Tan (China Daily)
Updated: 2009-05-11 07:58

Economists are pondering whether the current monetary policy is too relaxed.

There is no doubt that the total value of loans this year will exceed the planned 5 trillion yuan ($733 billion). Experts predict the sum will be between 8 trillion yuan and 9 trillion yuan.

Yi Gang, vice-governor of the People's Bank of China, summoned the vice-presidents of the main banks on Apr 22 to discuss the next step in the country's monetary policy. At the meeting, Yi said that the rapid credit increase since November of 2008 had both merits and shortcomings but that, in general, the benefits outweighed the disadvantages.

In the months to come, the central bank will not put restrictions on commercial banks' credit operations and hopes that growth will be reasonable, smooth and steady, according to Yi.

Related readings:  China to keep relaxed monetary policy  Monetary policy should be 'fast and heavy-handed'  Further adjustment in monetary policy possible  New monetary policy key to curbing crisis

But it will be hard to judge whether the growth is smooth and steady without concrete numbers delineating what the central bank considers reasonable.

The central bank said the country should pursue a "moderately relaxed" monetary policy but, again, there should be set measurements defining what constitutes a moderately relaxed policy.

According to a State Council document, M2 (the broadest measure of money supply) should grow by 17 percent in 2009. But if a 17 percent increase of M2 is considered moderately relaxed, then the current monetary policy, which has resulted in a first quarter growth rate of 25.5 percent, is obviously over-relaxed.

A long-term excessively-relaxed monetary policy will be detrimental to the Chinese economy.

It will be hard to optimize the loan structure with the majority of funds flowing to government-sponsored infrastructure projects. China Banking Regulatory Commission, the industrial watchdog, asked each bank to set up a loan department targeting small and medium-sized businesses but so far the department seems to be only for decoration.

The economic crisis in China is different than in the US and European countries since Chinese financial institutions are not plagued with toxic assets. The problem with the Chinese economy is its unbalanced economic structure and people's low consumption capability. An excessive supply of loans cannot root out this problem. Residents' consumption ability will instead probably weaken as government projects absorb more funds.

The author Ye Tan is a commentator on finance and economics in Shanghai.