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Recent credit shortage not a major concern for nation

Updated: 2013-12-30 07:45
By Luo Jiexin and Xue He ( China Daily)

Soon after the United States announced a tapering of its bond-buying program, better known as quantitative easing, China's money markets experienced a new credit shortage.

The overnight Shibo, the Shanghai Interbank Offered Rate, rose to a multi-week peak of 4.515 percent on Dec 23, 100 basis points higher than before the US announced its tapering.

The rate ebbed only after the central bank conducted the first reverse-repurchase agreements in three weeks the following day to boost liquidity.

Many have cited this as a sign that China will enter a long period of liquidity squeeze. They suggest the authorities relax their monetary stance to prevent the economy from slowing down.

But is that actually the case?

It is true that the US move will change global money flows, because a tightening of monetary supplies in the US will shore up its interest rates and reverse the depreciating trend of the greenback.

US interest rates have climbed since the second half of the year, when Washington hinted of a pullback from the QE policy. Yields on 10-year government bonds have grown to 2.8 percent from 2 percent since the beginning of the year. The 15-year mortgage rate hit 3.5 percent from 2.5 percent in October.

Since money flows to markets with higher interest rates and stronger currencies, in this case the US market, emerging economies will witness capital outflows and depreciation of their currencies.

This rule will also apply to China, but it is going too far to suggest that the world's largest emerging market will face a severe money shortage. And it is premature to call on the central bank to shift to relax its monetary policy.

To understand this, it is necessary to figure out what is happening in the Chinese money markets.

It is true that there is a money shortage. This can be described as serious in some parts. But the cause of the shortage mostly lies in domestic factors, with the US announcement of tapering QE giving the market an excuse to temporarily hike borrowing costs.

In some cities in East China's Jiangsu and Zhejiang provinces, the money supply has been very tight since the second half of the year. The situation has worsened in recent days, with companies and homebuyers complaining about limited access to loans.

But a better examination of the markets will lead to the conclusion that the markets have money. The truth is that lenders, be they banks or private lenders, are reluctant to lend because of fears that their money will end up as bad loans.

We surveyed about 30 bank executives and private lenders in the two provinces this month. Most of them said they still had money to lend. But the problem, they said, was that they cannot find good investment projects.

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