Central bank to further check excess liquidity, inflation

Updated: 2007-11-08 21:04

BEIJING -- The People's Bank of China (PBOC) announced Thursday it might use a variety of measures, including bank and treasury bond issues and reserve requirement ratios, to control the country's "severe" liquidity problem.

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A PBOC report gave no details about the extent of the measures or when or how they would be implemented, but it stressed that absorbing liquidity in banks and strengthening credit control could not fundamentally tackle the constant and rapid accumulation of liquidity and other structural problems.

"These measures can only create a steady monetary and financial environment for China's economic growth and win time for restructuring and reform," said the central bank's Third Quarter Report of the Implementation of the Monetary Policies.

Excessive growth in investment, the trade surplus and credit remained the prominent problems of the Chinese economy.

"China still faces severe situations on liquidity.... The role of price levers will be strengthened while the use of interest rates and exchange rates policies will be more coordinated so as to stabilize inflation anticipation," it said.

The report identified the immediate reason for excess domestic liquidity as the continuous surplus of international payments, but also pointed to deep-seated structural problems, such as the high saving ratio accompanied by low consumption.

The report revealed that bank savings are shifting from time accounts to current accounts, although the saving inclination among local residents picked up slightly after interest rate hikes, interest tax cuts and rising risks on the capital market.

PBOC figures show the decline in aggregate deposits on individual accounts slowed in the third quarter, with the drop being 213 billion yuan (about $28.55 billion) less than the decrement in the second quarter.

At the end of September this year, the balance of deposits in Renminbi rose 6.9 percent over that of 2006 to 17.2 trillion yuan ($2.3 trillion). The growth was 9.2 percentage points lower than the comparable previous figure.

The total balance of deposits in Renminbi and other currencies by all financial institutions amounted to 39.5 trillion yuan ($5.29 trillion) at the end of September, up 16 percent over the same time of 2006. The rise was 0.4 of a percentage point lower than the comparable growth rate between September 2006 and September 2005.

The report said the central bank would strictly monitor short-term capital inflow, tighten exchange settlement management and make efforts to satisfy the demand of domestic institutions for foreign currencies by expanding overseas investment channels and encouraging companies and individuals to carry out industrial and financial investment abroad.

Investment, a more powerful engine than consumption of China's economy,which was expected to register a double-digit growth for the fifth year, will continue to grow rapidly boosted by strong investment sentiment and sufficient capital supply.

PBOC figures show approximately 170,000 new projects have been started in the first nine months of this year, up 18,000 from the same period of last year, involving an aggregate planned investment of six trillion yuan, up 24.2 percent over the same period of last year.

Although per capita cash income for rural households and per capita disposal income for urban homes have both grown faster than the GDP, the report said consumer price hikes may dampen the consumption growth to some extent.

Inflation risks deserve continuous attention as the upward movement in prices for grain crops and energy products as well as labor costs was expected to raise the possibilities of price hikes on the whole.

Boosted by its rocketing trade surplus, which hit $185.7 billion by the end of September, exceeding the total trade surplus of $177.47 billion for 2006, China had registered $1.43 trillion in foreign exchange reserve by September, up 45.1 percent year-on-year, the highest in the world.

The country's consumer price index, a key measure for inflation, hit a 11-year high of 6.5 percent in August.

This year the central bank has raised the reserve requirement ratio by four percentage points accumulatively, cut interest income tax from 20 percent to five percent, and lifted interest rates five times.

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