OPINION> EDITORIALS
Capital stimulus
(China Daily)
Updated: 2009-06-01 07:48

While China's central bank warned in a recent report that the economy is still under downward pressure in spite of early signs of recovery, the Chinese government has adjusted capital requirements to further boost investment and improve industrial structure. However, if the new stimulus is to work its magic, Chinese banks need to increase credit support without relaxing risk control measures.

Last week, the State Council lowered capital requirements for fixed-asset investment (FAI) in infrastructural construction and some housing projects. At the same time, it raised the minimum financial requirements for investments in high energy-consuming and heavily polluting sectors.

As a way of macroeconomic control, the capital requirement system was introduced in 1996 to encourage development of certain industries or rein in overheated growth in some other sectors. Five years ago, the central government raised the minimum capital requirement ratio to 35 percent to cool down the sizzling real estate market. At that time, Chinese commercial banks were not allowed to extend loans to real estate developers who put up initial capital of less than 35 percent of the property project's total investment.

Now, as China is going all out to buck the global recession, some measures to ease the capital strain on domestic enterprises are more than needed.

After the latest adjustment, the minimum amount of capital needed to initiate development of a new commercial property or an affordable housing project has been slashed from 35 percent of the total project cost to 20 percent.

That will surely give a fresh boost to China's real estate investment, which accounts for about a quarter of the country's total FAI.

In the first three months of this year, China's real estate investment grew by only 4.1 percent - down 28.2 percentage points compared to the 28.6 percent FAI growth (2.36 trillion yuan in value) a year earlier for the same period.

As the global financial and economic crisis makes it impossible to continue relying on export for growth, China expects that investment and consumer spending will sustain its economic expansion. But, since consumer spending is unlikely to increase substantially overnight, investment growth becomes more important than ever, at this stage, to stimulate recovery of the national economy.

Chinese banks have responded positively to the government's 4-trillion-yuan ($586 billion) investment plan for two years by lending 5.17 trillion yuan ($760 billion) in the first four months of the year. Given the severity of the current crisis, such unprecedented credit support is badly needed.

Nevertheless, with the government lowering capital requirements, domestic banks have to carry out due diligence more thoroughly. Simply reducing loans to borrowers with less capital will undermine the country's ongoing efforts to stimulate economic growth. And, granting loans without strengthening risk control could lead to a surge in bad loans.

The performance of Chinese banks will decide how effectively the capital stimulus can work.

(China Daily 06/01/2009 page4)