China faces liquidity, inflation pressure

By Dong Zhixin (
Updated: 2007-03-14 14:24

Central bank governor Zhou Xiaochuan talks to reporters on the sidelines of the annual session of the National People's Congress in Beijing March 12, 2007. [Xinhua]

China is facing greater pressure of liquidity and inflation as the trade surplus, household deposits and consumer price index surged in February in the world's fastest growing major economy.

The country's trade gap reached US$23.76 billion in February, up from the US$2.5 billion from the same period last year, the General Administration of Customs said Monday. The country's record monthly surplus was $23.8 billion in October.

The surge came after the trade surplus soared 74 percent to hit a record 177.5 billion dollars last year. Some economists are pencilling in 230 billion dollars for 2007.

The huge imbalance of international payment left the nation's economy awash with cash. At the end of last year, the country's foreign exchange reserve topped US$1.07 trillion, the largest in the world.

China is in preparations for creating a forex investment company modeled on Singapore's Temasek to make more profitable use of the forex holdings, said Finance Minister Jin Renqing last week.

The new cabinet-level entity is expected to get anywhere from US$200 billion to 400 billion to invest in higher-return opportunities around the world.

Speeding up the investment of foreign reserves could help ease the rising pressure on the yuan to rise in value.

China is also considering allowing individuals to convert their renminbi holdings into foreign currency for overseas investments, revealed Hu Xiaolian, chief of the State Administration of Foreign Exchange.

Currently, individuals are allowed only to buy overseas investment products of Qualified Domestic Institutional Investors.

Household deposits surge

The trade figure came after the central bank said Monday that newly added household deposits hit an all-time high in February.

Household deposits grew 99.12 billion yuan, an increase of 58.38 billion yuan over the same period last year. The sharp increase was attributed to the timing of the lunar new year which fell in the middle of February this year and in mid-January last year.

The residents usually get a big share of their salary during the Spring Festival, said the central bank, adding that the close of the stock markets during the holiday also helped to push up the deposits.

Upon the release of the deposits figure, the central bank announced the issuance of 140 billion yuan of bills with a maturity of one year, in an apparent bid to absorb the increased liquidity.

That added to the 390 billion yuan the central bank issued in bills with maturities of three months, one year and three years since the end of last month.

The rocketing cash holdings increased the commercial banks' impulse to offer loans. The yuan-denominated loans grew 41.38 billion yuan, a year-on-year increase of 26.47 billion, official statistics showed.

The credit expansion may force the central bank to raise the reserve requirements ratio for the sixth time in nine months, several investment banks said. Lenders now must set aside 10 percent of their deposits at the central bank.

China would continue to use a mix of open-market operations, statutory reserve requirements and interest rates to soak up excess liquidity in the financial markets, said central bank governor Zhou Xiaochuan on Monday.

Excess liquidity is partly blamed for the high-flying prices in the country's stock market, which grew more than 130 per cent last year in a bull run.

Shares in the Shanghai Stock Exchange and Shenzhen Stock Exchange are trading at 33 times earnings on average, much higher than the average of 15 in developed markets.

The regulators are encouraging red chips companies listed in Hong Kong to list in the mainland bourses to offer more quality shares to investors.

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