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China's monetary policies still facing challenges
Updated: 2004-06-18 13:52

A credit squeeze targeted at red-hot sectors in China's economy seems to have been paying off, but according to a central bank source, the country's monetary policies are still facing challenges.

The People's Bank of China said in a recent report that banks doled out a combined 113.2 billion yuan (US$13.6 billion) in Renminbi-denominated loans last month, less than half of the figure for the same month in 2003.

This was largely attributed to the decrease of short-term loans + which should be serviced in less than one year -- and bill business, while loans of longer terms maintained high growth, said Deputy Governor Sheng Songcheng of the central bank's Shanghai branch, pointing out that enterprises will thus lack funds in hand for daily operation.

The growth of small and medium-sized enterprises would become a worry for the Chinese leaders who are eager to cool down the economy as banks would take priority in reducing loans, often short-term ones, for these firms, taking into account loan safety and returns.

A new embarrassment is the Renminbi interest rate, which Sheng said would induce raw-material stockpiles and affect the enterprises' daily operation if not raised, at a time when inflation is fairly high.

But a rate hike would heighten the yuan-appreciation pressure as more "hot money" flows in to cash in on the already-big gap between Renminbi and US-dollar interest rates, hamper consumption and likely further press banks to lend more in tandem with more deposit influx.

Central bank Governor Zhou Xiaochuan's earlier view was that " we will observe economic data in the future."

Asia's second biggest economy is gradually beginning to respond to repeated attempts by the government to tap the brakes on excess investment-- largely backed by bank lending + in such areas as steel, aluminum, cement and real estate.

The People's Bank had ordered commercial banks to set aside more deposits as reserves in the central bank for three times in a row since last September, freezing hundreds of billions of yuan that can otherwise be used for lending.

It had said new yuan loans should be confined to 2.6 trillion yuan (US$313.3 billion) this year.

A positive sign is that investment in construction and factory equipment and other fixed assets, contributing greatly to the country's "overheating economy" as claimed by many economists, slowed its pace -- down 16.4 percentage points from April to an 18.3 percent growth in May.

This appears to bolster the case for an economic soft landing as desired by the Chinese government, who has set an economic growth target of 7 percent for this year, down from a sizzling 9.1 percent in 2003, analysts say.

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