China to focus on curbing liquidity

Jan 21 | Updated: Jan 22 2007, 06:47am hrs
China's central bank will use a combination of monetary policy tools this year to soak up excess liquidity in the banking system as continued trade surpluses increase the nation's foreign exchange reserves.

M2, the broadest measure of money supply, which includes cash and all deposits, is likely to increase about 16 % this year, compared with a 16.9% expansion in 2006, the Beijing- based central bank said on its Web site today. The 2007 forecast is based on assumptions that economic growth will be 8 % and the consumer price index won't increase more than 3 %.

"China will maintain steady growth in lending, increase the flexibility of the yuan and let the market determine the exchange rate,'' the central bank said on the statement. "The country pledges to maintain the steady advancement of its monetary policy, helping to keep economic growth stable.'' Record trade surpluses have pushed up China's foreign reserves to more than $1 trillion, flooding the financial system with cash and complicating central bank efforts to prevent a rebound in loans and investment. Governor Zhou Xiaochuan has raised interest rates twice and bank reserve requirements four times over the past nine months to try to cool the economy. "Liquidity in the banking system is still huge, even though the growth in money supply has largely stabilised compared with the early months of 2006,'' Huang Yiping, chief Asia economist of Citigroup Inc. in Hong Kong, said before the announcement.

Excess reserves at China's financial institutions, extra cash in excess of required reserves, rose 2 %age points in December to 4.78 %, the central bank said on January 15. "That means there is still much room to raise reserve requirements further,'' Wang Yuanhong, senior economist with the State Information Center, affiliated with National Development and Research Center, said before the statement. China's money supply grew in December at close to its slowest pace of 2006, with M2 rising 16.9 % to 34.6 trillion yuan ($4.4 trillion), after gaining 16.8 % in November, the bank said on January 15.

Outstanding yuan loans rose 15.1 % in December from a year earlier to 22.5 trillion yuan, and new yuan lending climbed to 214.2 billion yuan from 193.5 billion yuan in November.

Governor Zhou on January 5 ordered Chinese banks to put aside 9.5 % of deposits starting on Jan. 15, up from 9 % to prevent a rebound in lending and investment. The central bank raised the reserve requirement by 0.5 percentage point in June, July and November after leaving it unchanged for more than two years.