Ensuring Steady Growth


The People's Bank of China (PBC), the country's central bank, seems to be loosening liquidity to stimulate economic growth.

According to the PBC, in March, newly increased renminbi loans reached 1.01 trillion yuan ($160.32 billion), much higher than the market expected and hitting a record high in the past 15 months.

After the global economic crisis in 2008, China launched a 4-trillion yuan ($634.92 billion) stimulus package to stabilize economic growth. In the meantime, it adopted an eased monetary policy with monthly credit surpassing 1 trillion yuan ($158.73 billion). However, to cope with inflation, China has gradually reduced stimulus efforts, causing the credit scale to drop markedly. In the past year, newly granted loans each month were all much lower than 1 trillion yuan ($158 billion).

The massive growth of monthly credit this time appeared as the Chinese economy has been undergoing a decrease in growth. In the first quarter of this year, China recorded a GDP growth of 8.1 percent, lower than the market expectation. This is the fifth consecutive slowdown of quarterly GDP growth after the first quarter of 2011 and the lowest in three years.

Li Wei, an economic analyst of Standard Chartered Bank, said the massive credit scale growth in March may indicate the government's intention to ease the monetary policy and ensure economic growth.

Wang Tao, analyst of UBS Securities Co. Ltd., said the current figures reflect the government's regulation intentions that both monetary and fiscal policies will be eased.

According to Wang, with the government's practice of allowing banks to grant loans for the construction of affordable houses and other key projects under construction and relaxing control of loans granted to first house purchasers and developers of common commercial houses, the newly added loans in March increased markedly. This also indicates that capital will give more support to the real economy and it is more likely that economic growth will reach the bottom in the second quarter.

Favoring growth

After China publicized economic and financial figures for the first quarter, the central bank said it would increase liquidity supplies by various means such as lowering deposit reserve rate, appropriately strengthening reverse repurchase rates and releasing liquidity by expired central bank bills.

Zhu Jianfang, chief economist of CITIC Securities Co. Ltd., said the central bank's recent actions indicate that when maintaining the keynote of being moderate, the government tends to ease the monetary policy to some sectors, with the aim of "transfusing blood" to the real economy in transition.

"The focus of the policy is transferring from controlling inflation to ensuring steady economic growth," Zhu said.

Zhu said that as the European debt crisis rages on, capital flowing to China will slow and the amount of base currency from funds outstanding for foreign exchange will then be reduced. It is still possible that the deposit reserve rate will be further lowered.

China is not the only country in the process of easing its monetary policy. Emerging economies, including other BRICS countries, are launching a new round of easing measures, indicating that the world economic recovery is far from accomplished. On April 19, the Brazilian central bank announced it would reduce the benchmark interest rate by 75 basis points to 9 percent, almost the lowest in history. On April 17, India reduced its interest rate for the first time in three years.

Li Huiyong, chief macro-economic analyst of Shenyin and Wanguo Securities Co. Ltd., said the present situation shows China faces severe pressures of an economic slowdown, and to ensure a soft landing, it is necessary to readjust its credit policies in order to support economic development and satisfy capital demand of state projects. In 2012 it is unlikely that the newly granted credit would be lower than 8 trillion yuan ($1.27 trillion), and if the economy slows down faster than expected, newly granted credit would be even higher.

According to a PBC news release, the central bank will steadily increase money supplies to the market.

Less than optimistic

Demand for loans among enterprises remains weak despite increased sources of bank credit. PBC figures indicated that at the end of March, the balance of narrow money (M1) stood at 27.8 trillion yuan ($4.41 trillion), a year-on-year increase of 4.4 percent, which was 0.1 percentage point higher than in February but 3.5 percentage points lower than the end of 2011. The balance of broad money (M2) stood at 89.56 trillion yuan ($14.22 trillion) at the end of March, rising 13.4 percent year on year, which was 0.4 percentage points higher than a month ago but 0.2 percentage points lower than the figure at the end of 2011.

Although newly increased loans in March were higher than in the previous two months, most of these newly increased loans were short-term ones, while the volume of newly granted mid- and long-term loans continued slow growth as in the first two months of this year. PBC figures showed that in the first quarter, loans granted to non-financial corporations and other sectors increased 1.95 trillion yuan ($309.52 billion), of which short-term loans increased by 1.05 trillion yuan ($166.67 billion), mid- and long-term loans increased by 590.6 billion yuan ($93.75 billion) and notes financing grew by 257.5 billion yuan ($40.87 billion). Newly increased mid- and long-term loans only accounted for 30 percent of the total newly increased loans.

Shi Lei, research supervisor of Ping An Securities Co. Ltd., said most of the new loans granted to corporations are short-term ones and the growth of long-term loans is still weak, indicating that the overall demand of the economy is relatively weak.

Zhang Yongjun, researcher at China Center for International Economic Exchanges, said it is still tight in terms of both newly increased loans and money put into circulation.

"The 13-percent M2 growth is much lower than the expected target of 16 percent. The first quarter should have been the peak of granting credit, but actually the growth of credit in the first quarter of this year was not fast, therefore it is necessary for the central bank to lower the deposit reserve rate," Zhang said.

A survey report issued by the PBC at the end of March showed that the reason for tight growth of newly increased loans and money put into circulation is not because banks don't have enough money to use, but because corporate demand for loans is declining.

Most entrepreneurs thought the monetary policy should not be deemed relaxed just because of the fast growth of credit in March. Compared with the same period of last year, the amount of bank credit did increase a lot, but note financing declined by nearly 300 billion yuan ($47.62 billion). The total volume of financing in March grew by only 79.9 billion yuan ($12.68 billion) year on year, so the liquidity should not be deemed as being massively relaxed. This indicates that the monetary policy is only "slightly readjusted," but not fully relaxed as in 2008-09.

Financial Indicators in Q1

In the first quarter, the total financing volume was 3.88 trillion yuan ($615.87 billion), a decline of 348.7 billion yuan ($55.35 billion) from last year.

In the first quarter, among the total financing volume, renminbi loans increased by 2.46 trillion yuan ($390.48 billion), up 217 billion yuan ($34.44 billion) from the same period of last year. Renminbi deposit increased by 3.76 trillion yuan ($596.83 billion), which was 218.5 billion yuan ($34.58 billion) lower than the same period last year.

At the end of March, the balance of renminbi loans stood at 57.25 trillion yuan ($9.09 trillion), a year-on-year increase of 15.7 percent, which was 0.5 percentage points higher than that at the end of February. The balance of renminbi deposits stood at 84.69 trillion yuan ($13.44 trillion), a year-on-year increase of 12.5 percent, which was 0.1 percentage point lower than that at the end of February.


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