International | May 23 2006
By Chris Shaw (Tokyo)
The annual report of the People’s Bank of China has given some indications of the likely direction of its policy in coming months, as it contains indications the PBoC will continue to target excess liquidity and rapid credit growth in the economy.
The bank’s last policy move was the unexpected increase in official interest rates last month, though as most economists point out the 0.27% increase was not enough to dampen the market and was more a warning shot in terms of future policy.
As Standard Chartered Bank notes, there are not yet any signs of a slowdown in the economy as even though industrial output growth slowed slightly in April from March it remains very strong.
This is a reflection of too much liquidity in the system according to Bank of America, who suggests the most likely policy move is the introduction of measures designed to slow the pace of bank lending.
The central bank agrees, the report making the point further measures would be considered in an attempt to slow the rate of credit growth, these measures to include a number of policy tools such as further reforms to the exchange rate regime and adjustments to bank reserve requirements.
The latter is potentially the most significant in slowing the domestic economy, as tougher reserve requirements would force banks to reduce their lending and strengthen their balance sheets, so reducing the number of more marginal loans being made.
Government policy makers are suggesting such measures are possible, with Hu Jinglin, the head of the economic construction department, arguing last week reserve requirements should be lifted to control the level of credit and fixed-asset investment. He also suggested a tightening in fiscal spending in an attempt to slow the rate of growth of infrastructure spending.
If the PBoC decides to tighten reserve requirements in the banking sector it would be a significant policy change, as the last increase in the reserve ratio was early in 2004. China International Capital Corporation suggests such a move would have positive implications, as it should help lessen inflationary pressures and help in draining some of the excess liquidity out of the system.
