Wednesday, April 14, 2004
Cooling an overheating Chinese economy
For a few months now, the warning signs have been tangible of the Chinese economy overheating -- surging raw material prices, shortfalls in the supply of energy, rising inflation etc. Several astute China-watchers have warned that the government needs to start taking steps right now to prevent the Chinese economy crashing (and perhaps taking the world economy along) and instead take it downwards on a glide path to avoid a bust. The obvious steps to take would be to let the Yuan move to a higher band and raising interest rates, though both are probably politically unpalatable to the Chinese govt (imagine what the appreciating Yuan would do to exports). I am not sure whether this "western" doctrine applies to China, given all of the complexity within the economy and the banking system. Keith Bradsher provides more signs that the chinese economy may indeed be overheating.
The biggest monetary policy challenge facing China is the flood of foreign cash, both foreign direct investment and speculative, that is washing into the country. It is being converted into yuan, pumping up the money supply and allowing China's banks to lend more and more. The official New China News Agency said on Tuesday that new figures from the Commerce Ministry showed that actual foreign investments rose 7.5 percent in March compared to a year earlier. Contracts for future foreign investments, an indicator of how much money may be entering China in the coming months, increased by 49.2 percent.
Interest rates have already jumped more than half a percentage point just this week for 7-day interbank loans, climbing to 2.48 percent late Monday, and even higher on Tuesday. Rates have climbed even faster for some bonds. The central bank cut back the volume of bills that it tried to auction this week by three-fifths compared to last week. But the bank was able to sell less than half of them as investors rejected the low interest rates that the bills carry at a time when unregulated rates are rising quickly.
The government for its part has instructed the People's Bank (the central Bank) to curb lending by commercial banks. Measures include raising minimum reserve requirements to 7.5% of outstanding loans. Wonder is this move will put an end to reign in bad loans. Or are interest rate hikes inevitable?
The biggest monetary policy challenge facing China is the flood of foreign cash, both foreign direct investment and speculative, that is washing into the country. It is being converted into yuan, pumping up the money supply and allowing China's banks to lend more and more. The official New China News Agency said on Tuesday that new figures from the Commerce Ministry showed that actual foreign investments rose 7.5 percent in March compared to a year earlier. Contracts for future foreign investments, an indicator of how much money may be entering China in the coming months, increased by 49.2 percent.
Interest rates have already jumped more than half a percentage point just this week for 7-day interbank loans, climbing to 2.48 percent late Monday, and even higher on Tuesday. Rates have climbed even faster for some bonds. The central bank cut back the volume of bills that it tried to auction this week by three-fifths compared to last week. But the bank was able to sell less than half of them as investors rejected the low interest rates that the bills carry at a time when unregulated rates are rising quickly.
The government for its part has instructed the People's Bank (the central Bank) to curb lending by commercial banks. Measures include raising minimum reserve requirements to 7.5% of outstanding loans. Wonder is this move will put an end to reign in bad loans. Or are interest rate hikes inevitable?
