BIZCHINA / Top Biz News

Money supply growth unlikely to slow
By Zheng Lifei (China Daily)
Updated: 2006-07-20 09:22


Concerned about an overheating economy in the making, the central bank has recently taken a slew of measures to curb credit growth, another factor driving money supply growth.

It ordered commercial banks to raise their required reserve ratios by half a percentage point to 8 per cent earlier this month, following its decision to increase the one-year benchmark lending rate by 27 base points to 5.85 per cent in April.

The reserve ratio is the amount of cash a bank is required to deposit in the central bank, and can restrain banks' lending capacities.

"What the central bank can do is to control the supply side of the credit, while the demand side is largely out of its hands," said Zhang Xuechun, an economist with the Asian Development Bank's (ADB) Resident Mission in China.

The central bank, Zhang said, could restrain commercial banks' lending ability by raising interest rates, increasing reserve ratios, issuing central bank bills or with "window guidance."

"However, if the dynamic investment cannot be cooled," the ADB economist said, "the central bank will still find it hard to slow the money supply growth, as long as demand for credit continues to rise."

The sizzling economy and the robust growth in fixed-assets investments, may indicate that the thirst for credit will remain strong in the second half of this year, pushing the central bank to further tighten monetary policy.

China's economy grew 10.9 per cent in the first half, according to the latest figures released on Tuesday by the National Bureau of Statistics.

The economy accelerated by a stunning 11.3 per cent in the second quarter from a year ago, its fastest pace in more than a decade.

Urban fixed-assets investment jumped 31.3 per cent in the first half from a year earlier, after it registered 30.3 per cent expansion in the first five months.

With 2006 marking the start of the 11th Five-Year Plan (2006-10), the year's booming investment has been in line with expectations, said Han Meng, an economist with the Chinese Academy of Social Sciences.

"Typically, the first year of a five-year plan will see a rapid growth in investment; this year will be no exception," said Han.

The quicker-than-expected economic expansion and the surge in fixed-assets investments, economists say, may prompt the central bank to take immediate steps to tighten monetary policy. The newly released statistics, economists also say, show that the central bank may face an uphill battle in achieving its target of 16 per cent growth in the M2.


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