Exposure to subprime debt limited
By Fu Jing (China Daily)
Updated: 2008-03-07 07:13

The impact of the US subprime crisis on Chinese banks will be limited and their bottom line will not be significantly affected, the central bank governor said Thursday.

But Zhou Xiaochuan warned that vigilance was necessary as many uncertainties still exist about how the debt crisis will unfold and what impact it will have on China, which faces mounting inflationary pressure.

"There will be further indirect impact from the US subprime mortgage crisis on China's economy. It cannot be underestimated since what lies ahead is far beyond our experience," he told a press conference on the sidelines of the annual session of the National People's Congress, the top legislature.

A recent report in Capital Week magazine said six of China's major commercial banks had lost around 4.9 billion yuan ($686 million) in the US subprime market, which accounted for around 1 percent of the total profit they made in 2007.

Talking about the relationship between currency value and inflation, Zhou said a faster appreciation of the yuan may help control prices, but cannot be the predominant means of curbing inflation.

Some economists have suggested that a faster appreciation of the yuan could help cut the trade surplus, which is believed to be the main reason for the current excessive liquidity that is driving up prices. A stronger yuan would make exports more expensive in foreign currency terms.

The exchange rate is decided more by market forces, Zhou explained.

China has made its currency regime more flexible by letting the yuan appreciate steadily. The currency has risen about 12 percent since July 2005, when it was unpegged from the greenback.

Inflation control is mainly dependent on government policies, including a tight monetary stance, he said.

Premier Wen Jiabao mentioned nine measures to ensure effective supply and curb excessive demand as ways to stabilize prices in his Government Work Report, which was delivered at the start of the NPC annual session on Wednesday, he pointed out.

Last year, the central bank raised the reserve ratio 10 times and interest rates six times to mop up excess liquidity.

The reserve ratio has so far been raised once this year; and economists expect further interest rate hikes.

Zhou said there is room for an interest rate increase, but domestic and international factors need to be taken into account.

He said the recent fall of US interest rates did affect China, but only partially. "China has many domestic factors to consider in interest rate revisions."

Zhou cited the influence of the domestic capital market and consumption, as the country is increasingly dependent on stimulating domestic demand, rather than exports, to spur economic growth.

Successive interest rate cuts by the US Federal Reserve to rev up the economy have widened the China-US interest rate spread and helped push down the US currency.

Some analysts said the central bank now had limited room to raise rates further and had to let the yuan rise to curb inflation.