China steps up fight against over-investment
China announced on Monday it would redouble efforts to restrain the torrid pace of investment in some industries and intensify a battle against emergent inflation to prevent asset “bubbles” from creating another rash of bad loans.
The People's Bank of China (PBoC), the central bank, said it was tightening monetary policy and seeking to cool loan growth by increasing the ratio of deposits that financial institutions must keep at the central bank. The cabinet announced its intention to pursue further “macro-controls” to curb investment in fixed assets.
Taken together, the moves represented Beijing's most resolute initiative to temper its economic boom since it first sounded the alarm last summer. It was also evidence that steps taken thus far have failed to tame inflation, loan growth, money supply or fixed asset investments, economists said.
“An excess of credit growth can create inflation and asset price bubbles,” said a PBoC statement, breaking with a previous reluctance to use the word “bubble”. “This can create new non-performing bank loans and concentrate financial risk.”
The move to increase the reserve requirement for financial institutions at the central bank from 7 per cent to 7.5 per cent would deprive banks of around Rmb110bn ($13bn) in funds available for lending, a small amount compared with the PBoC's overall target of capping new loans this year at Rmb2,600bn, down 13 per cent from last year.
Nevertheless, the bank's determination is clear and it may act again if loan growth continues to rise, economists said. Figures for loan growth in the first quarter of this year were not available, but fixed asset investment rose 53 per cent in the first two months as local governments splurged on all manner of industrial and property projects.
“We must further strengthen macro-controls to take resolute steps to curb rapid investment growth to help prevent inflation and ‘ups and downs’ in the economy,” said a statement following a weekend cabinet meeting chaired by Wen Jiabao, premier.
It was not clear what type of “macro-controls” the government had in mind, but an official at a key economic ministry said Beijing was issuing a series of administrative orders aimed at preventing the construction of wasteful, polluting, small-scale and unprofitable industrial capacity.
The focus of these efforts would be in industries such as steel, aluminium, cement, property and other metals that are driving inflationary pressures and straining the environment, the official said. In one such order, several real estate projects in Beijing have been stopped, developers and officials said.
The “big four” state banks, which comprise more than 60 per cent of China's banking assets, have also been ordered to reduce lending to problem sectors. This is already having an effect, with some large steel and aluminium expansion projects being mothballed, company executives said.
Nevertheless, the restraints thus far imposed on the economy have not been enough to contain an inflation trend that is being driven by shortages of grain, transport capacity, water and electricity.
news.ft.com |
