China Cuts Money Supply Goal to 15% to Curb Inflation (Update2)
Jan. 5 (Bloomberg) -- China cut its money supply growth target for 2005 to curb inflation and slow expansion in the world's fastest-growing major economy, the People's Bank of China said.
The central bank plans to cap growth in M2, the nation's broadest measure of money supply, at 15 percent this year from the 17 percent target set in January 2004, Governor Zhou Xiaochuan said in a statement on the bank's Web site. China's actual M2 may have risen 14.5 percent in 2004, according to the statement.
The bank also targeted total yuan-denominated lending at 2.5 trillion yuan ($302 billion) for the year, down from 2.6 trillion yuan, the statement said. China will ``actively and steadily push forward'' reform on its yuan exchange rate mechanism this year while maintaining the basic stability of the currency on a reasonable and balanced level, Zhou is cited as saying.
``The central bank should fully take advantage of the function of interest rate in adjusting the economy,'' Zhou said.
The government of Premier Wen Jiabao last month called for a gradual slowdown in an economy that grew at a 9.1 percent annual pace in the third quarter. China is targeting growth of at least 7 percent a year to create tens of millions of jobs for graduates, surplus farm workers and fired state workers.
The central bank on Oct. 29 raised its benchmark lending rate for the first time in nine years, by 0.27 percentage point to 5.58 percent, to slow growth. Five of eight economists surveyed by Bloomberg forecast another quarter-point increase by March 31.
`Soft Landing'
The reduction in the target ``is consistent with the expectation that (China) will be raising interest rates and looking for more ways to slow fixed asset investment, which in turn would slow M2 growth,'' said David Malpass, chief economist at Bear, Stearns & Co. in New York.
The action ``doesn't really alter our forecast for a soft landing,'' Stephen S. Roach, chief economist at Morgan Stanley & Co. in New York, said in an interview.
Chinese central bankers began a three-day meeting yesterday in Nanning, capital of the southern Chinese province of Guangxi, to set the target for money supply expansion.
``Setting the target lower is in line with the government's decision in December to strengthen macroeconomic controls,'' said Zhu Baoliang, chief economist at the Beijing-based State Information Center, in an interview yesterday. Bank spokesman Bai Li declined to comment during the meeting, which ends Jan. 6.
The new target doesn't suggest a shift in monetary policy because money supply climbed 14 percent in November from a year earlier, staying within the government's 2004 target for a sixth straight month. China Daily's Business Weekly reported the 2005 target two days ago, citing unidentified people.
Slowing Down
China's money supply growth slowed last year from a 2004 peak of 19.4 percent. The M2 target is set by agencies including the central bank and the National Development and Reform Commission.
The country will move gradually toward a more flexible exchange rate for yuan, which has been fixed at about 8.3 to the U.S. dollar since 1995, Premier Wen said on Dec. 8.
``The statement on the yuan (today) is consistent with the government's longer-term objective of making the yuan convertible,'' economist Roach said. ``It's not going to happen overnight.''
Yuktai Chan, who helps manage about $3 billion in Asian equities at Threadneedle Asset Management in London, said China needs to strengthen its banking system before the country moves to a more flexible foreign exchange system.
``The banking infrastructure is the basis of the economy,'' she said. ``If it's not solid, everything collapses around it.''
Share Sale
China is seeking to sell shares in its four biggest lenders to help them reduce 1.89 trillion yuan in bad loans. China Construction Bank, the nation's third-largest lender, and Bank of China, the No. 2, each received a $22.5 billion bailout before their planned initial share sales.
Plans to restructure Industrial & Commercial Bank of China, the nation's largest lender, and Agricultural Bank of China, the fourth biggest, may also feature on the agenda at this week's meeting, the Economic Information Daily reported on Dec. 27.
China is close to injecting $30 billion into Industrial Bank, with the bailout plan expected to receive approval from regulators before the end of this month, the Financial Times said yesterday, citing unidentified people close to the situation.
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