Liquidity concern valid
(China Daily)
Updated: 2006-05-16 06:51
chinadaily.com.cn
The fact that the psychologically important level of 8 yuan per US dollar was breached yesterday justifies the Chinese monetary authorities' growing concern over excessive liquidity.
Yesterday, constant appreciation pressure finally pushed the official central parity rate for the Chinese currency versus the US dollar up to 7.9982 yuan per US dollar - the highest level since a 2.1-per-cent revaluation last July.
Though the rise of the yuan is largely of symbolic significance to the country's gradual introduction to more flexibility in its foreign exchange regime, in hindsight, it adds to the credit of the central bank's focus on fast growth of bank loans.
The People's Bank of China (PBOC) on Sunday offered a four-point explanation about the unexpected fast growth of bank loans in this year's first quarter.
To the surprise of monetary policy-makers, domestic banks in the first quarter used up roughly half of their lending targets for the whole year, granting 1.26 trillion yuan (US$156.25 billion) in loans, up 14 per cent from a year ago.
Besides all the domestic factors that contributed to the current credit boom, the central bank also correctly identified the external driving force. As foreign trade surplus and inflow of foreign investment continue to inflate China's foreign exchange reserves, liquidity has to grow in spite of the central bank's efforts to sterilize as much additional supply of local currency as possible.
The latest rise of the exchange rate of the yuan only confirms that market anticipation of further appreciation will not disappear any time soon.
Since it is necessary to keep the pace of foreign exchange reform in line with the soundness of the domestic financial sectors, the monetary authorities must be ready to make full and timely use of available domestic policy tools when liquidity excess becomes a serious concern.
PBOC's diagnosis was pertinent to the domestic reality.
Fast economic and fixed-assets-investment growth brought a strong demand for bank loans. Meanwhile, domestic banks tried to profit more by lending more and doing so earlier.
The danger of too much liquidity is that extensive investment growth will not only lead to overcapacity in some industries but also leave bad loans piled up in domestic banks later.
At a time when the national economy is registering a double-digit growth, individual businesses might have ample reasons to support their investment decisions.
Yet, as a whole, the country cannot afford to undergo another round of investment expansion that could undermine its pursuit of a more balanced and sustainable growth model.
The faster-than-expected growth of loans in the first quarter calls for immediate actions to tighten liquidity to slow investment growth.
By issuing the four-point explanation, the central bank obviously intends to warn both commercial banks and some overheated sectors of its concern.
If the banks are not responsive enough, the monetary authorities should respond with concrete measures. |
