online.wsj.com
China Tries a Soft Touch in Effort To Check, but Not Derail, Growth
By JAMES T. AREDDY
DOW JONES NEWSWIRES
March 23, 2004; Page A2
SHANGHAI -- China's robust economic growth may be too much of a good thing. But with only certain sectors tilting toward overheating , Chinese policy makers are reluctant to raise interest rates lest they drag down overall growth -- and with it the stock markets. So they are resorting to other tools to tighten credit and temper the exuberance.
Among those tools , Beijing has instituted a new policy that gives banks more discretion in raising rates above the central bank's benchmark rate , has tightened lending restrictions for certain overheated sectors , and is relying heavily on boosting bank reserve requirements to cut the pool of funds available for lending.
Much of China's economic picture remains positive. Growth , which clocked in at 9.1% last year , shows scant signs of slackening. The inflation rate , quiescent for much of last year , is forecast to more than double this year , but only to 3%. The stock exchanges in Shanghai and Shenzhen , have been riding high on the good news. The Shanghai Composite Index , which measures hard-currency Class B shares and local-currency Class A shares , is at its highest level in 27 months. Since November , it has risen 33% , while the Shenzhen Composite Index has gained 30%.
The Shanghai and Shenzhen exchanges are even shaking off the uncertainties surrounding Taiwan's weekend presidential election , with the composite indexes each edging higher Monday. However , share prices of companies linked to Taiwan or to trade with the island dropped , as re-elected President Chen Shui-bian is seen as less accommodating toward the mainland.
Bolstering China's economy is torrid bank lending , encouraged by interest rates at 25-year lows. The official cost of borrowing in China has remained unchanged since February 2002 , when rates were reduced to the lowest levels since Beijing embarked on free-market changes in 1979. The benchmark one-year lending rate is stuck at 5.31% and the payout on deposits is holding steady at 1.98%. and given the overall economy , the central bank is signaling that it sees no need for a change -- for now. While the inflation rate "has risen in recent times , it has not reached the level requiring immediate readjustment of interest rates," the state's Xinhua news agency quoted Zhou Xiaochuan , governor of the central bank , as saying this month.
But the situation might be untenable. During the first two months of this year , investment in real estate , factories and other fixed assets leapt 53% compared with the same period of 2003. New bank loans have shot up in recent months at a 21% annual rate. The trend , if left unattended , could endanger already fragile state banks , which in their haste to lend could be piling up new bad loans on top of historically heavy loads of nonperforming loans.
The central-bank governor and financial-policy makers are far from complacent. Keen to douse the loan growth while preserving momentum in the overall economy , Beijing is using alternative credit levers in order to avoid the drastic impact a rate increase might have in drowning out the sectors that lag behind.
Beijing controls almost every cost of credit in China , and in many cases has begun tightening up. Starting this year , for instance , a new formula applies to how banks can set lending rates , which in effect allows them to charge more interest on loans. Without adjusting the benchmark one-year 5.31% lending rate , the new policy pushes the upper margin to about 9% from 6.9%. The central bank is also underpinning bond yields by draining excess funds from the local money market each week. In addition , authorities are setting guidelines that aim to limit lending to overheated sectors such as property and aluminum production.
The lever most likely to be applied in the near term: boosting reserve requirements at banks , thereby choking off some of the available funds for lending.
"As the economy continues [showing] signs of overheating but before the debate can be called conclusively , they'll continue to ratchet up intermediate efforts," says Tim Condon , head of Asian research at ING Financial Markets in Hong Kong.
State media reports in recent weeks have begun discussing a possible increase in the 7% reserve rate level , the percentage of deposits that banks need to park at the central bank. The next move , they say , may be tailored to hit hardest banks that are especially cash-rich and thus lending-prone. Mr. Condon says higher reserves would make sense because they would leave banks with fewer funds to make loans , and authorities "see the problem as overlending," not overheating.
The central bank already raised reserve requirements in September , to 7% from 6% , in a move that seemed to temporarily curtail lending. In December , the central bank signaled that it again might tinker with bank reserve requirements when it cut the amount of interest it pays banks to hold their reserve cash. While the move looked like an oddly timed monetary easing , analysts say it was really aimed at cutting the cost to the central bank of calling in more reserves to tighten credit.
It's unclear whether an additional reserve rise will prove effective. Banks have a greater incentive to lend right now because of a change that allows them to set higher lending rates. But the banks are getting pinched in other ways. The biggest issuer of debt in China after the government, China Development Bank, said this month that nearly 80% of investors in one of its $1.2 billion bonds took advantage of an option to make the issue a floating-rate instrument.
Floating coupons help protect the investor from upswings in interest rates but will potentially be more expensive for the state-run bank, thus making it a more circumspect lender.
Write to James T. Areddy at james.areddy@dowjones.com
KJC |
