China acts to restrain banks by lifting rates
Beijing seeks to put some discipline on the weaker lenders
HONG KONG The Chinese central bank announced late Wednesday that it was raising the interest rates that it charged banks for loans and that it would require the weakest banks to hold larger reserves.
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Taken together, the two measures represent a moderate tightening of monetary policy - a light tap on the brakes for an economy that is showing signs of overheating and rising inflation.
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Economists said the two moves could slow somewhat the swift increase in bank lending that has produced a steep increase in China's money supply and raised fears that country's banks might be creating another wave of bad loans.
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The two steps also show Beijing's growing determination to prevent banks from taking undue risks in lending under the assumption that the government will bail them out if they run into trouble. The moves will increase pressure on banks to shore up their finances to avoid extra costs in borrowing money and in holding greater reserves.
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Under new interest rate rules, which are to take effect on Thursday, the central bank, the People's Bank of China, will have the flexibility to charge much higher interest rates to ailing banks. By contrast, its current policy is to charge essentially the same interest rates to all banks that want to borrow money.
The central bank said separately that the weakest banks would be required to hold 7.5 percent of their assets as reserves at the central bank starting on April 25. Banks are now required hold 7 percent of their assets as reserves, except for rural credit unions, which are allowed to hold 6 percent, because Beijing is trying to help rural areas.
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Because the central bank pays negligible interest on reserves, the increase to 7.5 percent acts as a financial penalty on weaker banks and an incentive to operate more prudently.
.
Shortages of critical commodities and increasingly severe transportation bottlenecks are starting to fuel inflation. Several hours before the central bank acted, China's National Bureau of Statistics said wholesale prices of industrial goods in February were 3.5 percent higher than a year earlier.
.
That rise is the same pace of inflation at the wholesale level as in January and represents a sharp acceleration from most of last year, when inflation was virtually nonexistent.
.
With prices surging for a wide range of commodities, banks are starting to charge each other higher rates for loans, building into the interest rates their expectations for inflation in the coming months. The interest rate for three-month interbank loans has risen to 4 percent in recent weeks while the central bank has been charging just 2.7 percent for 20-day loans.
.
"The incentives to borrow from the central bank are getting higher," even though the central bank dislikes issuing such loans because they allow banks to avoid the discipline of having to impress other banks that they are creditworthy, said Joan Zheng, an economist in Hong Kong with J.P. Morgan.
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The central bank said it would charge as much as 63 hundredths of a percentage point more on 20-day loans for some borrowers. The bank did not identify its criteria for how much of an increase to apply for each borrower. But Liang Hong, an economist in Hong Kong with Goldman Sachs, said the central bank was likely to charge the highest rates to small banks that had been lending with particular recklessness lately.
.
Typically owned by municipalities, the small banks have had trouble lately persuading bigger banks that they are creditworthy enough to borrow on the interbank market, and have been turning to the central bank instead, Liang said.
.
"This is a more clever way of doing this than raising reserves" for all banks, a move that would have also put a financial penalty on the four big state-owned banks that dominate Chinese banking, she said.
.
The New York Times Beijing seeks to put some discipline on the weaker lenders
HONG KONG The Chinese central bank announced late Wednesday that it was raising the interest rates that it charged banks for loans and that it would require the weakest banks to hold larger reserves.
.
Taken together, the two measures represent a moderate tightening of monetary policy - a light tap on the brakes for an economy that is showing signs of overheating and rising inflation.
.
Economists said the two moves could slow somewhat the swift increase in bank lending that has produced a steep increase in China's money supply and raised fears that country's banks might be creating another wave of bad loans.
.
The two steps also show Beijing's growing determination to prevent banks from taking undue risks in lending under the assumption that the government will bail them out if they run into trouble. The moves will increase pressure on banks to shore up their finances to avoid extra costs in borrowing money and in holding greater reserves.
.
Under new interest rate rules, which are to take effect on Thursday, the central bank, the People's Bank of China, will have the flexibility to charge much higher interest rates to ailing banks. By contrast, its current policy is to charge essentially the same interest rates to all banks that want to borrow money.
.
The central bank said separately that the weakest banks would be required to hold 7.5 percent of their assets as reserves at the central bank starting on April 25. Banks are now required hold 7 percent of their assets as reserves, except for rural credit unions, which are allowed to hold 6 percent, because Beijing is trying to help rural areas.
.
Because the central bank pays negligible interest on reserves, the increase to 7.5 percent acts as a financial penalty on weaker banks and an incentive to operate more prudently.
.
Shortages of critical commodities and increasingly severe transportation bottlenecks are starting to fuel inflation. Several hours before the central bank acted, China's National Bureau of Statistics said wholesale prices of industrial goods in February were 3.5 percent higher than a year earlier.
.
That rise is the same pace of inflation at the wholesale level as in January and represents a sharp acceleration from most of last year, when inflation was virtually nonexistent.
.
With prices surging for a wide range of commodities, banks are starting to charge each other higher rates for loans, building into the interest rates their expectations for inflation in the coming months. The interest rate for three-month interbank loans has risen to 4 percent in recent weeks while the central bank has been charging just 2.7 percent for 20-day loans.
.
"The incentives to borrow from the central bank are getting higher," even though the central bank dislikes issuing such loans because they allow banks to avoid the discipline of having to impress other banks that they are creditworthy, said Joan Zheng, an economist in Hong Kong with J.P. Morgan.
.
The central bank said it would charge as much as 63 hundredths of a percentage point more on 20-day loans for some borrowers. The bank did not identify its criteria for how much of an increase to apply for each borrower. But Liang Hong, an economist in Hong Kong with Goldman Sachs, said the central bank was likely to charge the highest rates to small banks that had been lending with particular recklessness lately.
Typically owned by municipalities, the small banks have had trouble lately persuading bigger banks that they are creditworthy enough to borrow on the interbank market, and have been turning to the central bank instead, Liang said.
.
"This is a more clever way of doing this than raising reserves" for all banks, a move that would have also put a financial penalty on the four big state-owned banks that dominate Chinese banking, she said.
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