China Hits the Brake, but Maybe Too Softly
By KEITH BRADSHER
NYTimes
Published: April 25, 2004
ONG KONG
LISTEN to the recent talk from senior Chinese officials and look at a few of their actions, and it may seem at first that Beijing is finally acting decisively to rein in a galloping economy.
The People's Bank of China, the country's central bank, has raised reserve requirements for banks twice in the last five weeks. The central bankers and officials from the powerful State Development and Reform Commission have said that investment in apartment buildings, factories and other fixed assets - up 43 percent in the first quarter from a year earlier - is excessive and must be brought under control.
On the surface, even the money supply in China appears to be growing a little less swiftly these days. China's broad M2 measure of money supply rose 18.9 percent in March from a year earlier, a steep ascent but not quite as fast as last summer, when it was soaring at an annual pace of 21 percent.
Yet, has government policy really changed that much? Independent economists say the changes to date represent only small steps.
"The measures the government has initiated so far seem fairly limited, and it really depends on what other policies come into place" over the next several months, said Wang Xiaolu, the deputy director of the National Economic Research Institute in Beijing.
The main increase in reserve requirements, covering all banks, was announced on April 12 but will require banks to hold only an extra $13.3 billion in reserves, giving them that much less money to lend. An earlier increase, on March 24, covers banks with weak bank balance sheets and is expected to have a much smaller effect on reserves.
The biggest banks in China already hold more reserves than government regulations require, further muting the effect of the new rules.
By comparison, however, economists estimate a net flow of $10 billion to $15 billion into China each month, from foreign direct investment and speculation alike. The People's Bank of China pegs the value of China's currency, known as the yuan or renminbi, to the dollar, so it must convert the incoming foreign exchange into local currency, feeding an increase in the money supply.
China has an official policy of sterilizing this inflow - that is, selling Chinese treasury bills and notes to the banks to take back out of circulation the renminbi that it pumps into the system to buy incoming dollars. The reality, though, is that the People's Bank of China has struggled for the last year to sell enough bills even to pay off other bills that are maturing, much less soak up any of the incoming investment.
The scale of the increase in the money supply is now being debated. The People's Bank of China began seeking public comment last December on whether a broader measure of money supply, M3, might be needed in addition to the M2.
Liang Hong, a Goldman Sachs economist here, questioned in a report last Tuesday whether M2 was really the right barometer of the money supply in China or of the country's inflationary pressures.
One problem is that M2 in China excludes some of the fastest-growing financial assets. These include insurance-company deposits at banks and money managed by securities firms. Both categories have grown more than 80 percent annually in recent years. Repurchase agreements in the interbank market and commercial guaranteed bills are also excluded from M2 but are growing quickly.
Ms. Liang did not try to estimate what she believed to be the true rate of growth in the money supply, saying that too little data was available. More optimistic than many economists these days, she predicted that China's economy would maintain a "solid growth path."
But she also contended that China should look to interest rate increases and currency appreciation to control inflation, instead of continuing to set money supply targets, an approach that went out of favor in Western countries by the late 1980's.
"A major risk to our view is that continued policy inaction in effectively tightening monetary conditions will lead the government to resort to more aggressive tightening measures down the road, resulting in a harder landing of the economy than would otherwise be the case," she wrote.
PERHAPS most troubling, however, is evidence that any monetary policy may be losing some effectiveness. The businesses responsible for China's soaring investment can increasingly raise cash without going to banks, and investment spending is now rising twice as fast as bank lending.
Where is the money coming from? Joan Zheng, an economist at J. P. Morgan here, calculates that makers of steel and other commodities are earning huge profits from high prices and reinvesting the money.
Local governments are investing the proceeds from land sales, which are increasingly valuable in a soaring property market.
"Just relying on monetary policy is not enough," Ms. Zheng said. "You need taxation policy and government pressure." |
