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Monetary challenges

(China Daily)
Updated: 2007-04-14 06:50

With this year's third hike in the required reserve ratio for banks set to take effect next Monday, a stronger-than-expected surge of foreign exchange reserves and new bank loans requires new efforts from the monetary authorities.

If the central bank is to stick to its target of money supply and credit growth for the whole year, these first-quarter growth figures seem to warrant more tightening measures now.

Related readings:
 China March M2 money up 17.3% Money supply, reserves add yuan pressure
 China's forex reserve tops US$1.2 trillion
 
China could safely diversify reserves -ADB

According to the People's Bank of China, the country's foreign exchange reserves reached US$1.2 trillion at the end of March, up 37.36 percent year-on-year. In the first three months, the country added 1.42 trillion yuan (US$184 billion) in new renminbi bank loans, a year-on-year increase of 167.8 billion yuan (US$21.7 billion).

On the one hand, an accelerated accumulation of foreign exchange reserves indicates that it will be more difficult and urgent for China to reduce its external imbalance.

In spite of a sharp drop in China's trade surplus last month, it reached US$46.4 billion in the first quarter double that in the same period last year. Meanwhile, foreign direct investment climbed about 12 percent year-on-year to US$15.9 billion, reversing last year's declining trend.

The two factors have contributed significantly to the growth of foreign exchange reserves. But the huge gap between these and a jump of US$135.7 billion in the reserves in the first quarter, compared with an increase of US$250 billion for the whole of 2006, gives ample reason for the monetary authorities to step up vigilance against a possible inflow of speculative capital. The latter can fuel asset bubbles and become a menace to domestic economic and financial stability.

On the other hand, sizzling credit growth has made it harder to rein in extensive investment growth that has long impeded the country's effort to shift to a more sustainable growth pattern.

The amount of new loans in the first quarter almost accounted for half of what banks had granted during the whole of last year. Three hikes in deposit reserve ratios and one rise in interest rates so far this year show that the central bank has been prompt to respond. However, looming monetary challenges mean that it is still not time to take a breather.

(China Daily 04/14/2007 page4)


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