China said yesterday the nation’s lenders issued a lower-than-expected 492.6 billion yuan (US$77 billion) in new loans last month, indicating Beijing’s efforts to rein in liquidity are taking effect.
However, the People’s Bank of China (PBOC), the central bank, still sounded the alarm on the politically-sensitive inflation figure, which hit a more than three-year high of 6.5 percent last month.
Last month’s loans were lower than the 633.9 billion extended in June and 25.2 billion yuan less than the same month last year, the bank said in a statement.
It was also below forecasts of 555 billion yuan by 11 economists surveyed by Dow Jones Newswires.
The broadest measure of money supply, M2, was up 14.7 percent year-on-year at the end of last month compared with a 15.9 percent rise at the end of June, the central bank said, in another sign of slowing credit.
“Today’s data should reassure Beijing that rate hikes and other measures are having the intended effect of tightening credit conditions and reducing upward pressure on inflation,” Royal Bank of Canada economist Brian Jackson said.
Policymakers have been pulling on a variety of levers to rein in bank lending over fears of soaring property prices and inflation, which Beijing worries could trigger social unrest.
In its quarterly monetary policy report, also released yesterday, the central bank said it was “not optimistic” about the prospect of inflation and stressed that stabilizing prices remained a top priority.
“The foundation of stabilizing prices is not sound and the situation is not optimistic,” it said.
The central bank said in the report that it would use “multiple policy tools” including interest rates, exchange rates and bank reserve requirements to try to keep prices in check. The wording in the report was similar to its previous one.
It repeated that it will keep the yuan exchange rate basically stable at a “reasonable and balanced level.”
However, talk swirled that the central bank was preparing a policy move. A flurry of stories in local newspapers affiliated with the government suggested that the PBOC would increasingly use a stronger currency to help it manage imported inflation as the US dollar weakens.
It was not clear whether the PBOC’s report was written before or after those stories were published yesterday. The report made a reference to the US debt rating downgrade on Aug. 5, indicating it was finalized within the past week.
The media reports, appearing in half a dozen newspapers in a rare display of uniformity, augmented market speculation that a PBOC policy change was imminent, perhaps involving a widening of the trading band for the currency.
The yuan steadied to around 6.39 to the US dollar in spot markets yesterday, pausing after a steep rise this week, as the PBOC set a record-high mid-point for the yuan for a third consecutive day.
It has now appreciated about 6.7 percent since it was depegged from the US dollar in June last year and 3 percent so far this year.
BNP Paribas economists said that a swifter yuan rise “looks logical” if China is sufficiently confident that its economy can weather a global economic slowdown.
“If, in doing so, it also means China reserves growth slackens off and so the need to continue acquiring so many Treasuries is reduced, then this sends an exquisitely timed signal to the US after last week’s ratings downgrade,” BNP wrote in a note to clients.