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Fri, Mar 26, 2004 - Page 12 News List

Chinese authorities act to keep a lid on inflationary threat

AP , SHANGHAI

Hoping to cool rising inflation, China's central bank will tighten credit by increasing the amount of deposits that weaker banks must set aside, but it ruled out yesterday any immediate hikes in lending or deposit rates.

Adjustments announced Wednesday in reserve rate requirements and in the interest rates the central bank charges to some commercial institutions also are intended to rein in lending by weaker banks, whose mountains of bad loans are considered a source of financial instability.

Local analysts quoted in state-run media said they expect the new policies will have limited impact since they affect only some banks.

The monetary policy committee of the central bank, or People's Bank of China, ruled out any short-term increases in commercial bank lending and deposit rates in a statement released yesterday. It did, however, express concern about soaring lending.

"The committee believes a stable monetary policy should be continuously implemented and the scale of lending should be properly brought under control," the statement said.

Outstanding bank loans have grown by more than 20 percent from last year. Regulators fear that excessive lending by commercial banks is supporting booms in real estate development and in certain industries -- such as auto manufacturing, steel and aluminum -- that could lead to supply gluts and financial crisis.

Given the fast rate of growth in investment in construction and new factory equipment -- which in the first two months of this year surged 53 percent over last year -- inflation remains a threat, a report by analysts at Merrill Lynch said.

"The new measures are unlikely to alter China's strong growth momentum and hence the looming inflationary pressure," the report said.

Recent rises in food and fuel prices have pushed inflation to the highest levels in years. The consumer price index rose 2.1 percent in February, while wholesale prices jumped 3.5 percent.

Under the central bank's order Wednesday, banks not holding a minimum capital adequacy ratio of 8 percent must raise the percentage of deposits held as reserves to 7.5 percent from the current 7 percent. The change takes effect April 25.

Most Chinese commercial banks fail to meet the 8 percent minimum requirement for capital adequacy -- expressed as a percentage of a bank's risk-weighted capital exposures. Those that do are not required to raise their reserves.

In a further measure aimed at curbing bank lending, the central bank said it was raising the rediscount rate -- what commercial banks pay the central bank in return for cashing in short-term commercial bills before maturity -- by 0.27 percentage point to 3.24 percent.

A change in the reserve requirement is considered one of the most blunt instruments a central bank can use to control lending growth. Just six months ago, the reserve requirement for all commercial banks was raised to 7 percent from 6 percent.

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