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Tue, Apr 13, 2004 - Page 12 News List

China warns of excessive growth

ECONOMICS The central bank is raising the financial reserves banks are required to hold as the nation tries to keep inflation in check and avoid `irrational' investment

AP , SHANGHAI

A man takes a nap under an advertisement with the word ``Prosper'' on the streets of Beijing yesterday. China's leaders are warning of reckless investment and the central bank is boosting the financial reserves that banks are required to hold to guard against inflation and lessen financial risks.

PHOTO: AP

China's leaders are warning of reckless investment and the central bank is boosting the financial reserves that banks are required to hold to guard against inflation and lessen financial risks.

"Excessively fast growth in lending could add to inflationary pressures or cause a bubble in asset prices that could add to the amount of bad loans, adding to financial risks," the People's Bank of China, or central bank, said in a notice issued yesterday.

The comments followed a pledge by China's Cabinet to do more to curb excessively fast growth in lending for construction projects and to counter other "conspicuous contradictions" in the economy.

"Some problems are still developing, including excessively fast expansion of investment," the state-run Xinhua News Agency reported, summarizing the outcome of a Cabinet meeting on the economy Friday.

"Investments are irrational," said the report, posted on Xinhua's Web site. "There are too many new projects and the scale of construction is too big. In some industries blind investments and the problem of low quality, redundant construction is very severe."

The central bank announced late Sunday that most banks will be required to hold reserves equal to at least 7.5 percent of their outstanding loans and other capital commitments. The level for some weaker banks was set at 8 percent.

The step takes effect April 25 and is the third tightening of reserve requirements in eight months. The bank set the reserve requirement at 7 percent in August. Late last month, it raised that to 7.5 percent for weaker banks not meeting certain capital adequacy standards.

The international recommended minimum is 8 percent, but many Chinese banks do not meet it.

Bad loans already total some 2 trillion yuan (US$250 billion) at China's state banks, according to the China Banking Regulatory Commission. Foreign analysts say the figure is higher, especially at smaller banks and rural credit cooperatives.

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 trigger a financial crisis.

Outstanding bank loans have already grown by more than 20 percent so far this year from last year.

Sunday's measure is expected to remove 110 billion yuan (US$13.3 billion) from the financial system, the central bank said.

A change in the reserve requirement is considered one of the most blunt instruments a central bank can use to reduce money in circulation. Too much cash can fuel inflation.

Fast growth in investments in construction and new factory equipment -- which surged 53 percent higher in the first two months of this year than the same period last year -- appears to have raised fears that earlier hikes in the reserve requirement may not have done enough to discourage excess lending.

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