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Mon, Jan 01, 2007 - Page 10 News List

S Korean central bank to contain mortgage growth

BLOOMBERG

The Bank of Korea will strengthen efforts to ensure growing household debt, led by a surge in mortgage lending, doesn't cause financial instability, Governor Lee Seong-tae said.

"Stability in the financial markets has weakened since mortgage lending ballooned household debt," Lee said in a prepared New Year speech to employees yesterday. "That requires us to establish monitoring systems and take prompt action in case of any sign of unrest."

Lee is seeking to curtail soaring household and business debt, which raises the risk of loan defaults and could undermine the longest economic expansion in a decade. The Bank of Korea in November ordered banks to put aside more money as reserves, and on Dec. 21 cut the limit on loans for small business lending.

Cheap credit, a housing shortage and expectations of capital gains have fueled the biggest home price increases in 17 years. House prices rose 3.1 percent in November, the largest gain since April 1990, according to data from Kookmin Bank.

Lee said the US$788 billion economy has weathered a stronger currency, high oil prices and tensions over North Korea's nuclear test in October to expand 5 percent last year over 2005. Growth will slow this year, he said.

The central bank on Dec. 5 forecast economic growth would slow to 4.4 percent this year as overseas demand for South Korean cars, semiconductors and televisions weakens.

Export growth will slow to 10.8 percent this year from 12.9 percent last year, it said.

"Next year's economic expansion will be lower than this year's but the pace of growth will quicken in the second half," Lee said.

The bank will keep its monetary policy flexible to help support growth while keeping inflation in check, he said. It raised borrowing costs five times since October 2005 to stem lending and price gains. Lee has kept rates on hold since August as inflation showed few signs of picking up.

Separately, China's central bank, under pressure from the US and other G7 nations to make the yuan more flexible, will this year pursue a "stable currency policy" to promote economic growth, its central banker said yesterday.

The People's Bank of China "will continue to strengthen and adjust financial control mechanisms, execute a stable currency policy, improve foreign exchange management and push for financial reforms and innovation," Governor Zhou Xiaochuan (周小川) said. "We want to contribute to ensure stable and accelerated economic development."

China's widening trade gap has driven the nation's foreign-exchange reserves to US$1 trillion and undermined government efforts to cool the economy.

China's central bank on Dec. 29 relaxed currency controls to make it easier for individuals to buy stocks and bonds abroad and help reduce the value of the yuan. By making it easier to invest abroad, the central bank may reduce demand for the yuan.

"The central bank over the past year has kept a stable currency policy to keep the currency and loans growing at a reasonable rate, aiding stable and accelerated economic growth," Zhou said in his New Year's Day message posted yesterday on the central bank's Web site. "The central bank also steadily improved financial reforms and accelerated the pace of reforms in shareholding of commercial banks," he said.

New yuan-denominated bank lending is expected to top 3 trillion yuan (US$384 billion) last year, overshooting the central bank's target of 2.5 trillion yuan.

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