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Worst over, but banks still under pressure (2)

By Xie Yu (China Daily)

14:02, June 26, 2013

Prepared for decontrol

The People's Bank of China issued a statement after its second-quarter monetary policy committee meeting on Sunday afternoon, which reiterated its commitment to interest rate reform.

On the same day, Zhang Chenhui, director of the finance research institute at the State Council Development Research Center, was reported as saying that China may lift the lower limit for lending rates before the end of 2013.

Analysts said the central government is urging the banks to improve their ability to manage liquidity, and prepare for reform of the financial markets that will see the introduction of more market mechanisms in the future.

"Chinese banks have become increasingly dependent on a loose monetary environment and low interbank market rates," said Yang Guoying, a researcher with the Beijing-based China Finance Thinktank.

"Extensive use of short-term loans to support long-term investment projects puts great pressure on the banking system.

"As the central bank said earlier, M2 supply is sufficient in China - but the problem is the poor liquidity management of the banks.

"China should enhance interest rate liberalization, to improve the efficiency of circulation of money, and banks should prepare for that."

The credit crunch is being blamed mainly on an unreasonable capital structure of the banks - they are pursuing higher returns by putting a lot of capital into arbitration and speculation, rather than the real economy.

Guo Tianyong, director of the Research Center on the Chinese Banking Industry at the Central University of Finance and Economics in Beijing, said on his microblog that the government is making a clear stance, that the current priority is to adjust the economic structure, even at the expense of growth, and the banks should cooperate.

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