Faster Credit Growth to Ease Deflation Pressure

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Last updated at: (Beijing Time) Saturday, June 01, 2002

Faster Credit Growth to Ease Deflation Pressure

China's central bank is planning to encourage faster growth of credit during the coming months of this year to help overcome persistent deflationary pressures.

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China's central bank is posed to take action to help the country overcome persistent deflationary pressures.

Dai Xianglong, governor of the People's Bank of China, said Friday the central bank will pursue a more rapid credit growth in the remaining part of the year than originally planned.

Target for growth of the broad money supply measurement M2 in 2002 is now set at 14 per cent, one point higher than the original goal of 13 per cent set at the beginning of the year.

But Dai, speaking at a central bank conference, said a new interest cut is unlikely. He reminded his colleagues that the country's interest rates, after eight slashes since 1996, are already at their lowest level in two decades.

Instead of a rate cut, the central bank will allow commercial banks to float their lending rate in a wider range to make them more willing to issue loans to smaller enterprises.

Bankers believe interest rates for loans to smaller enterprises need to be higher than official rates because lending to these firms is generally more risky.

The central bank will also grant more loans to rural co-operatives to make them more financially capable of supporting agricultural and other business activities in rural areas, Dai said. Many of the rural financial institutions are in great need of capital to sustain their businesses.

The central bank is making this money supply plan adjustment after the country has seen three quarters of falling prices.

Although the country's economic growth rate remained at a robust 7.6 per cent during the first three months of the year, its consumer price index, another key barometer for the condition of the economy, still lingers in negative territory.

China's banks are apparently taking on increasing responsibility in powering economic growth, after the finance minister and other major economic officials said recently it is time for the four-year-fiscal stimulus policy to be phased out.

The government's input in infrastructure has been playing the leading role in driving the country's economic growth since 1998.

But the input, mainly financed by treasury bond issues, pushed the government's deficit to 260 billion yuan (US$31 billion) last year and triggered worries over the health of public finances.

But it is also not an easy job for banks, many of which are struggling with high levels of non-performing loans and are unprecedentedly wary in issuing new loans.

This is why the central bank has decided to allow them to charge higher lending rates than previously permitted.

Dai also urged commercial banks to enhance their marketing capabilities to increase their proficiency in lending and making profits.

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