PBOC Forecast Faster Money Growth

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Last updated at: (Beijing Time) Tuesday, October 22, 2002

PBOC Forecast Faster Money Growth

The Monetary Policy Committee of the People's Bank of China (PBOC) announced Monday it reached an agreement at its fourth quarter meeting that the RMB interest and exchange rates should continue to remain basically stable in the near future.

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China's central bank has broadly raised its full-year forecast on money supply growth, a sign analysts say reflects a growing role of the monetary policy in combating lingering deflationary pressures.

The People's Bank of China said Monday a fourth quarterly meeting of its monetary policy committee predicted broad money supply, or M2, which covers cash in circulation and all deposits, would grow by up to 17 per cent this year.

It compares to the maximum 15 per cent target it set at the beginning of the year.

"The purpose is obviously to combat deflation and problems in economic growth,'' said Huang Jinlao, a researcher with the Institute of International Finance at the Bank of China.

"It illustrates that the central bank wants the monetary policy to play a bigger role.''

China's consumer price index, a key gauge for inflation, dipped by 0.8 per cent in the first nine months of the year from a year earlier, extending a downward spiral that started last November.

Although the central bank has largely defended its prudent monetary policy and avoided calling sliding prices "deflation,'' analysts say it has been scaling up money supply in the second half of the year, most noticeably in the past two months.

The annualized M2 growth quickened from 14.4 per cent in July to 15.5 per cent at the end of August -- the slickest since August in 2000. It powered to 16.5 per cent in September.

Zhang Xueying, senior researcher with the State Information Centre, said a key factor in the acceleration was the substantial rise in bank loans for the year, which is primarily a response to the country's better-than-expected economic growth and partly because of growing pressure from the central bank to lend more.

Huang said the central bank's move could also be seen in frequent open market operations, which were most active in July and August, as well as its increased buying of foreign currencies aimed at bolstering local currency supply, which has led to rises in foreign reserves.

China's foreign reserves soared by 33.2 per cent year-on-year to US$253.09 billion at the end of August.

Zhang said the pace of money supply was faster than expected but the revised growth rate is "appropriate'' given an expected weakening next year in the role of the fiscal policy.

The Chinese Government reportedly has plans to issue 150 billion yuan (US$18 billion) in treasury bonds next year, unchanged from this year.

"But the growth is zero,'' Zhang said.

He said a more important issue is whether the increases in money supply can alleviate an unabated funding drain among small and medium-sized enterprises and county-level economies.

In response to worries that rapid growth in loans may heighten financial risks, Han Qiang, an official with the Industrial and Commercial Bank of China, said the bank's lending plans are largely independent from monetary policy concerns and based on its own circumstances.

"As long as we can find good customers, the quality of loans should be no problem,'' Han said.

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