Monetary policies cause anxiety on China's capital market

11:14, March 30, 2010      

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Although the current trend for China's economic recovery is apparently positive, the A-share market has still fluctuated around the 3,000 point level mainly because of rumors surrounding the future monetary policy. This has led to numerous uncertainties in the entire capital market.

Will the news loans in March exceed 800 billion yuan?

News loans extended by commercial banks in March will maintain a relatively high growth rate. The Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China and China Construction Bank offered loans totaling nearly 200 billion yuan during the first two weeks of March. This is slightly higher than that in the same period of the previous month. Judge from this figure, the banking institutions will extend about 800 billion to 1 trillion yuan in new loans in March.

With the amount of loans in March rising from the earlier estimate of 150 to 500 billion yuan to the current 800 billion to 1 trillion yuan, there has been a clear difference on the market in the amount of new loans in March.

In fact, the estimate of 150 billion yuan in loans in March was based on the lending target of 7.5 trillion yuan for 2010 set by banking regulators and the requirement for commercial banks to extend 30 percent of loans in each of the first two quarters and 20 percent in each of the remaining two. Some media agencies therefore concluded that the maximum of 150 billion yuan of loans could be extended during the rest of March.

However, industry insiders do not agree with such estimations. They say the quarterly lending ratio made by regulators is just the ideal ratio, and the 150 billion yuan of loans were too low in light of commercial banks' strong motivation to make profits.

They stated that in addition to the profit-seeking instincts of banks, some medium and long-term projects approved by the Chinese government last year will also involve follow-up funds. Therefore, bank loans may increase by 500 billion yuan in March, with the pace slowing down compared with February.

This statement seems to be confirmed by China's banking regulators. Zhu Min, deputy governor of the People's Bank of China recently stated at a forum that the increase in bank loans was very strong in January, continued beyond expectations in February, and will slow down in March, resulting in a more balanced loan structure.

Will the deposit reserve ratio soon be raised?

With the release of relevant economic data for February, it is rumored that the People's Bank of China may again raise the deposit reserve ratio in March.

In fact, the central bank has been taking balanced measures in open market operations. According to statistics, it withdrew a total of 218 billion yuan last week, a record high in two years. So far, it has been withdrawing funds for five consecutive weeks after the Spring Festival, collecting money by 61 billion, 59 billion, 82 billion, 213 billion and 218 billion yuan each week, respectively. The figures show that the central bank is now speeding up fund withdrawal.

Through such moves, the central bank can relieve fund withdrawal pressure in months when there are much due funds, and increase fund supply in the months when there are less due funds. Balanced fund supply will enable the central bank to take a balanced strategy in open market operations.

Some analysts believe that issuing central bank bills will make it less necessary to raise the deposit reserve ratio in the short term. However, it will cost less to raise the deposit reserve ratio. Meanwhile, it is highly possible that the central bank may raise the deposit reserve ratio again in the future, given the ample market liquidity.

Some experts believe that it will be better to make a decision after relevant economic data for March 2010 is released.

Will China increase the interest rates?

It is commonly agreed that when the consumer price index (CPI) reaches 3 percent, it is the right time to increase interest rates. Therefore, when the CPI rose to 2.7 percent in February 2010, there were hot discussions on whether or not to increase interest rates.

Although the CPI for February was higher than expected, it was mainly resulted from seasonal factors. As the expected inflation has eased to some extent, it is almost impossible to raise interest rates in the first quarter of 2010.

However, people are still worried that interest rates may be raised in the future, believing that it is more reasonable to wait for the release of the CPI for March to make a judgment. Some believe that even if the CPI for March does exceed 3 percent, it does not mean that there has to be a rise in interest rates. Credit control is the main tool for CPI control, while interest rate increase is just a reserve method.

By People's Daily Online
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