PBOC sets out policy to combat inflation

08:27, February 01, 2011      

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China's central bank announced in a report that it has set the growth rate target of M2, the broad measure of money supply, at 16 percent for 2011 to curb inflation and control financial risks.

M2 rose by 19.7 percent over the previous year, exceeding the officially set target of 17 percent, according to the People's Bank of China (PBOC) on Jan 11.

Analysts said that M2, which includes cash and all types of deposits, might be the only announced quantitative target in 2011 for the central bank to tighten liquidity. Usually it would publish regulatory targets for both M2 and new yuan loans.

"Risks of rising inflation cannot be neglected because major economies are expected to shore up their economy by maintaining an easy monetary stance and large amounts of capital flows into emerging economies," said the PBOC in a report published on Sunday. It added that continuously rising labor costs and resource prices also reinforce rising inflation expectations.

The central bank vowed to strengthen control over total financing quantity, including yuan lending, corporate debt and equity financing, trust loans and entrusted loans to keep inflation at a stable level.

"That means it will make more efforts to rein in credit while encouraging the expansion of bond financing," said Lu Zhengwei, chief economist with the Industrial Bank.

A source told China Daily the overall credit target in 2011 is likely to be 7.5 trillion yuan ($1.14 trillion). But unlike in previous years, the target includes lending outside the balance sheet of banks and this target will not be publicized.

China has told its lenders to put all loans sold or transferred to less-regulated trust companies back on their books to better reflect the country's lending statistics. Some banks have resorted to those securitized products - which are de facto lending but are not counted as such - to get around the regulatory requirements.

To strengthen control over credit, the central bank will check the credit and capital levels of commercial banks monthly, and raise the reserve requirements of individual lenders if their capital-adequacy ratios do not meet the regulatory targets, local media reported.

China has been facing the challenge of excessive liquidity since the government introduced stimulus measures worth $586 billion in late 2008 and adopted a "moderately loose" monetary policy to propel an economy battered by the global financial crisis.

In 2010, new yuan loans reached 7.95 trillion yuan, exceeding the government's target of 7.5 trillion yuan, while consumer inflation jumped by 3.3 percent over the same period, exceeding the officially set ceiling of 3 percent.

Deutsche Bank's Greater China Chief Economist Ma Jun said a 16 percent year-on-year increase of M2 for 2011 is far from enough to check the nation's already white-hot inflation. "The government should hike interest rates rapidly by 50 basis points each time, and control the scale of new lending and construction projects rigidly in the next few months, to keep inflation in the second half of 2011 within 4 percent."

Reuters contributed to this story.

By Wang Xiaotian, China Daily
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