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Thursday July 16, 2009

China taps on brakes as money supply surges


M2 growth soars way beyond forecasts as bank loans leap

BEIJING: Money supply growth in China surged in June on the back of breakneck bank lending ordered by the government to pump up the world’s third largest economy.

In a new sign of its worry that rapid lending could fuel inflation, the central bank responded with the latest in a series of baby steps to absorb surplus cash washing through the economy by requiring banks to buy 100 billion yuan (US$15bil) in special bills.

The economy is awash with liquidity in part because money is flowing back into China in anticipation that Beijing’s economic stimulus efforts will succeed.

The central bank reported that its foreign exchange reserves leapt by US$177.9bil in the second quarter to US$2.13 trillion.

“We think a gradual policy tightening in an early stage would be a positive move, especially in light of the expected very strong GDP growth in (the second quarter) and rapidly dissipating deflationary pressures,” Yu Song and Helen Qiao, Goldman Sachs economists, said in a note.

Traders said the central bank would issue the bills in September at a punitively low interest rate to a clutch of banks that had been responsible for a growing share of new loans. The operation means those banks will have less money to lend out.

Other steps in recent weeks by the central bank indicating that monetary loosening is over, even if outright tightening has not yet begun, include the resumption of one-year bill sales and an increase in yields in its open market operations.

The broad M2 measure of money supply grew at a record pace of 28.5% in June, blowing past forecasts of a 26% rise and accelerating from a 25.7% increase in May.

Money is being created at a faster clip because banks, which are nearly all state-owned in China, have been lending at a frantic pace in response to the ruling Communist Party’s drive to secure at least 8% economic growth this year.

“China has achieved impressive results in reviving economic activities,” said Gao Shanwen, chief economist with Essence Securities. “The basic tone of the appropriately loose monetary policy is unlikely to change, but there will be fine-tuning.”

There is no question that China’s economy is humming again after nearly stalling at the end of last year; more homes are being built, record numbers of cars have been sold and the government says that millions of jobs have been created.

Analysts polled by Reuters forecast the economy grew 7.5% in the second quarter from a year earlier. China will report its gross domestic product figures today.

Yuan loans outstanding were 34.4% higher than a year earlier, also the highest on record, up from May’s year-on-year reading of 30.6%.

The People’s Bank of China had already published preliminary figures on July 8 showing that banks extended 1.53 trillion yuan in new local-currency loans in June, up from 664.5 billion yuan in May. It confirmed that total yesterday.

“Probably the smaller lenders are expecting a credit tightening in coming months, so they rushed to lend out money in June. Everybody – the regulators and the banks – knows that the lending spree can’t go on like this,” said He Weijiang, an analyst with Central China Securities in Shanghai.

For now, though, the big jump in foreign-exchange reserves was a register of confidence abroad in the Chinese revival.

In a statement on its website, the People’s Bank of China said reserves rose US$55.14bil in April, US$80.6bil in May – a record for a single month – and US$42.1bil in June.

The cumulative total far exceeded combined proceeds of China’s trade surplus and foreign direct investment inflows in the second quarter. FDI fell for the ninth straight month in June, though at a slower pace than in May.

Changes in reserves are clouded by a host of undisclosed transactions and swings in the valuation of the non-dollar part of the stockpile, but the surge points to inflows of foreign capital betting on a strengthening economy, soaring stock prices, a property market rebound and, perhaps, yuan appreciation.

That was in stark contrast to the first quarter, when reserves rose just US$7.7bil, as the global credit crisis caused banks to call in loans and multinational firms to repatriate profits.

“Now we all know that it’s almost impossible for the yuan to depreciate and people since March actually expect appreciation of the yuan against the dollar,” said Ting Lu, an economist with Merrill Lynch in Hong Kong. — Reuters


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