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China's central bank reassures on monetary policy

(Agencies)
Updated: 2009-07-31 09:38

The benchmark Shanghai stock index (SSEC) clawed back some lost ground, closing up 1.7 percent Thursday. Two initial public offerings in Shanghai soared beyond expectations this week, underlining how speculative fever had returned in full force to Chinese markets.

The bull run in Chinese stocks has stemmed in large part from the whopping 7.37 trillion yuan ($1.08 trillion) lent by banks in the first six months of the year, easily topping the full-year figure of 4.91 trillion yuan in 2008 and prompting questions about how Beijing will tame money growth.

A man reads information on an electronic screen at a brokerage house in Shanghai July 30, 2009. [Agencies]

"We will focus on market tools, not quantitative-style control methods, flexibly using many kinds of monetary policy instruments," Su said. In this context, market tools likely referred to central bank's regular selling and buying of bills in the open market to influence liquidity.

Related readings: Working capital rules to be tightened PBOC reaffirms moderately loose monetary policy PBOC rules out monetary policy change Chinese shares rise on moderately loose monetary policy promise Economist: China's economy rebounds, uncertainty still exists Economy can grow 8% this year: FM

Dong Xian'an, chief economist with Industrial Securities in Shanghai, said firm lending quotas were still very much on the table, because they are a direct way to manage the underdeveloped and occasionally unruly Chinese financial system.

"Credit quotas are still an effective, if not the ideal, way to control credit growth," he said, adding that moving to a more market-oriented system would take time.

Lu at Merrill Lynch said that while Beijing was unlikely to impose hard-and-fast loan caps on banks, the central bank could well use a blend of moral suasion and punitive bill issuance to coax them into lending less.

It has already started down that path. Earlier this month, the People's Bank of China told a group of banks that have been particularly aggressive in lending that they would be required to buy 100 billion yuan in one-year special bills.

The special bills will carry a punitive yield of 1.5 percent and the banks were ordered to buy them in September -- a clear move to stem lending bursts that tend to come at quarter-end.

Another sign of Beijing softly tapping on banks' shoulders came on Thursday with an announcement from the China Banking Regulatory Commission that it will strengthen controls over loans made for corporate working capital.

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