Wen calls for reining in excessive lending
(China Daily)
Updated: 2004-02-10 23:49

Premier Wen Jiabao Tuesday called on financial officials to tighten their reins on lending to over-invested industries to slow down investment growth, which he described as being excessive fast-paced last year.

Addressing officials from banking, securities and insurance industries, Wen said another key priority for the financial sector this year should be to deepen the reforms at State commercial banks. The core part of the reforms will be joint-stock restructuring of the Bank of China and the China Construction Bank, he said.

Financial officials are in Beijing for their annual working conference, where they discuss their strategies and plans for the year.

Wen said the problem of launching unreasonable and poor copy-cat projects, which ignited runaway inflation in the early 1990s, is now serious in some industries and regions. At the same time, credit grew at a faster-than-needed rate last year, which poses risks to the health of the nation's financial system, he said.

China's fixed assets investments totalled 5.5 trillion yuan (US$662 billion) in 2003, which represented a whopping 26 per cent annual growth. The rate compared to 16 per cent in 2002.

Economic officials said the investments were responsible for 46 per cent of last year's economic growth, which stood at an impressive 9.1 per cent despite the impact of SARS (severe acute respiratory syndrome).

But many of these investments were excessive and unhealthy.

At a conference earlier this month, Vice-Premier Zeng Peiyan singled out sectors such as steel, aluminum and cement as industries showing signs of overcapacity.

These sectors have experienced powerful growth last year due to increasing demand from manufacturers and real estate developers. But the demand also lured companies to expand their capacity without considering the limits of demand.

At Monday's meeting, Wen said that some cities' lavish of urban development programmes also spurred unwanted investment growth.

Behind investment growth was the expansion of loans, which jumped by 21 per cent last year, as compared to about 16 per cent in 2002. Structure problems were also founded in loan growth.

Wen said the financial sector should limit credit growth and optimize loan structures to help the central government meet its goals of healthy economic growth.

In fact, the central People's Bank of China already took some steps to slow down credit growth last year.

In May, it issued a circular requiring commercial banks to refrain from financing speculative real estate developers and buyers.

In August, the bank raised the required reserve ratio for commercial banks from 6 per cent to 7 per cent, which further reduced money available to the banks for funding new projects.

But factors that drove unnecessary credit growth did not disappear. Many local governments still intervened in commercial banks' operations to make the banks fund local officials' pet projects, and some banks themselves are loosely managed.

In addition, despite its tightening moves, the central banks' foreign exchange purchases with Chinese funds still resulted in an affluent money supply which banks can use as source for issuing new loans.

China's rapid export growth and speculators smuggling "hot" money into China -- betting on an appreciating renminbi -- led to abundant foreign exchange in the markets.

Under China's foreign exchange administration system, the central bank has to buy foreign exchange with renminbi to keep the yuan's exchange rate stable.

Central bank officials have pledged to take more sophisticated measures to counter all factors that drive up credit growth in 2004.