People's Bank Can Get Money If Needed, Economists Say

By Kevin Hamlin and Li Yanping

Sept. 5 (Bloomberg) -- China's central bank has ready access to the money it needs to meet any capital or funding shortfall, economists said.

The New York Times reported yesterday that the People's Bank of China was in talks with the Ministry of Finance on ways to shore up its balance sheet, citing three unidentified people with knowledge of the discussions. The central bank declined to comment today and the finance ministry wouldn't immediately comment.

Providing ``some recapitalization for the People's Bank of China is unlikely to be particularly challenging given China's strong fiscal position,'' Richard Yetsenga, a currency strategist at HSBC Holdings Plc in Hong Kong, said in an e- mailed note yesterday.

Pressure on the central bank's finances has increased over the past year. The rates on bills that it issues to soak up cash from foreign-exchange inflows have climbed above yields on U.S. Treasury bonds that it holds. The yuan's 18 percent gain versus the dollar in the past three years has also cut the value of foreign-exchange reserves invested by the bank in dollar- denominated assets.

The People's Bank of China needs to increase its $3.2 billion of capital, the New York Times reported.

No Funding Problem

Any capital or funding needs can be solved by an injection of money from the finance ministry, said Stephen Green, head of China research with Standard Chartered Bank Plc in Shanghai. He said that the central bank should have no funding problem because of the money that it made over most of the past five years when returns on U.S. bills were higher.

``It's not a commercial organization so it's not held by any rules on its balance sheet,'' Green said. ``The key thing is people's confidence in its ability to repay the currency and bills and no one is suddenly thinking that they are insolvent or that they are not going to meet liabilities.''

Another economist had a similar view.

``The erosion in the central bank's capital due to foreign- exchange losses is an academic issue and has no practical implications,'' said Wang Qing, chief China economist at Morgan Stanley in Hong Kong. ``Unlike private financial institutions, a central bank's operation and credibility is independent of the capital position on its balance sheet.''

Bill Sales

One of the central bank's main tasks is to ``sterilize'' capital inflows. It does that by selling government bills to remove from the financial system the extra yuan that are printed to buy dollars from exporters.

China's foreign-exchange reserves have swelled to a record $1.8 trillion as money floods in from exports, foreign direct investment and investors abroad speculating on continued gains by the yuan. The extra cash has added to inflation risks.

Wang Tao, an economist with UBS AG in Beijing, said she wouldn't be surprised if the central bank wanted to increase its financial strength to continue sterilizing inflows.

``This objective is not just its own, but is set by the government,'' Wang said. ``If the central bank did not sterilize foreign-exchange inflows, then inflation would have been very high; if it did not buy and hold foreign-exchange reserves, then the yuan would have appreciated more.''

China's inflation has cooled to 6.3 percent in July from February's 8.7 percent, which was the fastest pace in 12 years.

To contact the reporter on this story: Kevin Hamlin in Beijing on khamlin@bloomberg.net;