China to Raise Money Supply 17% in 2009, Boost Loans

By Lee Spears

Dec. 14 (Bloomberg) -- China aims to increase its money supply 17 percent in 2009 and encourage lending to boost domestic consumption and buoy growth in the world’s fourth-largest economy.

M2, the broadest measure, including cash and all deposits, will increase 17 percent, the State Council said in a statement on its Web site. The government will also suspend the issue of three-year central-bank notes and aims to increase total financial-institution lending by 4 trillion yuan ($584 billion) next year, the statement said.

The People’s Bank of China is taking measures to boost liquidity and bank lending that the economy needs to sustain growth amid a global recession. The government last month announced 4 trillion yuan of spending through 2010 to spur more investment by municipalities and enterprises.

“Policy at the moment is generally being focused on boosting liquidity in the banking sector and making sure that is lent to fund investment in infrastructure projects,” Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong, said today.

Money supply gained 15 percent in October from a year earlier. China cut interest rates by the most in 11 years last month and has lowered the proportion of deposits that lenders must set aside as reserves. It has also scrapped temporary loan controls and sold fewer bills to try to boost liquidity.

China will boost policy-directed bank loans over the 2008 level of 100 billion yuan and will aim to increase total lending by financial institutions by 4 trillion yuan, said the statement, dated Dec. 8 and posted on the Web site late yesterday.

Corporate Bonds

One-year and three-month central bank notes will be issued less frequently, the statement said.

The government will encourage the expansion and development of corporate bonds, short-term financing bonds and medium-term notes, the statement said. Preference will be given to the issuance of bonds that fund infrastructure, post-earthquake construction and environmental protection, it said.

Banks should “give lending support to companies with relatively sound fundamentals, relatively good credit records, who are competitive, who have a market, who have orders but are having temporary operating or financial difficulties,” the statement said.

The government told banks to lend more to support areas in line with those promoted by government policy, including infrastructure, rural development, high technology and environmental technology. It also advised them to limit lending to processors and other industries that are big energy consumers.

Directions to Banks

“Commercial banks and other financial institutions should continue to deepen reforms of all kinds, improve management, internal controls and risk-prevention systems,” the statement said. “They should manage a balance between using finance to boost economic growth and guarding against financial risk; they should avoid being blindly reluctant to lend during an economic downturn.”

The statement also said new futures for commodities, including products including steel and grain, should be introduced to meet the needs of economic development.

The government will “take effective measures to stabilize the stock market,” the State Council statement said. Mainland China’s benchmark CSI 300 Index has lost 63 percent this year, making it the second-worst performer in Asia.

China will “increase flexibility” for lowering lending rates and also increase flexibility in foreign-exchange rates as it aims to maintain a “stable, balanced” yuan exchange rate, the statement said.

To contact the reporter on this story: Lee Spears in Beijing at lspears2@bloomberg.net.