China Needs to Keep Reining in Loans, Researcher Says

By Bloomberg News

July 14 (Bloomberg) -- China’s central bank can keep inflation in check without harming the economy by making clear it plans to rein in lending, said Xia Bin, head of financial research at the State Council Development Research Center.

“The People’s Bank of China needs to manage inflation expectations by giving signals of a more stable money-supply growth,” said Xia, who attended a meeting hosted by Premier Wen Jiabao last week. “The government’s appropriately loose monetary policy shouldn’t be without limits.”

Policy makers pledged this week to do more to guide loan expansion as record growth in credit adds to the risks of asset bubbles and bad debts. New loans rose almost fivefold in June as the credit boom revived the world’s third-biggest economy, helping the Shanghai Composite Index surge 71 percent this year.

Two government debt sales failed last week to draw enough bids as investor concerns grew that the threat of inflation would prompt policy makers to further restrict funds. The People’s Bank sold bills through 28- and 91-day repurchase agreements today at higher yields for a third consecutive week.

“The central bank will guide the rates higher through open-market operations,” said Dong Dezhi, an analyst at Bank of China Trading Center in Shanghai. The yield on the central bank’s three-month bills may rise to 1.4 percent, from 1.22 percent yesterday, before stabilizing, he forecast.

Current money-supply growth is sufficient to achieve the government’s economic growth target of 8 percent, said Xia, whose center is affiliated with the Cabinet. He estimates a 14 percent increase in money supply would be enough to back gross domestic product growth of 10 percent. M2, the broadest measure of money supply, rose 25.7 percent in May from a year earlier.

Open-Market Operations

The People’s Bank sold bills through 28-day repurchase agreements at 1.05 percent today, compared with 0.9 percent in the year through June 16.

China will mainly use such sales and so-called “window guidance” to curb lending, said Liu Yuhui, director of the Center for Chinese Economic Evaluation in Beijing at the Chinese Academy of Social Sciences. “The way of quietly changing the policy, which has special Chinese characteristics, will help avoid any great impact on the market and the economy.”

China’s GDP increased 6.1 percent in the first quarter from a year earlier, the least in almost a decade. The consumer price index declined for a fourth month in May, falling 1.4 percent.

Rate Outlook

Banks made new loans totaling 7.4 trillion yuan ($1.1 trillion) in the first half, more than triple the amount a year earlier. That helped drive up stocks and property values. A government report last week showed home prices in major cities climbed in June for the first time in seven months.

Zhu Baoliang, chief economist in Beijing at the State Information Center, said it’s unlikely China will raise interest rates or require banks to set aside more cash as reserves “in the short term.”

The central bank has kept borrowing costs unchanged this year, after reducing the benchmark one-year deposit rate five times in the last four months of 2008 to 5.31 percent as the government sought to bolster economic growth amid the global recession.

“We haven’t seen a sustainable recovery in China’s economy yet,” Zhu said. “If we cut stimulus efforts, the economy may head towards a second bottom.”

--Belinda Cao, Judy Chen. Editors: James Regan, Sandy Hendry

To contact the Bloomberg news staff on this story: Belinda Cao in Beijing at lcao4@bloomberg.netJudy Chen in Shanghai at Xchen45@bloomberg.net.