Chinese banks must carefully pace their lending this year because heavy issuance of loans amid industrial overcapacity has created growing credit risks, China's central bank governor Zhou Xiaochuan said in comments seen on Tuesday.
Zhou also said that the experience of the international financial crisis showed that it was not enough to simply focus on inflation and that the People's Bank of China considered a wider range of issues in determining its monetary policy, including international balance of payments.
To that end, he highlighted reserve requirement ratios as an important tool in the central bank's arsenal. Forcing banks to put aside more of their deposits on reserve is a way for China to mop up cash flowing into the economy from its bulging current and capital account surpluses.
Zhou's comments were made in an interview with China Finance, a magazine published under the People's Bank of China, and appeared on its Web site.
We will "keep a good handle on the pace of monetary and credit growth, guiding financial institutions towards balanced release of credit and avoiding excessive turbulence," he said.
He also reiterated that the central bank will continue to implement "an appropriately loose monetary policy," while making "efforts to improve the focus and flexibility of policy."
The essence of China's loose monetary policy last year was an explosion of credit — a record of nearly 10 trillion yuan ($1.5 trillion) in new loans, about double the 2008 — total after banks answered the government's call to power the economy's recovery from the global financial crisis.
But the surge in lending appeared to go beyond even what the government expected, fuelling concerns that it was leading to property market speculation and going to industries that were already suffering from overcapacity.
"The large flows of credit towards redundant projects and those riddled with industrial overcapacity will not only go against the objective of economic structural adjustment, but will also pose bank lending quality risks," Zhou said.
The government is expected to trim new lending to 7-8 trillion yuan in 2010. Zhou's comments underlined that it will try to exercise greater oversight over both the direction and the pace of banks' lending this year.
He also said that maintaining low inflation was an objective of Chinese monetary policy, along with supporting high growth, high employment and balanced international payments.
"Since the financial crisis, monetary policy purely focused on inflation targets has clearly fallen short of its ambitions," he said.
Price pressures are building in China, withy consumer price inflation picking up to 0.6 percent in the year to November, but many analysts believe that inflation will fall back in the second half of 2010, in part because of industrial overcapacity.
Zhou expanded on his point about balance of payments, noting that China was in a special situation because of its trade surplus and investment inflows.
"Given that we face an imbalance in international payments and we have to flush liquidity from forex inflows, we still place a lot of emphasis on the role of reserve requirements," he said.
China last adjusted banks' reserve requirements in December 2008, when it cut the ratio as part of its easing of monetary policy to combat the financial crisis. Many analysts think the central bank will wait until mid-year to raise interest rates but that an increase of required reserves could come sooner.
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