Chinese Mandarin - Money supply grows by 18.9% in April

CHINA / National

Money supply grows by 18.9% in April
(Bloomberg)
Updated: 2006-05-15 17:03

China's money supply expansion unexpectedly picked up in April and bank
lending more than doubled, increasing pressure on the central bank to
rein in liquidity growth.

M2, which includes cash and all deposits, rose 18.9 percent from a year
earlier after gaining 18.8 percent in March, the People's Bank of China
said today on its Web site. Growth was expected to slow to 18.5 percent,
according to the median estimate of 23 economists surveyed by Bloomberg
News.

The central bank raised a benchmark interest rate last month for the
first time since October 2004 to curb surging lending and investment. It
may follow up with additional tightening measures such as forcing banks
to set aside more money as reserves, economists said.

"Liquidity in the banking system is still high and banks still have a
strong incentive to lend," said Qing Wang, a currency strategist with
Bank of America in Hong Kong and a former IMF official. "The central bank
needs to take stronger measures to drain liquidity from the system."

M2 money supply stood at 31.4 trillion yuan ($3.9 trillion) at the end of
April, the report said. It was the 11th straight month that growth topped
the central bank's target. New yuan lending in April rose to 317.2
billion yuan from 142.2 billion yuan.

On April 27, the central bank raised its one-year lending rate by 0.27
percentage point to 5.85 percent, a move it said was aimed at curtailing
lending to investment projects. Investment in factories and real estate
jumped 30 percent in the first quarter.

Reserve Requirement

Economists including Wang and Jonathan Anderson at UBS AG expect the
People's Bank of China to raise the percentage of deposits banks must set
aside as reserves, known as the required deposit reserve ratio. Such a
move would help push market interest rates higher, making it more
expensive to borrow, they said.

"The rate hike only makes sense in conjunction with other measures to
reduce liquidity and control lending," Anderson said in a report to
clients on April 27. "We still look for some administrative announcements
and probably a reserve requirement hike over the next month."

Money supply is expanding almost twice as fast as the overall economy as
a swelling trade surplus and rising investment from overseas boost
currency inflows.

The surplus in China, the world's third largest trading nation, widened
to $10.5 billion in April from $4.42 billion a year earlier, bringing the
total for the first four months to $33.7 billion. Foreign investment in
the first quarter rose 6.4 percent to $14.3 billion.

Currency Controls

China's foreign-exchange reserves jumped by a third from a year earlier
to $875.1 billion at the end of March, the central bank said last month.
The reserves grew by $200 billion last year, driven by a record $102
billion trade surplus and $60 billion in foreign investment.

China revalued the yuan in July by 2.1 percent against the dollar,
dropping a decade-old peg and linking its value to a basket of
currencies. The yuan has climbed 1.3 percent against the dollar since
then.

To keep the yuan from rising too quickly against the dollar, the central
bank buys foreign currency from the country's commercial banks and
exchanges them for yuan. To prevent those funds entering the economy and
fueling inflation, it mops up the extra liquidity it's created by issuing
treasury bills to financial institutions, a policy known as sterilization.

The central bank in January said it will seek to limit money supply
growth to 16 percent this year after allowing expansion to top its 15
percent target for most of 2005 as it sought to soften the effects of the
July revaluation.

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