An interest rate hike is on the cards in China to curb excessive
liquidity as bank lending rebounded in February.
"The rapid growth in bank loans and M1 supply raise the
possibility of raising interest rates by the People's Bank of China
(PBC) around April," according to an analytical report in the
China Securities News.
Renminbi-denominated loans climbed to 413.8 billion yuan in
February, an increase of 264.7 billion yuan over the same period
last year, figures released by PBC showed, signaling a resurgence
of excess credit lending despite government restraining
policies.
The report said the constant growth in M1 supply, the narrow
measure of the money supply which includes cash in circulation and
corporate demand deposits, rose 21 percent to 12.6 trillion yuan by
the end of February, and has added inflationary pressure and made
another interest rate hike necessary.
Measures have been launched by the central bank to contain
liquidity after 560 billion yuan was withdrawn through open market
operations in the two weeks ending last Friday.
The containment policies, however, were offset by the
newly-increased currency liquidity generated by mounting trade
surplus in February, which surged 51.7 percent to a record US$23.75
billion.
In the fight against excess liquidity, the government has been
cautious about further interest rate hikes, fearing that they will
entice more speculative funds into the country and accelerate the
formation of economic bubbles.
To date, the central bank has preferred to raise the deposit
reserve ratio -- rather than interest rates -- to soak up excess
liquidity.
The central bank has lifted the deposit reserve ratio five times
since last July, with the latest move on Feb 25 expected to take
176.5 billion yuan out of the banking pool.
However, an interest rate hike was inevitable, as reserve ratio
adjustments and open market operations had proved ineffective,
according to the report.
The last interest rate hike was in August last year, when the
central bank raised the one-year benchmark interest rate by 0.27
percentage points.
(Xinhua News Agency March 14, 2007)