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Tuesday, August 26, 2003

Not Only Worried About the Heat in Europe

Europe isn't the only place where people are worried that things are getting too hot. The Chinese government are woried about the pace of expansion in their domestic economy and the''re trying to apply the brakes a little. This is the kind of heat we'd just love to have here in Europe.

The People's Bank of China decided over the weekend it would mop up funds in the system by raising bank reserve requirements by a percentage point. Days later, it injected funds via the open market in the first such move since January. Analysts said on Tuesday Beijing was putting in place a policy to curtail the rapid growth of funds in the market to prevent economic overheating, while soothing jangled nerves and alleviating a short-term liquidity crunch. "The government is trying to send a signal that they won't squeeze things out. That they want stability, but that they're also concerned about the strong credit growth and the need to cool things down," said Standard Chartered economist Tai Hui. "There was concern there may be a short-term liquidity squeeze, hence the move to put back liquidity. But I wouldn't be surprised if two to four weeks, or two months down the line, they take that back."

The moves over the past few days highlight the tightrope Beijing has to walk as it balances the need to spur economic growth -- vital to create jobs for millions of unemployed -- and the necessity of cooling certain overheating sectors. "China is keen to present itself as taking a more active role in money markets through open market operations, as it tries to balance excess money supply with strong growth," said Bank of America economist Frank Gong. Beijing announced on Saturday a reserve requirement hike for banks and other deposit-taking institutions by one percentage point to seven percent in a bid to cool down sizzling portions of the economy and ease lending risks. Analysts say the hike will drain a whopping 150 billion yuan ($18.1 billion) when it takes hold September 21. The reserve hike prompted fears of a sudden shortage of money on the Shanghai-based interbank market as banks hold back funds to meet the stricter obligations.

The central bank thus followed that up with an announcement on Monday it would buy 60 billion yuan ($7.25 billion) of repurchase agreements and agree to sell them back in seven days. The so-called reverse repo was conducted in tandem with an auction of 10 billion yuan in commercial bills -- effecting a net cash addition of 50 billion yuan. "The injection is meant to calm the markets, and represents a fine-tuning of the monetary environment," said Citigroup economist Yiping Huang. Analysts agreed the reserve hike was necessary to put the brakes on an economy in danger of overheating, especially in red-hot sectors such as auto making and real estate construction. Broad M2 money supply rose 20.7 percent at the end of July from a year earlier, while outstanding loans in the first half of the year grew an annual 23 percent to 15.9 trillion yuan.

"The amount of credit growth we saw in the first half deserves some caution. Twenty-three percent year on year just seems way too high," Hui said. Hence Beijing's move to soak up excess money in the system over the past months, for instance by issuing record amounts of commercial bills to drain the yuan stemming from intervention. Beijing's increase in reserve requirements to mop up excess money -- pumped out as the bank intervenes to keep the yuan steady -- meant it was intent on pursuing a stable yuan policy, analysts say. But economists say China was not keen on letting its yuan appreciate for fear of wrecking its vital export engine. China's economy, which grew an annual 8.2 percent in the first half of the year, is widely expected to grow around eight percent for the whole of 2003.
Source: Forbes

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