An Interview with the PBC Spokesperson on Current Issues
Q: In the first three months, new lending by all financial institutions reached 1.26 trillion, accounting for almost half of the new lending objective set for the entire year. How do you look at this excessive growth?
A: In the first quarter of this year, the outstanding RMB lending at all financial institutions totaled 20.6 trillion yuan, up 14.7 percent year on year and representing an escalation of 1.7 percentage points. The new lending in local currency reached 1.2568 trillion yuan, 519.3 billion yuan more than the same period last year. The increase of bill financing, short-term loan and medium and long-term loans was 203.9 billion, 116.9 billion and 175.3 billion more than the increase in Q1 2004. There are several factors behind such growth. Robust economic growth and rapid fixed investment increase drove up demand for loans. Secondly, as the trade surplus widened, the central bank purchase of foreign exchange with local currency added to the liquidity in the market. A third factor was higher incentive to lend on the part of commercial banks in order to raise return on asset and return for shareholders. In addition, some commercial banks tended to lend early to seek quick returns and lent more in the first half of any give year since 2003.
Q: The first quarter saw a trade surplus of 23.3 billion dollars and the growth of official foreign exchange reserve to 875.1 billion. How do you look at the BOP position at the moment? We know that the central bank has adjusted six foreign exchange management policies. Are there more measures to come on this front?
A: For a major developing country with robust economic growth and in the course of transition, having a generally balanced BOP account and fairly sufficient foreign exchange reserve is conducive to domestic economic development, and adds to the aggregate strength and resilience of the nation. But a persistent and large BOP surplus, like a sizable deficit, will negatively affect the sustained and rapid economic growth. Promoting a balanced external account is an significant component in achieving a balance between domestic development and opening-up and also important to bringing economic and social development onto a track of scientific development.
The State Council has attached importance to the BOP and set the objective of having a balanced external account for 2006 and the 11th Five-Year Program. This will be a long and complex procedure of avoiding negative effect and requires comprehensive consideration, better coordination among the various macro policies, transformation of government functions and institutional innovation. First of all, economic structural adjustment should speed up to give domestic demand a larger role in achieving a sustainable and rapid economic growth. Secondly, the growth pattern of external trade should be readjusted more rapidly to optimize the import goods and export goods structure with a view to achieving balanced trade. Export of goods with large energy input, highly polluting and resource goods will be limited while import of advanced technology and equipment will be increased. Science and technology advancement and self-initiated innovation will be more important. Thirdly, the quality of foreign capital utilization will be improved by guiding the sectoral and regional flow of foreign capital and promoting industrial structural upgrading and balanced economic development among all regions. Fourthly, domestic financial market will be promoted, while qualified enterprises will be encouraged to go abroad to conduct mutually beneficial cooperation and joint development. Resources both at home and abroad at both the domestic and external markets will be used.
In the future, foreign exchange system reform will be deepened, while the reform foreign exchange management will be furthered. Other works include facilitating trade and investment, promoting capital account convertibility, expanding channels for capital outflow, fostering the growth of foreign exchange market, further improving the RMB exchange rate regime, strengthening short-term capital flow management and BOP monitoring and early warning to achieve a balanced external account.
Q: According to some figures, China’s short-term external debt has increased rapidly. What is your view?
A: At end 2005, China’s outstanding external debt amounted to $281.05 billion (excluding the external debt of Hong Kong, Macau and Taiwan), a growth of $33.55 billion or 13.6 percent year on year, representing a slow down of 5 percentage points. Outstanding short-term debt stood at $156.14 billion, a growth of $32.94 billion year on year and accounting for 55.6 percent in total external debt. Looking at the components of short-term debt, growth of trade credit contributed 77.1 percent to the growth of short-term debt and represented the major reason behind the sharp rise of short-term debt’s share in total external debt. At end 2005, trade credit balance was $90.8 billion, growing $25.4 billion or 28.0 percent year on year and accounting for 32.3 percent in total external debt, 5.9 percent higher than end 2004. The rapid growth of trade credit was directly related to the rise of import and export. In 2005, total trade volume reached $1.42212 trillion, up 23.2 percent year on year. As a result, demand for trade-related financing rose. There was some synchronization between the growth of trade credit and rise in import and export. At the same time, growth of trade credit also reflected a stronger willingness of enterprises to prevent exchange rate risk through deferred payment and advanced foreign exchange collection.
At the moment, China has sufficient foreign exchange reserve. The short term external debt to foreign exchange reserve ratio has always remained within the internationally accepted safety zone. Given the large proportion of trade credit in short-term debt and the authentic trade background in most cases, large inflow and large outflow are unlikely. Furthermore, we have strengthened the external debt early warning system in order to prevent financial risks related to foreign exchanges. In general, the short-term debt risks are controllable.
Q: In response to the high growth of GDP and credit, is the central bank going to do something in monetary policy?
A: The overall situation is good as reflected in rapid and steady growth. But, fixed asset investment increased in an excessive manner; money supply and credit growth were both high; the structural imbalances in external trade were acute. In order to implement a scientific development approach and consolidate the results of macro-adjustment, the PBC raised, on 28 April, the benchmark interest rate for domestic currency lending as approved by the State Council.
At the same time, in order to guide financial institutions to reign in the rapid growth of credit, prevent large fluctuation in lending, further optimize lending structure, the PBC has strengthened window guidance, required banks to control the pace of lending and prevent drastic fluctuation. We have also required them to strengthen capital restraint, foster a culture of sound operation, further improve financial services, energetically adjust credit structure, continue to provide credit support to the bottleneck sectors while controlling lending to over-invested sectors. We hope banks can have more innovation, prevent interest rate risks, keep an eye on credit risks in economic restructuring, and enhance capability to identify risks. We also believe it is necessary to support small and medium sized enterprises and provide working capital loan through bill financing, and promote the healthy growth of bill business while preventing risks.
The PBC will closely monitor the effect of policies already adopted, continue to implement a sound monetary policy, preserve the continuity and stability of monetary policy, and promote appropriate growth of money and credit, in order to provide a stable monetary and financial environment for economic restructuring and the transformation of growth pattern.
Source: www.pbc.gov.cn
