China in bind on lending
(Reuters)
Updated: 2006-04-27 10:19
The solution looks as clear-cut as the problem: China has too much cheap
money fueling a new investment boom, so it needs to curb credit and push up the
yuan to shrink the trade surplus that is generating the liquidity.
The
National Development and Reform Commission is hinting at tighter curbs on
lending and new restrictions on China's perennially overheated sectors,
including aluminum, cement and real estate.
Economists are confidently
predicting the first increase in banks' reserve requirements in two years after
annual gross domestic product growth in the first quarter accelerated to 10.2
percent.
But, this being China, things are not as simple as they seem.
Beijing's ability to pull policy levers is complicated not only by the economy's
poor responsiveness to market signals but also by the traditional political
incentives at local level to pursue growth at all costs.
"We shouldn't
lose sight of the important role local government investment is playing in
boosting economic growth," said Sheng Hong, who heads the Unirule Institute of
Economics, an independent research organization in Beijing.
Sheng said
this week that the spurt in investment was strongest in urban infrastructure,
transport, energy and telecommunications, all sectors that are under the
government's control.
Li Xiaoxi, a professor at Beijing Normal
University, agreed, saying: "What's more, local governments can always get large
amounts of bank loans to pour into local projects." In Shenzhen, for example,
Mayor Xu Zongheng said in an interview this month that China Construction Bank
had offered to lend the city up to 100 billion yuan, or $12.47
billion.
This nexus between state-owned banks and local governments
remains a defining characteristic of China's political economy despite a
generation of market reforms.
"Many banks are willing to sign strategic
contracts with local governments because the banks know that interest and
principal are guaranteed," Xu said.
Banks extended 1.26 trillion yuan in
new loans in the first quarter, more than half of the central bank's target for
the full year. The real estate sector accounted for 14.84 percent of all bank
loans at the end of 2005, said Wu Xiaoling, a deputy governor of the central
bank.
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