Center

Money supply, reserves add yuan pressure

(Bloomberg)
Updated: 2007-04-13 20:25

"People expect more tightening in the second half, so they're quickly taking out loans now, which makes matters worse," said Kent Yau, an economist at Core Pacific-Yamaichi International in Hong Kong. "Investment in the stock market could turn into a bubble."

Outstanding yuan loans climbed 16.3 percent in March from a year earlier, the central bank said today. New yuan lending rose to 441.7 billion yuan from 413.8 billion yuan in February.

Outstanding yuan deposits rose 15.9 percent last month from a year earlier.

M1, the narrower measure which includes cash and demand deposits, increased 19.8 percent. That's the fourth month it has grown faster than M2, suggesting Chinese households want money on tap to invest in booming stock markets.

Asset Bubbles

Government concerns about asset bubbles were illustrated on Feb. 27 by the biggest one-day fall in Chinese shares in a decade. The benchmark CSI 300 Index has rebounded to records and has climbed by more than 175 percent in the past year.

China's inflation rate accelerated in February to 2.7 percent from 2.2 percent in the previous month. That's nearly the same as the one-year benchmark deposit rate of 2.79 percent, encouraging investors to look elsewhere for better returns.

A record 30 percent of Chinese households plan to invest money in stocks and funds, according to a central bank survey in February of 20,000 homes.

"Another increase in deposit rates would help to cool down the stock market," said Ben Simpfendorfer, a strategist at Royal Bank of Scotland Plc. in Hong Kong. "The risks of an equity bubble are serious enough to warrant more significant tightening."